SEC v. John E. Isselmann, Jr., District of Oregon (Aug. 31, 2002) — Complaint

HELANE L. MORRISON (Admitted in California) 
PAULINE E. CALANDE (Admitted in California) 
PATRICK T. MURPHY (Admitted in New York) 
ROBERT S. LEACH (Admitted in California) 
44 Montgomery Street, Suite 2600 
San Francisco, CA  94104 
Telephone:  415-705-2500 
Facsimile:  415-705-2501 
 
Attorneys for Plaintiff 
SECURITIES AND EXCHANGE COMMISSION 
 
 
 
UNITED STATES DISTRICT COURT 
DISTRICT OF OREGON 
 
 
 
SECURITIES AND EXCHANGE 
COMMISSION, 
 
                        Plaintiff,            
 
            vs.            
 
JOHN E. ISSELMANN, JR., 
 
                        Defendant.            
___________________________________ 
CV. _____________
COMPLAINT
 
Plaintiff Securities and Exchange Commission (“Commission”) alleges:  
SUMMARY OF THE ACTION
1. John E. Isselmann, Jr. (“Isselmann” or “Defendant”), the former General 
Counsel of Electro Scientific Industries, Inc. (“ESI” or “Company”), failed to provide 
important information to ESI’s Audit Committee, Board of Directors, and auditors 
regarding a significant accounting transaction that enabled ESI to report a profit rather 
than a loss.  Isselmann’s failure to fulfill his gatekeeper role was a cause of ESI reporting 
materially false financial results to the public, and violated the Commission’s rule barring 
COMPLAINT 
1

officers and directors of public companies from omitting to state or causing another 
person to omit to state a material fact to their accountants.   
2. ESI’s former Chief Financial Officer and Controller had fraudulently 
decided to eliminate retirement and severance benefits for ESI’s Asian employees in 
order to increase ESI’s bottom line by $1 million.  Isselmann later received written legal 
advice that the law prohibited the unilateral elimination of the benefits.  Despite having 
opportunities to provide the advice to ESI’s Audit Committee, Board of Directors, and 
auditors, Isselmann failed to do so.  Isselmann’s failure allowed the CFO and Controller 
to hide an ongoing fraud.     
3. By his actions, Isselmann violated Rule 13b2-2 under the Securities 
Exchange Act of 1934 [17 C.F.R. § 240.13b2-2], which, among other things, prohibits 
officers and directors of public companies from omitting to state or causing another 
person to omit to state a material fact to accountants.  Through this action, the 
Commission seeks to enjoin Isselmann from future violations of the federal securities 
laws and obtain civil monetary penalties against him.   
JURISDICTION
4. This Court has jurisdiction over this action pursuant to Sections 21(d), 
21(e), and 27 of the Exchange Act [15 U.S.C. §§ 78u(d), 78u(e), and 78aa].  Defendant, 
directly or indirectly, has made use of the means and instrumentalities of interstate 
commerce or of the mails or of the facilities of a national securities exchange in 
connection with the acts, transactions, practices, and courses of business alleged in this 
Complaint.    
COMPLAINT 
2

AUTHORITY TO BRING THIS ACTION
5. The Commission brings this action pursuant to Sections 21(d) and 21(e) of 
the Exchange Act [15 U.S.C. §§ 78u(d) and 78u(e)]. 
DEFENDANT
6. Isselmann, age 35, resides in Portland, Oregon, and is licensed to practice 
law in the State of Oregon.  He served as General Counsel of ESI from May 2000 until 
his resignation in August 2003.   
FACTUAL ALLEGATIONS
7. ESI is an Oregon corporation with its principal place of business in 
Portland.  The Company makes manufacturing equipment for electronics and other high 
technology companies.  ESI common stock is registered with the Commission pursuant to 
Section 12(g) of the Exchange Act and trades on the Nasdaq National Market. 
8. In order to meet external expectations that ESI would be profitable, the 
Company’s CFO and Controller engaged in a scheme to fraudulently inflate ESI’s 
financial results for its quarter ended August 31, 2002.  ESI’s CFO and Controller 
reduced expenses and increased ESI’s bottom line by $1 million by secretly and 
unilaterally deciding to eliminate vested retirement and severance benefits in ESI’s Asian 
offices (which included primarily Japan, but also Taiwan and Korea).  This accounting 
transaction violated generally accepted accounting principles because ESI could not 
legally eliminate the benefits as it had purported to do.  The accounting transaction 
enabled the CFO and the Controller to avoid a loss and report a profit in line with 
external expectations.  
9. Isselmann was not involved, present, or consulted when the CFO and the 
Controller made the accounting decision described above. 
10. On September 17, 2002, Isselmann participated in a meeting with ESI’s 
Audit Committee and auditors to review the quarterly financial results, including the 
financial impact of eliminating the retirement and severance benefits.  During the 
COMPLAINT 
3

