The SEC filed a financial fraud case this week which was discovered by work by the outside auditors and the audit committee of the company. SEC v. Wells, Civil Action No. 3:09-CV-01792 (D.S.C. Filed July 8, 2009). The case was brought against Jerry F. Wells, former Executive Vice President and Chief Financial Officer of UCI Medical Affiliates, Inc. The company is a provider of non-medical management and administrative services for a network of freestanding medical centers located in South Carolina and Tennessee. It is a controlled subsidiary of Blue Cross/Blue Shield of South Carolina.

Over a five year period Mr. Wells embezzled more than $2.9 million, directing the company to pay his personal expenses or make other payments for his benefit while causing the falsification of the financial statements to cover his actions, according to the complaint. In some instances Mr. Wells used a company credit card and instructed the AP supervisor to pay the charges and allocate them to various accounts. In other instances Mr. Wells is alleged to have prepared false expense reports and submitted them for reimbursement. Those reports were not reviewed by others and were paid by the AP supervisor.

To conceal the scheme, Mr. Wells capitalized the expenses as fixed assets on the balance sheet of the company rather than expensing them. In some instances, the complaint claims that Mr. Wells altered contractor invoices for work on his home to use as back up to justify the expenditures. He also provided fraudulent work descriptions on check requests.

Capitalizing the expenses had a material impact on the financial statements of the company. From 2003 through 2008 this practice resulted in over or under statements of income. In one year for example, income was overstated by 11.1% according to a chart in the compliant.

For each year between 2003 and 2008, Mr. Wells executed annual quarterly reports filed with the Commission. He also signed the SOX certifications and management representation letter to the outside auditors.

The scheme was unraveled by the outside auditors acting in conjunction with the audit committee. In December 2008, the auditors requested a meeting with the Audit committee to review concerns about certain charitable contributions the company paid for Mr. Wells. Following the meeting, the audit committee directed the auditors to test all of the company’s disbursements for its top three executives. When that testing revealed expenditures paid by the company for Mr. Wells, the auditors requested additional documentation. Mr. Wells failed to respond and was terminated shortly thereafter by the company.

The Commission’s complaint alleges violations of the antifraud and reporting provisions of the federal securities laws. The case is in litigation. The U.S. Attorney’s Office, and the FBI participated in the inquiry with the SEC. Criminal charges have not, to date, been filed. See also Lit. Rel. 21119 (July 8, 2009).

Seminar: Today at 2:00 is a seminar on current SEC enforcement trends which is free. It is available at: