CEO, CFO Charged In SEC Financial Fraud Action

Since the formation of the financial task force, and its related data group, there has been speculation regarding the focus of the new program and the impact of big data techniques. One indication of how the program could unfold may be in the approach used in the financial fraud action against Lynn Blodget, the president and CEO of Affiliated Computer Services, Inc., and Kevin Kyser, the CFO of that firm. In the Matter of Lynn R. Blodgett, Adm. Proc. File No. 3-16045 (August 28, 2014). In that proceeding the SEC brought an action centered on the efforts of the firm to meet a company financial metric followed by analysts. Stated differently the firm cooked the books to meet street expectations – the same approach typically employed in many Commission financial fraud actions.

Affiliated Computer Services, which was acquired by Xerox Corporation in 2010, provided business process outsourcing and information technology services through two reportable operating segments, the Commercial Services Group and the Government Services Group. About 85% of its revenues came from recurring, long-term contracts. Resale transactions originated in the Commercial Services Group. The revenue from those transactions was classified as non-recurring.

ACS established a goal of increasing its internal revenue growth as announced in its Form 10-K for fiscal 2009. In August 2008 an analyst following the firm stated that it was well positioned to meet its internal revenue growth goals. Yet by the end of the first quarter of fiscal 2009 ACS learned that it would fall short of guidance and consensus analyst expectations on this metric.

To increase revenue ACS arranged for an equipment manufacture to re-direct about $20 million of pre-existing orders that a manufacturer had already received from another reseller through the firm. Company transaction documents gave the appearance that ACS was involved in the transaction despite the fact that it was not. Indeed, the equipment continued to be shipped directly from the manufacturer to the reseller’s customers at the same prices – ACS never had possession of the equipment. The reseller’s customers were unaware of ACS’ claimed involvement.

At the end of each of the next three quarters ACS entered into similar transactions. The firm reported revenue totaling $124.5 million from these transactions. That revenue enabled the firm to meet its disclosed targets for internal revenue for three of the four quarters during the fiscal year. Those transactions were the most significant contributors to the firm’s internal revenue growth.

The resale transactions were not recorded in accord with GAAP nor were they properly disclosed. In addition, Messrs. Blodgett and Kyser each were paid a bonus which was tied, in part, to the reported revenue growth of the firm.

The Order alleges violations of Exchange Act Section 13(a), 13(b)(2)(A) and 13(b)((2)(B) and the related Rules by each Respondent.

To resolve the proceeding each Respondent consented to the entry of a cease and desist order based on the Sections cited in the Order. In addition, Mr. Blodgett agreed to pay disgorgement of $351,050 along with prejudgment interest and a civil money penalty of $52,000. Mr. Kyser agreed to pay disgorgement of $133,192, prejudgment interest and a penalty of $52,000.

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