A Leasing Transaction Under Negotiation Becomes Securities Fraud
The Commission filed financial fraud actions against a computer services company, its CFO and the CFO of the operating subsidiary where the fraud occurred. SEC v. Volt Information Sciences, Inc., Civil Action No. 13 CV 237 (S.D.N.Y. Filed Jan 10, 2013); SEC v. Egan, Civil Action No. 12-CV-236 (S.D.N.Y. Filed Jan 10, 2013). Volt names as defendants the company and Debra Hobbs, the CFO of operating subsidiary Volt Delta Resources, LLC, while Egan is against Jack Egan, Jr.,Volt’s CFO. The former settled while the latter did not.
Both cases on around a transaction with a large Customer and $7.55 million in income recognized in the fourth quarter and at fiscal year end 2007 by Volt. From October 2006 through mid-November 2007 the company, Ms. Hobbs, Mr. Egan and others negotiated a four year contract with a Customer to begin on January 1, 2008. It was for the lease of certain equipment which had a total price of over $70 million.
In late 2006 the company, Ms. Hobbs and Mr. Egan requested that the customer make a down payment on the future contract to permit VDR to begin development. The Customer agreed, noting that it could obtain $10 million in internal funding if it made a capital acquisition by the end of the year. To aid the customer in obtaining the funding which could then in part be used to make the down payment on the contract VDR entered into a sham contract for the sale of $10 million of equipment. That agreement was incompatible with the leasing arrangement under negotiation.
The defendants prepared the necessary internal paper work to reflect the sham transaction. The purchase price was $7.55 million. In January 2007 the Customer then transferred $10 million to Volt with the understanding that it would be refunded at the time of the final lease deal.
Before Volt’s fiscal year end of October 28, 2007 the company, Ms. Hobbs and Mr. Egan completed the internal papers to recognize the $7.55 million as income. That sum was recognized in the financial statements of the company which were included in filings made with the Commission.
The Volt complaint alleges violations of Securities Act Section 17(a) and Exchange Act Sections 10(b), 13(a), 13(b)(2)(A) and 13(b)(2)(B). The Egan action alleges violations of Securities Act Section 17(a) and Exchange Act Sections 10(b) and 13(b)(5).
The company and Ms. Hobbs settled with the Commission, consenting to the entry of permanent injunctions prohibiting future violations of the Sections cited in the complaint. The court will determine issues regarding penalties and other remedies at a later date. Ms. Hobbs has agreed to cooperate with the Commission. Mr. Eagn’s case is in litigation. See also Lit. Rel. No. 22589 (Jan. 11, 2013).