Sony Agrees to Pay $1-Million Penalty to SEC

Sony Corp. on Wednesday agreed to pay $1 million in penalties to settle Securities and Exchange Commission allegations that it misled investors by failing to disclose how badly its movie division was doing before finally announcing a staggering $3.2-billion loss by the unit in late 1994.

Although the fine is relatively small for a company the size of Sony, it marks yet another embarrassing chapter from an era the company would just as soon forget. SEC officials said the fine matches the largest previous penalty related to disclosure problems that don’t include fraud.

Sony agreed to settle the case without admitting or denying the SEC findings. In a brief statement, the Tokyo-based company said it “has a long and distinguished history of forthright business dealings around the world.”

In November 1994, Sony rocked Hollywood by posting the $3.2-billion loss on its movie operation, $2.7 billion of which stemmed from the writing off of film projects, the settlement of contracts and disposing of legal claims.

On top of that, Sony posted operating losses of $510 million, the legacy of such box-office duds as “Last Action Hero,” “Lost in Yonkers” and “I’ll Do Anything.” That brought the total loss to $3.2 billion.

In its order, the SEC said Sony failed to previously disclose losses in its movie division in quarterly earnings statements and in discussions in its annual report.

The SEC said Sony first suffered an operating loss in its film unit in the fiscal year ended March 31, 1994, and that the net loss for Sony Pictures that year came to $448 million, four times the previous year’s loss and double what had been forecast internally.

By that period, the SEC said, Sony Pictures--made up of Columbia and TriStar Pictures--had lost $967 million for its parent company since being acquired in 1989 for $3.4 billion. The SEC said Sony’s losses on movies in the first five years of ownership “consistently exceeded Sony’s internal projections.”

The SEC also criticized Sony for emphasizing in an earnings news release its film market share at the box office “without tempering those statements with any specific disclosure of the losses sustained by Sony Pictures.” In its annual report, the SEC said, Sony discussed only positive results such as box-office share, Oscar nominations and gross box-office receipts.

Even though Sony acknowledged in its annual report the disappointing performance of some pictures, “the balance of the Annual Report suggested that the year had been a successful one for Sony Pictures,” the SEC said in its order.

“We’re not saying it’s inappropriate to talk about the success of pictures or box-office share, but in doing so they had to tell the full story. They had to talk about the operational losses,” said Paul Gerlach, the SEC associate director of enforcement who oversaw the case.

One of the chief methods Sony used to mask losses in its film area was combining the movie results with earnings from its highly profitable music division. By reporting results for one large “entertainment” segment, the SEC said, Sony obscured its movie problems.

Whether the action will prod changes in Hollywood’s disclosure policies is unclear, although some Hollywood executives believe Sony’s disclosure failures were especially egregious, noting that the company’s dismal performance at the time was common knowledge in the industry.

The 1994 loss came amid a management shake-up at Sony’s film unit. A month before the loss was announced, Peter Guber, then the sole film head, was forced out. The following year, Michael P. Schulhof, who oversaw Sony’s operations in the U.S., met a similar fate.

The SEC in its order, however, places the blame directly on Tokyo officials for the disclosure problems, suggesting that U.S. officials favored disclosing more. For example, the SEC said U.S. executives favored reporting the music and film results separately.

In addition, Sony said U.S. executives “repeatedly brought the nature and extent of these losses to the attention of Sony’s top management in Japan,” questioned financial statements and suggested various “strategic initiatives” that would have required a large restructuring charge or write-down. That included potential strategic alliances with companies to raise money or a possible initial public offering of stock in part of Sony Pictures.

The only Sony executive named in the SEC order is Sumio Sano, a Sony director who was general manager of the company’s Capital Market & Investor Relations Division at the time the loss was posted. In that job, Sano supervised the drafting of earnings press releases and the management discussion and analysis appearing in documents filed with the SEC.

Last year, Sano was named president of Sony Precision Technology Co., which makes and sells scales and gauges for machine tools.

“He is still a valued employee,” said Kei Sakaguchi, senior director of corporate communications.

Sony first disclosed in public documents in February that it faced potential actions for allegedly making false and misleading public statements.

As part of the action, Sony is required to have an independent auditor examine the management discussions in its filings, make Sony’s chief financial officer primarily responsible for the accuracy of disclosures and comply with all financial accounting requirements.

Sony has undergone a sweeping change in management over the last two years and is now headed by movie veteran John Calley. Ironically, the company last year posted the best box-office results ever for a studio on the strength of films largely developed under its deposed regime.

Among its hits were “Men in Black,” “My Best Friend’s Wedding” and “Air Force One.”