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Securities and Exchange Commission v. Retail Pro

February 10, 2011

SECURITIES AND EXCHANGE COMMISSION, PLAINTIFF,
v.
RETAIL PRO, INC. (FKA ISLAND PACIFIC, INC.), BARRY M. SCHECHTER, RAN H. FURMAN, AND HARVEY BRAUN, DEFENDANTS.



The opinion of the court was delivered by: Hayes, Judge:

ORDER

The matters before the Court are the motions in limine filed by Plaintiff (ECF Nos. 95-96) and the sole remaining Defendant, Ran H. Furman (ECF Nos. 97-99).

I. Background

On September 4, 2008, Plaintiff Securities and Exchange Commission ("SEC") filed a Complaint in this Court. (ECF No. 1). The Complaint alleges:

3. This case involves a fraudulent scheme by Island Pacific, Inc. ('Island Pacific' or the 'Company') and its then senior management to overstate the Company's financial results for the quarters ended September 20, 2003 ('Q2 2004'), and December 31, 2003 ('Q3 2004'), and its fiscal year ended March 31, 2004 ('FY 2004'). The Company's senior management responsible for the fraud were defendants Barry M. Schechter ..., a controlling person and de facto officer; Ran H. Furman ..., the Chief Financial Officer; and Harvey Braun ..., the Chief Executive Officer.

4. In Q2 2004, Schechter, Furman and Braun caused Island Pacific to improperly record and report $3.9 million in revenue from a sham transaction with an Australian software company, QQQ Systems Pty Limited ('QQQ'). The transaction had no economic substance or business purpose and instead was entered into in order to artificially inflate Island Pacific's revenues reported in its financial statements. Subsequently, in the third quarter, Island Pacific improperly recorded an offsetting transaction whereby it purchased from QQQ $3.9 million of software. In fact, no contract finalizing this offsetting transaction was signed until the fourth quarter. Island Pacific and QQQ never exchanged any money as a result of these offsetting agreements. In addition, neither Island Pacific nor QQQ made any effort to sell the other's software or to determine the fair market value of their software licensing rights as required by applicable accounting principles.

5. As a result of improperly recognizing and reporting the $3.9 million as revenue, Island Pacific overstated its revenues by 140% for Q2 2004, 29% for the nine months ending Q3 2004, and 22% for the 2004 fiscal year, and reported a small profit instead of a massive loss for Q2 2004. The defendants also failed to disclose the sham nature of the QQQ transaction and actively concealed their fraud from Island Pacific's outside auditors, and the public, by creating forged and/or fabricated documents which they used in an attempt to demonstrate that the recognition of revenue from the transaction was proper. Additionally, Furman fired a company whistleblower [i.e., Joseph Dietzler] who expressed concern in an email that the offsetting transactions were 'structured in a manner that is intended to inflate revenues for the purpose of boosting the corporation's share price.'

6. As part of the fraudulent scheme, Schechter sold 637,750 shares of Island Pacific stock, receiving $488,410 in ill-gotten gains.

7. By engaging in this conduct, the defendants variously violated and aided and abetted violations of the antifraud, issuer reporting and record-keeping, internal controls, and prohibition against misrepresentations to accountants provisions of the federal securities laws. The Commission seeks to obtain injunctions from future violations, civil penalties, and officer and director bars against Schechter, Furman, and Braun, and additionally to obtain disgorgement of ill-gotten gains from Schechter.

Id. ¶¶ 3-7.

Following the Court's November 18, 2009 Order granting in part and denying in part Plaintiff's motion for summary judgment (ECF. No. 47), the following claims remain to be tried against Furman: (1) Section 10(b) of the Securities Act of 1934 and Rule 10b-5 thereunder; (2) aiding and abetting Island Pacific's violations of Section 13(a) of the Exchange Act and Rules 12b-20, 13a-1 and 13a-13 thereunder; and (3) SEC Rule 13a-14.

On November 19, 2010, the parties filed the following motions in limine: (1) Motion in Limine by Plaintiff for an Order Specifying that Facts Be Treated as Established and Excluding Contradictory Evidence or Testimony (ECF No. 95); (2) Motion in Limine by Defendant to Exclude Evidence Regarding this Court's Prior Summary Judgment Order (ECF No. 98); (3) Motion in Limine by Plaintiff to Exclude Testimony and Expert Report by Defendant's Expert, Jerry Arnold (ECF No. 96); (4) Motion in Limine by Defendant to Exclude Expert Witness Testimony by Plaintiff's Expert Peter Salomon (ECF No. 97); and (5) Motion in Limine by Defendant to Exclude Evidence of Consent Decrees and Judgments Entered into Between the Plaintiff and Defendants Retail Pro, Inc., Barry M. Schechter and Harvey Braun in Settlement of this Action (ECF No. 99).

On February 10, 2011, the Court heard oral argument on the motions in limine. This Order supplements the comments made by the Court during the February 10, 2011 hearing.

II. Discussion

A. Motion in Limine for an Order Specifying that Facts Be Treated as Established and Excluding ...


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