meeting, ESI’s CFO told the Audit Committee that the Japanese benefits were not legally 
required and that the decision to eliminate them had been approved by legal counsel.  
During the same discussion, Isselmann identified ESI’s legal counsel in Japan, causing an 
Audit Committee member to believe that outside legal counsel had reviewed the decision.  
Although Isselmann was unaware that the CFO had decided to eliminate the benefits in 
order to fraudulently inflate ESI’s financial results, and did not question the CFO about 
his statements, Isselmann was aware that at that time he had not reviewed or approved the 
decision to eliminate benefits nor had he, as General Counsel, sought any outside legal 
review of the issue.  At the conclusion of the meeting, the Audit Committee approved the 
inclusion of the $1 million transaction relating to the benefits in ESI’s financial results for 
the quarter. 
11. During the same time frame, Isselmann was informed that ESI’s auditors 
had been told that the elimination of the benefits had legal support.  In connection with 
the auditors’ review of ESI’s quarterly financial results, ESI provided the auditors with a 
written memorandum stating that the benefits had been eliminated because ESI was under 
“no legal obligation” to pay them and that the change was approved by ESI’s CFO and 
CEO.  Isselmann subsequently received a copy of this memorandum and was told that it 
had been written for the auditors.  However, Isselmann did not speak directly with the 
auditors and did not inform them that he had not reviewed the retirement benefits issue 
and that he had not retained outside counsel to do so. 
12. On October 3, 2002, Isselmann sought legal advice from ESI’s counsel in 
Japan on whether ESI could eliminate the benefits.   
13. On October 7, 2002, the outside counsel informed Isselmann in writing 
that ESI could not unilaterally eliminate its retirement and severance benefits in Japan 
and that if ESI wanted to terminate the benefits it was required to first consult with and 
obtain the consent of ESI’s Japanese employees.  As Isselmann was aware, ESI had 
neither consulted the Japanese employees nor obtained their consent to the elimination of 
COMPLAINT 
4

their retirement benefits.  Despite the contradiction with information Isselmann had been 
told had been written for ESI’s auditors, Isselmann did not speak directly with the 
auditors.  Nor did Isselmann provide the information to the Audit Committee, despite the 
fact that they had questioned the legal review of the matter. 
14. ESI’s Disclosure Committee met on October 7, 2002 to review and ensure 
the accuracy of ESI’s quarterly report to the Commission on Form 10-Q.  Isselmann, 
other ESI officers and employees, ESI’s external auditors, and its Portland-based outside 
corporate counsel attended the meeting, which had been arranged by Isselmann.  During 
the meeting, Isselmann tried to raise the issue of the termination of the Asian retirement 
benefits.  However, the CFO objected and, as a result, Isselmann provided no further 
detail and did not provide the written legal advice to the participants in the meeting.  
After the meeting, Isselmann spoke with the CFO and provided him with a copy of the 
written legal advice.  The CFO subsequently signed the Form 10-Q, which included the 
$1 million increase to the bottom line resulting from the elimination of the benefits. 
15. On October 15, 2002, ESI filed its Form 10-Q, reporting net income of 
$158,000 and earnings per share of $0.01 for the quarter.  Before the Form 10-Q was 
filed with the Commission, an Audit Committee member questioned Isselmann about the 
language describing the elimination of the benefits and the $1 million accounting entry.  
Isselmann failed to convey the legal advice to the Audit Committee member in response.  
As a result, the Form 10-Q was not changed. 
16. On March 31, 2003, Isselmann learned that the CFO (who had been 
promoted to CEO in December 2002) had eliminated the accrued liability for the benefits 
late at night after learning of an accounting error that negatively impacted earnings.  On 
the night of March 31, 2003, Isselmann reported to ESI’s outside counsel his suspicions 
that the CFO had engaged in misconduct.  The next day, Isselmann informed the Audit 
Committee. 
COMPLAINT 
5

