Financial Release No. 1061
In the Matter of SONY CORPORATION and SUMIO SANO, Respondents

Release No. 34-40305; August 5, 1998

ORDER INSTITUTING CEASE-AND-DESIST PROCEEDINGS PURSUANT TO SECTION 21C OF THE SECURITIES EXCHANGE ACT OF 1934 AND FINDINGS AND ORDER OF THE COMMISSION

I.

The Commission deems it appropriate and in the public interest to institute public administrative proceedings pursuant to Section 21C of the Securities Exchange Act of 1934 ("Exchange Act") to determine whether Respondent Sony Corporation violated Section 13(a) of the Exchange Act and Rules 13a-1, 13a-16, and 12b-20 thereunder, and whether Respondent Sumio Sano was a cause of such violations.

II.

In anticipation of the institution of these administrative proceedings, the Respondents have submitted Offers of Settlement which the Commission has determined to accept. Solely for purposes of these proceedings and any other proceedings brought by or on behalf of the Commission or to which the Commission is a party, Respondents, without admitting or denying the matters set forth herein, consent to the issuance of this Order Instituting Cease-and-Desist Proceedings Pursuant to Section 21C of the Securities Exchange Act of 1934 and Findings and Order of the Commission ("the Order"), and to the entry of the findings, and the imposition of the remedial sanctions, set forth below. ¹

III.

The Commission finds the following:

A. FACTS

1. The Respondents

a. Sony Corporation ("Sony") is a Japanese corporation that was established in 1946 and, through its subsidiaries, operates in numerous locations in the United States and around the world. Sony, by itself and through its subsidiaries, is engaged in the development, manufacture and sale of electronic equipment and the production and sale of motion pictures, music and television programming. Sonys common stock, in the form of American Depositary Receipts ("ADRs"), is registered with the Commission pursuant to Section 12(b) of the Exchange Act and trades principally on the New York Stock Exchange.

b. Sumio Sano was a director of Sony and the General Manager of its Capital Market & Investor Relations Division at all relevant times. In this latter capacity, his responsibilities included, among other things, supervising and coordinating the drafting of the text of the companys press releases and the Managements Discussion and Analysis ("MD&A") section of its public filings with the Commission.

2. Sony Forms Sony USA and Acquires Music and Motion Picture Subsidiaries

In January 1988, Sony acquired CBS Records and formed Sony USA Inc. (now known as Sony Corporation of America ("SCA")) as a holding company to hold Sonys investment in the acquired company, which was then renamed Sony Music Entertainment Inc. ("Sony Music"). In November 1989, Sony USA acquired Columbia Pictures Entertainment, Inc. for $3.4 billion and Guber-Peters Entertainment Company for $200 million. These companies, which are now known collectively as Sony Pictures Entertainment Inc. ("Sony Pictures"), included two movie studios (Columbia and Tristar), a theatrical exhibition company (Loews Theaters) and certain television production facilities. In connection with these acquisitions, Sony assumed debt of approximately $1.2 billion and allocated approximately $3.8 billion to goodwill.

When Sony acquired its motion picture operations, Sony internal projections for those operations showed losses for a period of 5 years after accounting for amortization and the costs of financing the acquisitions. However, Sonys business plan was based on the premise that, in the long term, as the means for electronic distribution of entertainment multiplied, Sony Pictures and its inventory of motion pictures would become an increasingly valuable source of entertainment content. As things turned out, Sony Pictures sustained significant and mounting losses (after accounting for amortization and the costs of financing the acquisition) in its first four years under Sonys control. These losses consistently exceeded Sonys internal projections. Although these losses were reflected in the consolidated financial results reported by Sony, neither the projected losses nor the actual losses from Sony Pictures were separately disclosed to investors. In the aggregate, by the close of Sonys fiscal year ended March 31, 1994, Sony Pictures had contributed net losses of approximately $967 million to Sonys consolidated results.

