by T. GormanPosted on Posted in SECActions

The Commission brought four actions centered on a years long financial fraud at Sheffield, England based Symmetry Medical Sheffield LTD f/k/a Thorton Precision Components, Ltd or TPC. The company is the English subsidiary of Symmetry Medical, Inc., a U.S. manufacturer of prosthetics, medical implants and instruments as well as specialized products for the aerospace industry. One action was brought against the senior executives who orchestrated the fraud. A second names as Respondents the company and its former CFO while a third action, based on SOX 304, was brought against the former CEO and president. The fourth named as Respondents the engagement partner and manager on the audits of the company.

The fraud was the product of a group of senior executives which included Richard Senior, then VP for European Operations, Matthew Bell, then Finance Director, Lynne Norman, then Controller, and Shaun Whiteley, then the Account Manager. The four executives systematically engaged in a fraudulent scheme to inflate the financial results of TPC by understating expenses and overstating assets and revenues. The scheme began as early as 1999, four years before TPC was acquired by Symmetry and five years before the latter’s IPO. Mr. Senior is alleged to have orchestrated the scheme by enlisting TPC’s finance staff.

The key elements of the scheme, which varied over time, included:

  • Premature revenue recognition over a four year period beginning in 1999;
  • Recording fictitious or provisional sales beginning in 2004 and continuing through 2007;
  • Creating false documentation to support the fictitious revenue;
  • Understating the cost of revenues and manipulating inventory; and
  • Other accounting manipulations.

As a result of the scheme net income was overstated for fiscal 2004 by 39%, 2005 by 421%, 2006 by 30%, for the first quarter of 2007 by 131% and for the second quarter of 2007 by –6.4%. In April 2008 Symmetry restated its financial statements for fiscal years 2006, 2006 and the first two quarters of 2007.

SEC v. Senior, Civil Action No. 3:12CV60 (N.D. Ind. Filed Jan 30, 2012) is the action against the four executives involved. The complaint alleges violations of Securities Action Section 17(a) and Exchange Act Sections 10(b), 13(a), 13(b)(2)(B) and 13(b)(5). Each defendant consented to the entry of a permanent injunction, without admitting or denying the allegations in the complaint, based on the sections they were alleged to have violated. Messrs Senior, Bell and Norman will also be barred from serving as an officer or director of a public company. Mr. Bell agreed to pay disgorgement of $136,209 along with prejudgment interest but payment is waivered based on his financial condition. Mr. Senior’s consent defers the resolution of the monetary component of the case pending the completion of assets discovery. Finally, Messrs. Bell, Norman and Whitley also agreed to be barred from appearing or practicing before the Commission as an accountant.

In the Matter of Symmetry Medical, Inc., Adm. File No. 3-14723 (Jan. 30, 2012) is a proceeding against the company and its CFO and Senior Vice President, Fred Hite. The action centers on the same facts alleged in the complaint against the four executives. To resolve the action the company consented to a cease and desist order based on Exchange Act Sections 13(a), 13(b)(2)(A) and 13(b)(2)(B). Mr. Hite consented to the entry of a cease and desist order based on Exchange Act Section 13(b)(5) and SOX Section 304(a). In addition, he agreed to pay a civil penalty of $25,000 and to reimburse the company for $185,000 in bonuses and other incentive based or equity based compensation and for stock sale profits. That obligations will be satisfied by paying to the company a combination of cash and vested stock that, collectively, totals $185,000 in value with the stock portion thereof not to exceed $85,000.

SEC v. Moore, Civil Action No. 3:12 CV 61 (N.D. Ind., Filed Jan 30, 2012) is an action against Brian Moore, a U.K. citizen who served as the CEO and president of Symmetry from June 2003 and January 2011. The case is based on SOX Section 304 and does not allege that Mr. Moore knew of the fraud at the company. Mr. Moore resolved the matter by agreeing to the issuance of a final judgment ordering him to reimburse $450,000 to Symmetry which represents certain discretionary compensation paid to him in during the 12 month period following the restated financials.

In the matter of Christopher Kelly, ACA, Adm. Proc. File No. 3-14724 (Jan. 30, 2012) is an a proceeding which names as Respondents two Associate Chartered Accountants in the U.K., Christopher Kelly and Margaret Hebb who were, respectively, the former audit partner and audit manager on Ernst & Young UK LLP’s audits of TPC for 2004 through 2006. The Order concludes that the two accountants engaged in improper professional conduct with respect to the engagements. The matter was resolved with the entry of an order by consent suspending each Respondent from appearing or practicing before the Commission as an account with a right to reapply after two years.

