NEW YORK — The Securities and Exchange Commission ruled Wednesday that Sony Corp. violated securities disclosure laws in 1994 by failing to warn investors about the mounting losses at Sony Pictures before announcing the $2.7 billion goodwill write-off on the studio in November 1994.
Sony has agreed to pay a $1 million fine to settle a complaint filed by the SEC in the U.S. District Court in Washington, D.C., and to comply with a “cease and desist order” from the SEC requiring changes in the way the company reports its earnings to give more detailed explanation of the studio’s financial performance.
The electronics and entertainment conglomerate began the new reporting practice earlier this year when it reported the earnings for the three months to March 31, the fourth quarter of its fiscal year. For the first time in that quarter, Sony disclosed the operating income of Sony Pictures whereas it previously had only reported the revenue of the studio.
Sony said in a statement that it neither admitted nor denied the findings of the SEC, “but we recognize the importance of corporate disclosure and as a result consent to the issuance of the order.”
Goodwill write-off
Sony stunned both Wall Street and Hollywood in November 1994 when it reported a $2.7 billion write-off of goodwill related to its 1989 purchase of Columbia Pictures, sending Sony stock down 5% in Japan and 6% in the U.S.
The SEC put the blame for the problems squarely on the shoulders of Japanese management, noting that U.S. execs had repeatedly warned Japanese execs about mounting losses at the studio and suggested various ways to restructure or write off goodwill.
In its order, which outlined the history of Sony’s ownership of the studio, the SEC revealed publicly for the first time that in the four years to March 1994, Sony Pictures lost a total of $967 million. While Sony expected the studio to lose money in its first five years, the losses were consistently higher than its projections.
Almost half of the total losses, $448 million, were sustained in the 1994 fiscal year, the SEC said, a loss that was “almost double” what was budgeted and four times the loss of the previous year.
In the three months to June 30, 1994, Sony Pictures lost $120 million, and, three months later, Sony Pictures’ revised budget “reduced estimated operating income to $11 million for fiscal 1995 whereas the initial budget six months earlier had projected operating income of $64 million.”
It was not until Nov. 17 that Sony announced the September quarter result and revealed the goodwill write-off. The SEC noted that from the time Sony bought the studio, its losses “were not separately dis-cernible” from public statements.
The commission noted that Sony’s SEC filings as late as September 1994 were “inadequate and incomplete” because they did not mention the mounting losses at the studio.
As a result, it said Sony violated the Exchange Act, and it blamed Sony’s former general manager for capital markets and investor relations, Sumio Sano, for the violations. Sano has since been moved to a new job at Sony Precision Technology, a spokeswoman said Wednesday.
Companies whose stock are traded on U.S. markets “have a paramount obligation to provide full and timely disclosure of information required by federal securities laws,” the SEC said.
Aside from separately reporting its studio’s earnings, the SEC ordered Sony to hire an outside auditor to examine the way it presents its quarterly earnings reports for the fiscal year ending March 31, 1999. The SEC also wants Sony’s chief financial officer to be made responsible for ensuring that the company’s public financial disclosures are accurate.
SEC’s assistant director of enforcement, Paul Gerlach, declined comment Wednesday on what prompted the SEC’s inquiry or how long it was undertaken, although Sony said in its statement that it had been negotiating with the commission since last December.