3. The Goodwill Write-off of $2.7 Billion

For the fiscal year ended March 31, 1994, Sony Pictures sustained a net loss of $448 million, which for the first time included an operating loss even before accounting for amortization and financing costs. Although Sonys motion picture operations had suffered net losses in each of the preceding years since the acquisition, the March 31, 1994 loss was almost double the loss initially budgeted for the year, and approximately four times as large as that sustained in the preceding year. During the fiscal year ended March 31, 1994, SCA management in the United States repeatedly brought the nature and extent of these losses to the attention of Sonys top management in Japan, questioned the value of Sony Pictures goodwill as reflected in Sonys financial statements, and suggested that Sony consider various "strategic initiatives" which, if adopted would likely have involved a restructuring charge or a write down of goodwill. SCA also engaged two investment banking firms to explore opportunities with suitable partners to form a "strategic alliance" in order to raise capital for Sony Pictures. Sony and its advisers also considered the possibility of raising capital through an initial public offering of some portion of Sony Pictures. In considering these options, Sony management was informed that a substantial writedown of goodwill could well be necessary to complete a strategic alliance or public offering.

In the first quarter of its fiscal year ended March 31, 1995, Sony Pictures continued to lose money (nearly $120 million) and its negative cashflow worsened. Many of Sony Pictures motion pictures were performing poorly at the box office. By September 1994, halfway through the 1995 fiscal year, the revised budget for Sony Pictures reduced estimated operating income to $11 million for fiscal year 1995, whereas the initial budget six months earlier had projected operating income of $64 million.

On November 17, 1994, Sony issued a press release announcing its consolidated results for the second quarter of its fiscal year ended March 31, 1995. In that press release, Sony also announced that it had changed its method of accounting for assessing the carrying value of its investment in acquired businesses, including goodwill, and that, as a result of the application of that new approach, Sony had written off approximately $2.7 billion of goodwill associated with its acquisition of Sony Pictures. After the announcement, the price of Sonys stock declined by more than 5% on the Tokyo Stock Exchange, where trading was temporarily halted, and the price of Sony ADRs dropped by approximately 6% on the New York Stock Exchange.

 4. Sonys Inadequate Disclosures Regarding Sony Pictures Before Announcing Its Goodwill Write-off

From the time Sony acquired its motion picture operations, the losses suffered by Sony Pictures were not separately discernible from the financial statements or disclosures made publicly available by Sony. In large part, that was because Sony reported only two industry segments--electronics and entertainment. Over the expressed preference of its outside auditors and its own U.S.-based financial officers for separate reporting of Sonys music and pictures businesses, Sony reported the combined results of Sony Music and Sony Pictures as a single "entertainment" industry segment. The combination of the financial results of Sony Music--which was profitable--and Sony Pictures during the relevant period had the effect of obscuring the significant losses Sony experienced in Sony Pictures. Moreover, as discussed below, in its press releases and in the MD&A section of its periodic public filings, Sony did not adequately describe the nature and extent of the net losses sustained by Sony Pictures or explain the impact of those losses on the consolidated results Sony was reporting. In addition, Sony selectively noted positive developments such as box office share or the success of individual motion pictures.

On June 15, 1994, Sony furnished to the Commission a report on Form 6-K ² attaching a press release that announced the companys consolidated results for the fiscal year ended March 31, 1994. Although the press release disclosed that declining results in Sonys entertainment segment were mainly attributable to the disappointing performance of a number of motion pictures, it did not separately discuss the extent to which the downturn was attributable primarily to the interest and amortization costs resulting from the acquisition of Sony Pictures. In addition, the press release emphasized the large box office share of recent successful motion pictures without tempering those statements with any specific disclosure of the losses sustained by Sony Pictures.

On August 3, 1994, Sony furnished to the Commission a copy of its Annual Report to Shareholders for the fiscal year ended March 31, 1994. The Annual Report painted a generally positive picture of the year-ended March 31, 1994 results for Sonys entertainment segment and failed to disclose that Sony Pictures had incurred its first ever operating loss and a net loss of nearly a half billion dollars. Instead, the MD&A section of Sonys 1994 Annual Report discussed only the positive results achieved by Sony Pictures--box office share, Academy Award nominations, and gross box office receipts--but simultaneously failed to disclose the known negative results and trends: operating income before amortization, net income, and operating cashflow. Although the Annual Report disclosed that the "disappointing performance" of a number of Sony Pictures motion pictures was "primarily" responsible for the 58% drop in the entertainment segments operating income for the year, the balance of the Annual Report suggested that the year had been a successful one for Sony Pictures.

