Cooking The Books

Sun Company's wholly owned shipyard, Sun Ship, was one of numerous other businesses owned by Sun Company and the shipyard losses were consolidated with the financial results of the other businesses. Sun Company's consolidated profits were very high that year so that losses in consolidation from the shipyard served to reduce taxes for Sun Company. 

To cover the discontinuation of operations, Sun put a pre-tax loss reserve of $236 million on their books. The immediate tax benefit to Sun Company from this 1980 loss reserve was $108 million. 

Simultaneously, to cover contract losses Sun entered a separate pre-tax loss of $124 million. $62 million of this was losses for work completed in 1980. The remaining $62 million was a loss reserve estimated to cover contract completions in following years. 

Constructing big ships takes time and work is not completed at the instant the discontinuation decision is made. It takes several years to complete the contracts and for that reason the losses are estimated and the loss reserve established. It turned out that the contract losses were underestimated and in subsequent years the amount of that loss reserve had to be increased some 50%. 

Because both the discontinuation charges and the contract charges have a tax benefit to the company (or reduction in taxes for IRS) in each year these charges are adjusted as the actual costs become known and each subsequent Annual Report of the company reports the corresponding tax charge or tax credit. Thus it is possible to track the annual reconciliation of the two loss reserves. 

Those federal income tax timing differences for the $236 million loss reserve and for the $ 62 million loss reserve as reported in the Sun Company Annual Reports can be viewed.  [CTB1]

Atkinson questioned the $236 million loss reserve because the property, plant and equipment were reported to have been written down to $10 million. Atkinson and Schorsch had much to do with the creation of that property, plant and equipment. They found it inconceivable that a proper writedown could be made to $10 million. The Philadelphia Bulletin reported the President of Sun Ship as saying the assets of the shipyard were being written down from $98 million to $10 million.[CTB 2]

On 1/9/81 Sun Company issued Press Release 3219.[CTB 3]

At the time of the discontinuation the controlling shareholder of Sun Company was the Glenmede Trust Company, holding about 27 % of Sun Company stock through their management of the various Pew trusts, including the Pew Memorial Trust. Directors of both Glenmede Trust Company and of Sun Company were Robert G. Dunlop, R. Anderson Pew, and Robert I. Smith. Robert G. Dunlop was Chairman Emeritus of Sun Company. R. Anderson Pew was President of a Sun Company subsidiary. Robert I. Smith was President of Glenmede Trust Company. Through their vote as Directors they exercised control of Sun Company. 

After a year of private query of Sun Company management without a satisfactory explanation for the apparent excessive writedown, Atkinson wrote to Glenmede. [CTB 4]

Still failing to obtain a reasonable answer Atkinson concluded the books were cooked by the $236 million loss reserve and suggested to the SEC that they look into the matter. The SEC Enforcement Branch in Philadelphia considered the matter and wrote an 8/11/82 letter to Sun Chairman Burtis forwarding Atkinson's 2/24/82 letter to Glenmede and requesting that explanations be furnished the SEC.[CTB 5]

The SEC has two levels of investigation. The lower level, instituted in this case is called a Matter Under Investigation or MUI. It has no subpoena power and is voluntary on the part of the company. The higher level requires authorization from Washington headquarters and is an investigation with subpoena power. The investigation conducted by the SEC Philadelphia was a MUI. After nine months the SEC concluded that the Sun Company accounting was correct. Since that was impossible, Atkinson concluded that the SEC had been corrupted in some manner. He then referred the matter to the U.S. Attorney in Philadelphia. At the same time he pursued an explanation from the SEC. When SEC answers were not forthcoming he filed FOIA requests and when FOIA answers were denied sued the SEC. The Affidavits from the SEC lawsuit reveal that Sun controlled the MUI and the conditions of SEC examination and that a proper investigation was prevented. 

At the DOJ improper actions were taken including writing of false letters and memoranda. Eventually these were exposed through FOIA requests and when found false, Atkinson used the Privacy Act (which requires that federal records be accurate about persons or that they be corrected) to cause DOJ and SEC acknowledgement and correction. The Who and What Memo 6/5/02 records examples of the corrupt behavior at DOJ in that period. [CTB 6]

On 5/18/81 Sun Company's Senior VP and General Counsel itemized the contents of the $236 million loss reserve. That itemization is contained in Atkinson's 2/24/81 letter to Sun Chairman Burtis. 

Robert H. Campbell, President of Sun Ship at the time of the bookcooking provided an affidavit as to the contents of the $236 million loss reserve. [CTB 7] (This is the same Robert H. Campbell who testified some 20 years later at the Enron hearings of 5/7/02.) [CTB 8] 

Why in the view of Atkinson and Schorsch, as presented to the Pennsylvania Board of Accountancy, the Sun Company accounting was false can be viewed. [CTB 9]

For the components of the $236 million loss reserve see the Summary 2/11/02.[S]