17. On April 1, 2003, after receiving the written legal advice, the Audit 
Committee commenced an internal investigation.  In August 2003, following the 
completion of an internal investigation by its Audit Committee, ESI restated its financial 
results for the quarter ended August 31, 2002.  The previously recorded accounting 
transaction was reversed and the accrued liability of $1 million for the payment of Asian 
retirement and severance benefits was restored.  . 
FIRST CLAIM FOR RELIEF 
Violation of Rule 13b2-2 Under the Exchange Act 
18. The Commission incorporates by reference Paragraphs 1 through 17. 
19. Exchange Act Rule 13b2-2 [17 C.F.R. § 240.13b2-2] prohibits an officer 
of director of an issuer from, directly or indirectly, making or causing to be made a 
materially false or misleading statement or omitting to state, or causing another person to 
omit to state, a material fact necessary in order to make statements made, in light of the 
circumstances under which such statements were made, not misleading to an accountant 
in connection with an audit or examination of the financial statements of the issuer 
required to be made and the preparation and filing of documents and reports required to 
be filed with the Commission. 
20. By engaging in the conduct described above, Isselmann, directly or 
indirectly, omitted to state, or caused another person to omit to state, a material fact 
necessary in order to make statements made, in light of the circumstances under which 
such statements were made, not misleading to an accountant in connection with an audit 
or examination of the financial statements of ESI required to be made and the preparation 
and filing of documents and reports required to be filed with the Commission. 
21. By reason of the foregoing, Isselmann has violated Rule 13b2-2 [17 
C.F.R. § 240.13b2-2] and must be enjoined to ensure such violations will not continue. 
PRAYER FOR RELIEF 
WHEREFORE, the Commission respectfully requests that the Court: 
COMPLAINT 
6

1. Permanently enjoin Isselmann and his agents, servants, employees, 
attorneys, and all persons in active concert or participation with them who receive actual 
notice of the judgment by personal service or otherwise from directly or indirectly 
violating, or aiding and abetting violations of, Exchange Act Rule 13b2-2;   
2. Order Defendant to pay civil penalties under Section 21(d) of the 
Exchange Act [15 U.S.C. § 78u(d)];  
3. Retain jurisdiction of this action in accordance with the principles of 
equity and the Federal Rules of Civil Procedure in order to implement and carry out the 
terms of all orders and decrees that may be entered, or to entertain any suitable 
application or motion for additional relief within the jurisdiction of this Court; and 
4. Grant such other and further relief as the Court may deem just, equitable, 
and appropriate. 
 
Dated:  September 21, 2004 
Respectfully submitted, 
By:  ________________________________ 
Robert S. Leach 
 
Attorney for Plaintiff 
SECURITIES AND EXCHANGE  
COMMISSION 
 
COMPLAINT 
7

HELANE L. MORRISON (Admitted in California) 
PAULINE E. CALANDE (Admitted in California) 
PATRICK T. MURPHY (Admitted in New York) 
ROBERT S. LEACH (Admitted in California) 
44 Montgomery Street, Suite 2600 
San Francisco, CA  94104 
Telephone:  415-705-2500 
Facsimile:  415-705-2501 
 
Attorneys for Plaintiff 
SECURITIES AND EXCHANGE COMMISSION 
 
 
 

UNITED STATES DISTRICT COURT 

DISTRICT OF OREGON 
 
 
 
SECURITIES AND EXCHANGE 
COMMISSION, 
 
  Plaintiff, 
 
 vs. 
 
JOHN E. ISSELMANN, JR., 
 
  Defendant. 
___________________________________ 

CV. _____________

COMPLAINT

 

Plaintiff Securities and Exchange Commission (“Commission”) alleges:  

SUMMARY OF THE ACTION

1. John E. Isselmann, Jr. (“Isselmann” or “Defendant”), the former General 

Counsel of Electro Scientific Industries, Inc. (“ESI” or “Company”), failed to provide 

important information to ESI’s Audit Committee, Board of Directors, and auditors 

regarding a significant accounting transaction that enabled ESI to report a profit rather 

than a loss.  Isselmann’s failure to fulfill his gatekeeper role was a cause of ESI reporting 

materially false financial results to the public, and violated the Commission’s rule barring 

COMPLAINT 1



officers and directors of public companies from omitting to state or causing another 

person to omit to state a material fact to their accountants.   

2. ESI’s former Chief Financial Officer and Controller had fraudulently 

decided to eliminate retirement and severance benefits for ESI’s Asian employees in 

order to increase ESI’s bottom line by $1 million.  Isselmann later received written legal 

advice that the law prohibited the unilateral elimination of the benefits.  Despite having 

opportunities to provide the advice to ESI’s Audit Committee, Board of Directors, and 

auditors, Isselmann failed to do so.  Isselmann’s failure allowed the CFO and Controller 

to hide an ongoing fraud.     