On September 7, 1994, Sony furnished to the Commission a Form 6-K that attached a press release announcing the companys results for the fiscal quarter ended June 30, 1994. This press release presented an inadequate and incomplete picture of the true financial results of Sony Pictures because it failed to disclose that the operating losses before amortization recently incurred by Sony Pictures were likely to continue, and that these losses would continue to have a negative effect on Sony as a whole. Instead, the press release noted the success of two of Sonys recent motion pictures, and reported that, valued in U.S. dollars, Sony Pictures sales in the United States rose by 1%.

On September 29, 1994, Sony filed with the Commission its Annual Report on Form 20-F reporting its results for the fiscal year ended March 31, 1994. Sonys 20-F favorably discussed the recent motion pictures released by Sony Pictures, but omitted to state material facts necessary in order to make the statements made, in light of the circumstances under which they were made, not misleading. Specifically, Sonys 20-F did not specifically discuss the extent to which the companys 1994 operating income before amortization was negatively impacted by the operating losses of Sony Pictures. Although the report disclosed the disappointing performance of "a number" of Sonys motion pictures and reported that the entertainment segments operating income before amortization declined 58.2% from the results in the prior year, the MD&A section did not separately discuss either Sony Pictures $161 million operating loss for that year or the $448 million net loss it had sustained. Further, while discussing Sony Pictures increasing sales in the previous years, the MD&A section failed to disclose that approximately $1.086 billion of cumulative net losses included in Sonys financial results were attributable to Sony Pictures from the time of its acquisition through June 30, 1994.

5. Sanos Responsibilities

 Respondent Sumio Sano was a director of Sony and the General Manager of its Capital Market & Investor Relations Division. In this latter capacity, Sano and his department were primarily responsible for drafting the aforementioned press releases and the MD&A sections of Sonys Annual Report to Shareholders and its Annual Report on Form 20-F. As such, Sano was or should have been aware of the significant losses being sustained by Sony Pictures, as well as their effect on Sonys consolidated results.

B. LEGAL DISCUSSION

1. Sony Violated Section 13(a) of the Exchange Act and Rules 13a-1, 13a-16, and 12b-20 Thereunder

Issuers whose securities are registered with the Commission and traded in U.S. markets have a paramount obligation to provide full and timely disclosure of information required by the federal securities laws. The issuers legal obligation extends not only to accurate quantitative reporting of the required items in its financial statements, but also to other information, qualitative as well as quantitative, needed to enable investors to make informed decisions. Such information, particularly the information embodied in the issuers MD&A discussion, is of critical importance to market professionals and individual investors alike.

Section 13(a) of the Exchange Act and Rules 13a-1 and 13a-16 thereunder require foreign private issuers of registered securities to furnish to the Commission reports on Form 6-K and to file reports on Form 20-F. Among other things, Section 13(a) and Item 9 of Form 20-F require that issuers include an MD&A section that addresses the issuers liquidity, capital resources and results of operations. Finally, Exchange Act Rule 12b-20 requires that an issuers periodic reports include any additional information "as may be necessary to make the required statements, in the light of the circumstances under which they are made, not misleading." 17 C.F.R. §240.12b-20.

In 1989, the Commission determined that additional interpretive guidance was needed regarding a number of areas of MD&A disclosure and published an interpretive release. Release Nos. 33-6835, 34-26831, IC-16961, FR-36 (May 18, 1989) (hereinafter "MD&A Release"). Drawing on earlier releases, the MD&A Release noted that the underlying rationale for providing MD&A disclosure is that, in the absence of MD&A, "a companys financial statements and accompanying footnotes may be insufficient for an investor to judge the quality of earnings and the likelihood that past performance is indicative of future performance." The MD&A Release also noted that "MD&A is intended to give the investor an opportunity to look at the company through the eyes of management by providing both a short and long-term analysis of the business of the company."