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by T. GormanPosted on Posted in SECActions

The Residential Mortgaged Backed Securities Working Group it the newest government initiative to investigate the mortgage securitization process which many believe is at the core of the recent market crisis. The new task force was announced by the President in his State of the Union speech last week. Attorney General Eric Holder added details to that announcement in a Friday press conference.

The Working Group will apparently operate within the construct of the President’s 2009 Financial Fraud task force. That group is an inter-agency task force which was designed to marshal the resources of the federal government by creating a mechanism for agencies to meet and share information regarding their respective law enforcement efforts. It is largely an information sharing mechanism to economize and streamline the efforts of the federal government.

The new Working Group differs since it brings together federal and state law enforcement authorities. Those agencies apparently will contribute specific prosecutors and investigators to a group which ultimately will be composed of about 50 members. The group apparently will operate out of the Department of Justice and within the framework of the 2009 task force but will not overlap prior efforts, according to the Attorney General.

The new Working Group is off to a fast start. By Friday it had issued 11 civil subpoenas to financial institutions for records. The financial institutions have not been identified. The focus of the subpoenas also has not been identified. The question is, what is its purpose? To be sure the President and the Attorney General, along with the SEC Enforcement Director who also participated in the Friday news conference, made it clear that they intend to hold accountable those who broke the law and committed fraud in connection with the securitization process. Consumers apparently will also somehow benefit from all of this.

The question remains however: What is the focus of this new Working Group? The securitization process has already been investigated for years by multiple agencies. The Department of Justice has conducted criminal investigations which resulted in prosecutions such as the one against Lee Farkas, former Chairman of collapsed mortgage lender Taylor, Bean and Whitaker. The SEC has brought civil cases such as those against the former senior executives of sub-prime mortgage giant Countrywide Financial and Wall Street icon, Goldman Sachs & Co. Dozens of private damage actions have been brought, many of which are currently in litigation. Each agency has touted its success in this area. Regardless of one’s view of this record, after all this effort the question remains: What is the point of this new Working Group?

One answer is that it is going to focus more on the impact of the securitization process on consumers and search for ways to aid them and quell the on-going difficulties in the housing market. While this would seem to be the charge of the new Dodd-Frank consumer protection agency, if this is the point, it at least differs from the earlier investigative focus of many agencies. Under these circumstances it may make a positive contribution to the over all situation.

If the purpose of the new Working Group is to quell the populist notion that the architects of the market crisis must go to prison, it is treading on dangerous ground. Any prosecutions of senior financial institutions executives stemming from this new effort will begin with questions about the fairness of the charges. After all the investigative efforts into this question and the determination of many agencies such as the DOJ and the SEC not to charge these executives, it will be difficult at best to establish that suddenly something new, something missed, something meriting criminal prosecution now appeared and justifies the extreme of criminal prosecution. No doubt defense lawyers will scream foul from the very first moment that such charges are brought. And, that claim will have the ring of truth given the circumstances.

Perhaps more importantly, given the pressure from politicians and the public to “put the crooks in jail,” the environment is ripe for prosecutorial over-reaching. The history of such zealous prosecutions is repeat which unsavory and unfair tactics. The option backdating prosecutions are a recent example. Prior to 2006 when the first criminal and civil cases were brought simultaneously, little regulatory attention was given to this issue. Yet once the notion hit the public airwaves in articles published in the Wall Street Journal it became the “flavor of the moment.” The DOJ and the SEC rushed to bring cases. The result was, in many instances, prosecutorial overreaching.

The Broadcom cases are the best example. There co-founds Henry Samueli and Henry Nichols and former CFO William Ruehle were charged criminally and civilly with securities fraud keyed to option backdating claims by, respectively, the DOJ and the SEC. The prosecutions were high profile and headline grabbing. After years of dragging through the courts and millions of dollars in defense fees, the court in the criminal cases found prosecutorial abuse and overreaching which lead to the dismissal of the criminal and civil charges. Kent Roberts, the former General Counsel of McAfee was more fortunate. After years of litigation a jury finally ended his ordeal, rejecting the government’s option backdating claims. While each man has now been cleared, nothing can restore their reputations or the years of agony they endured as a result of over zealous prosecutions.

If the new Working Group is a response to the populist sediment the likelihood of another Broadcom debacle looms large. That type of a result will not quell the populist sediment. More importantly it is not justice. Rather, it undermines the very foundations of the justice system. Perhaps more importantly however, it unfairly destroys the lives and reputations of those caught in its web. Just ask Henry Samueli, Henry Nichols, William Ruehle or Kent Roberts.

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