3. By his actions, Isselmann violated Rule 13b2-2 under the Securities 

Exchange Act of 1934 [17 C.F.R. § 240.13b2-2], which, among other things, prohibits 

officers and directors of public companies from omitting to state or causing another 

person to omit to state a material fact to accountants.  Through this action, the 

Commission seeks to enjoin Isselmann from future violations of the federal securities 

laws and obtain civil monetary penalties against him.   

JURISDICTION

4. This Court has jurisdiction over this action pursuant to Sections 21(d), 

21(e), and 27 of the Exchange Act [15 U.S.C. §§ 78u(d), 78u(e), and 78aa].  Defendant, 

directly or indirectly, has made use of the means and instrumentalities of interstate 

commerce or of the mails or of the facilities of a national securities exchange in 

connection with the acts, transactions, practices, and courses of business alleged in this 

Complaint.    

COMPLAINT 2



AUTHORITY TO BRING THIS ACTION

5. The Commission brings this action pursuant to Sections 21(d) and 21(e) of 

the Exchange Act [15 U.S.C. §§ 78u(d) and 78u(e)]. 

DEFENDANT

6. Isselmann, age 35, resides in Portland, Oregon, and is licensed to practice 

law in the State of Oregon.  He served as General Counsel of ESI from May 2000 until 

his resignation in August 2003.   

FACTUAL ALLEGATIONS

7. ESI is an Oregon corporation with its principal place of business in 

Portland.  The Company makes manufacturing equipment for electronics and other high 

technology companies.  ESI common stock is registered with the Commission pursuant to 

Section 12(g) of the Exchange Act and trades on the Nasdaq National Market. 

8. In order to meet external expectations that ESI would be profitable, the 

Company’s CFO and Controller engaged in a scheme to fraudulently inflate ESI’s 

financial results for its quarter ended August 31, 2002.  ESI’s CFO and Controller 

reduced expenses and increased ESI’s bottom line by $1 million by secretly and 

unilaterally deciding to eliminate vested retirement and severance benefits in ESI’s Asian 

offices (which included primarily Japan, but also Taiwan and Korea).  This accounting 

transaction violated generally accepted accounting principles because ESI could not 

legally eliminate the benefits as it had purported to do.  The accounting transaction 

enabled the CFO and the Controller to avoid a loss and report a profit in line with 

external expectations.  

9. Isselmann was not involved, present, or consulted when the CFO and the 

Controller made the accounting decision described above. 

10. On September 17, 2002, Isselmann participated in a meeting with ESI’s 

Audit Committee and auditors to review the quarterly financial results, including the 

financial impact of eliminating the retirement and severance benefits.  During the 

COMPLAINT 3



meeting, ESI’s CFO told the Audit Committee that the Japanese benefits were not legally 

required and that the decision to eliminate them had been approved by legal counsel.  

During the same discussion, Isselmann identified ESI’s legal counsel in Japan, causing an 

Audit Committee member to believe that outside legal counsel had reviewed the decision.  

Although Isselmann was unaware that the CFO had decided to eliminate the benefits in 

order to fraudulently inflate ESI’s financial results, and did not question the CFO about 

his statements, Isselmann was aware that at that time he had not reviewed or approved the 

decision to eliminate benefits nor had he, as General Counsel, sought any outside legal 

review of the issue.  At the conclusion of the meeting, the Audit Committee approved the 

inclusion of the $1 million transaction relating to the benefits in ESI’s financial results for 

the quarter. 

11. During the same time frame, Isselmann was informed that ESI’s auditors 

had been told that the elimination of the benefits had legal support.  In connection with 

the auditors’ review of ESI’s quarterly financial results, ESI provided the auditors with a 

written memorandum stating that the benefits had been eliminated because ESI was under 

“no legal obligation” to pay them and that the change was approved by ESI’s CFO and 

CEO.  Isselmann subsequently received a copy of this memorandum and was told that it 

had been written for the auditors.  However, Isselmann did not speak directly with the 

auditors and did not inform them that he had not reviewed the retirement benefits issue 

and that he had not retained outside counsel to do so. 

12. On October 3, 2002, Isselmann sought legal advice from ESI’s counsel in 

Japan on whether ESI could eliminate the benefits.   

13. On October 7, 2002, the outside counsel informed Isselmann in writing 

that ESI could not unilaterally eliminate its retirement and severance benefits in Japan 

and that if ESI wanted to terminate the benefits it was required to first consult with and 

obtain the consent of ESI’s Japanese employees.  As Isselmann was aware, ESI had 

neither consulted the Japanese employees nor obtained their consent to the elimination of 

COMPLAINT 4



their retirement benefits.  Despite the contradiction with information Isselmann had been 

told had been written for ESI’s auditors, Isselmann did not speak directly with the 

auditors.  Nor did Isselmann provide the information to the Audit Committee, despite the 

fact that they had questioned the legal review of the matter. 