In 1992, the Commission applied the standards governing appropriate MD&A disclosures in the context of poorly performing subsidiaries. In the Matter of Caterpillar Inc., Release No. 30532 (March 31, 1992). In Caterpillar, the Commission determined that Caterpillars MD&A disclosures failed to adequately apprise investors of a material risk of lower earnings and did not quantify the impact CI lower earnings from a Brazilian subsidiary on Caterpillars overall results.

As with Caterpillar, Sonys MD&A failed to disclose the extent to which net losses attributable to a subsidiary (Sony Pictures) were reflected in Sonys overall bottom line. Sony reported the favorable box office and sales figures of Sony Pictures in the years 1991 to 1993 but failed to discuss a "known trend," i.e., that Sonys reported financial results included cumulative net losses of more than $1 billion through June 30, 1994 that were attributable to Sony Pictures. In addition, Sony failed to disclose that it had been considering for more than a year, in the context of certain strategic business options, the possible need to write off a substantial portion of Sony Pictures goodwill.

In sum, Sony violated Section 13(a) of the Exchange Act and Rules 13a-1, 13a-16, and 12b-20 thereunder by furnishing a Form 6-K on June 15, 1994, another Form 6-K on September 7, 1994, and an Annual Report to Shareholders in August 1994 that contained inadequate disclosures concerning the performance of Sony Pictures. Sony also violated the foregoing provisions by filing a Form 20-F on September 29, 1994 for the fiscal year ended March 31, 1994 with an MD&A section that contained inadequate disclosures concerning the performance of Sony Pictures.

2. Sumio Sano

In his capacity as the General Manager of Sonys Capital Market & Investor Relations Division, Sano had responsibility for supervising and coordinating the drafting of the text of the Sony press releases and periodic filings that contained inadequate disclosures regarding Sony Pictures. By failing to ensure that Sonys disclosures regarding the results of Sony Pictures were complete and accurate, Sano was a cause of Sonys violations of Exchange Act Section 13(a) and Rules 13a-1, 13a-16, and 12b-20 thereunder.

IV.

SEGMENT REPORTING

Sony has adopted Statement of Financial Accounting Standards No. 131 for purposes of reporting its financial results beginning with the fiscal year ended March 31, 1998. The adoption of FAS 131 requires Sony to provide separate segment reporting for, among other things, Sony Pictures.

V.

FINDINGS

Based on the above, the Commission finds that Respondent Sony Corporation violated Exchange Act Section 13(a) and Rules 13a-1, 13a-16, and 12b-20 thereunder, and that Respondent Sumio Sano was a cause of such violations.

VI.

ORDER

Accordingly, IT IS HEREBY ORDERED, pursuant to Section 21C of the Exchange Act, that Sony Corporation cease and desist from committing or causing any violation of, and committing or causing any future violation of, Section 13(a) of the Exchange Act and Rules 13a-1, 13a-16, and 12b-20 thereunder; and

IT IS FURTHER ORDERED, pursuant to Section 21C of the Exchange Act, that Sumio Sano cease and desist from causing any violation and any future violation of Section 13(a) of the Exchange Act and Rules 13a-1, 13a-16, and 12b-20 thereunder; and

IT IS FURTHER ORDERED, pursuant to Section 21C of the Exchange Act, that Sony comply with its undertaking to engage an independent auditor to conduct an examination of Sonys MD&A presentation for the fiscal year ending March 31, 1999 and to express an opinion thereon to be included in Sonys Annual Report to shareholders and its Form 20-F for the fiscal year ending March 31, 1999; and

IT IS FURTHER ORDERED, pursuant to Section 21C of the Exchange Act, that Sony comply with its undertaking to adopt and implement procedures and practices to ensure that its Chief Financial Officer will be designated henceforth as the officer primarily responsible for ensuring that Sonys public financial disclosures, including but not limited to MD&A presentations in its filings with the Commission, are accurate and otherwise in compliance with applicable legal and accounting requirements; and

IT IS FURTHER ORDERED, pursuant to Section 21C of the Exchange Act, that Sony continue to comply with its undertaking, described in Section IV above and implemented prior to the date of this Order, to adopt FAS 131 for purposes of reporting its financial results.

By the Commission.

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