14. ESI’s Disclosure Committee met on October 7, 2002 to review and ensure 

the accuracy of ESI’s quarterly report to the Commission on Form 10-Q.  Isselmann, 

other ESI officers and employees, ESI’s external auditors, and its Portland-based outside 

corporate counsel attended the meeting, which had been arranged by Isselmann.  During 

the meeting, Isselmann tried to raise the issue of the termination of the Asian retirement 

benefits.  However, the CFO objected and, as a result, Isselmann provided no further 

detail and did not provide the written legal advice to the participants in the meeting.  

After the meeting, Isselmann spoke with the CFO and provided him with a copy of the 

written legal advice.  The CFO subsequently signed the Form 10-Q, which included the 

$1 million increase to the bottom line resulting from the elimination of the benefits. 

15. On October 15, 2002, ESI filed its Form 10-Q, reporting net income of 

$158,000 and earnings per share of $0.01 for the quarter.  Before the Form 10-Q was 

filed with the Commission, an Audit Committee member questioned Isselmann about the 

language describing the elimination of the benefits and the $1 million accounting entry.  

Isselmann failed to convey the legal advice to the Audit Committee member in response.  

As a result, the Form 10-Q was not changed. 

16. On March 31, 2003, Isselmann learned that the CFO (who had been 

promoted to CEO in December 2002) had eliminated the accrued liability for the benefits 

late at night after learning of an accounting error that negatively impacted earnings.  On 

the night of March 31, 2003, Isselmann reported to ESI’s outside counsel his suspicions 

that the CFO had engaged in misconduct.  The next day, Isselmann informed the Audit 

Committee. 

COMPLAINT 5



17. On April 1, 2003, after receiving the written legal advice, the Audit 

Committee commenced an internal investigation.  In August 2003, following the 

completion of an internal investigation by its Audit Committee, ESI restated its financial 

results for the quarter ended August 31, 2002.  The previously recorded accounting 

transaction was reversed and the accrued liability of $1 million for the payment of Asian 

retirement and severance benefits was restored.  . 

FIRST CLAIM FOR RELIEF 

Violation of Rule 13b2-2 Under the Exchange Act 

18. The Commission incorporates by reference Paragraphs 1 through 17. 

19. Exchange Act Rule 13b2-2 [17 C.F.R. § 240.13b2-2] prohibits an officer 

of director of an issuer from, directly or indirectly, making or causing to be made a 

materially false or misleading statement or omitting to state, or causing another person to 

omit to state, a material fact necessary in order to make statements made, in light of the 

circumstances under which such statements were made, not misleading to an accountant 

in connection with an audit or examination of the financial statements of the issuer 

required to be made and the preparation and filing of documents and reports required to 

be filed with the Commission. 

20. By engaging in the conduct described above, Isselmann, directly or 

indirectly, omitted to state, or caused another person to omit to state, a material fact 

necessary in order to make statements made, in light of the circumstances under which 

such statements were made, not misleading to an accountant in connection with an audit 

or examination of the financial statements of ESI required to be made and the preparation 

and filing of documents and reports required to be filed with the Commission. 

21. By reason of the foregoing, Isselmann has violated Rule 13b2-2 [17 

C.F.R. § 240.13b2-2] and must be enjoined to ensure such violations will not continue. 

PRAYER FOR RELIEF 

WHEREFORE, the Commission respectfully requests that the Court: 

COMPLAINT 6



1. Permanently enjoin Isselmann and his agents, servants, employees, 

attorneys, and all persons in active concert or participation with them who receive actual 

notice of the judgment by personal service or otherwise from directly or indirectly 

violating, or aiding and abetting violations of, Exchange Act Rule 13b2-2;   

2. Order Defendant to pay civil penalties under Section 21(d) of the 

Exchange Act [15 U.S.C. § 78u(d)];  

3. Retain jurisdiction of this action in accordance with the principles of 

equity and the Federal Rules of Civil Procedure in order to implement and carry out the 

terms of all orders and decrees that may be entered, or to entertain any suitable 

application or motion for additional relief within the jurisdiction of this Court; and 

4. Grant such other and further relief as the Court may deem just, equitable, 

and appropriate. 

 

Dated:  September 21, 2004 

Respectfully submitted, 

By:  ________________________________ 
Robert S. Leach 
 

Attorney for Plaintiff 
SECURITIES AND EXCHANGE  
COMMISSION 

 

COMPLAINT 7