The SEC filed a settled financial fraud action against three former senior finance executives of Cardinal Health, Inc. SEC v. Miller, Civil Action No. 09-CV-4945 (S.D.N.Y. Filed May 27, 2009). This case follows a similar action brought against the company two years ago. SEC v. Cardinal Health, Inc., Civil Action No. 07 CV 6709 (S.D.N.Y. Filed July 26, 2007) (settled with a consent to the entry of a permanent injunction prohibiting future violations of the antifraud and reporting provisions, the payment of a $35 million penalty and the retention of an independent consultant to review disclosure processes and practices related to the issued in the complaint).

The action yesterday was brought against former Cardinal executives Richard Miller, CFO, Gary Jensen, vice president and corporate controller, and Michael Beaulieu, corporate vice president, controller and principal accounting officer. The scheme, according to the complaint, was designed to permit the company to continue its string of consecutive years of high growth. Specifically, Cardinal had reported 16 consecutive years of 20% or higher growth in earnings per share before special items and 77 fiscal quarters in which it met or beat performance guidance.

Changes in the pharmaceutical distribution business put downward pressure on Cardinal’s operating revenue, operating revenue growth rates and earnings. This in turn impaired the ability of the company to meet guidance.

A key part of the scheme involved the reclassification of revenue from “bulk” to “operating revenue.” The former consisted largely of certain full case quantities of pharmaceutical products delivered to customer warehouses. It had little profit margin. The latter consisted primarily of customized orders delivered to pharmacies and others. In late 2001, with defendant Miller’s approval, a new practice was instituted under which bulk sales held for 24 hours or more were reclassified as operating revenue. Later bulk sales were intentionally held for more than 24 hours to meet the new practice. Overall this practice was used to inflate Cardinal’s reported operating revenue by more than $5 billion. Since operating revenue is a key industry metric, this misleads the public and investors.

Defendants also manipulated Cardinal’s reported earnings in certain quarters by selectively accelerating payment of vendor invoices. This permitted the premature recording of over $133 million in cash discount income. Other improper techniques were used to bolster income including improper practices regarding reserves and the misleading classification of $22 million in anticipated litigation settlement proceeds according to the complaint.

Following an internal investigation, Cardinal restated its fiscal results for FY 2000 to 2003 and for the first three quarters of FY 2004. That restatement reduced Cardinal’s net earnings by a cumulative total of $65.9 million.

To settle the action, each defendant consented to the entry of a permanent injunction prohibiting future violations of the antifraud, reporting and internal control provisions of the securities laws. Mr. Miller also agreed to an order imposing a $120,000 civil penalty and prohibiting him from serving as an officer or director of a public company for five years. He also agreed in a related Rule 102(e) order to suspend his right to practice before the SEC as an accountant for three years. Mr. Jensen agreed to pay a $75,000 civil penalty and to an officer/director bar for three years. Mr. Beaulieu agreed to pay a civil penalty of $50,000 and an officer/director bar for three years.

Is it the market crisis or something else? It seems like one investment fund fraud after another keeps appearing. Day after day, investors keep losing their money in what look like respectable ventures that turn out to be fraudulent. Almost as fast as the SEC can find them and get an emergency court order freezing all the assets to save something for the just-fleeced investors, another scheme pops up that separated others from their hard-earned savings. All of this must leave the average investor wondering if there is any place but under the mattress to put their money.

The latest alleged scam is run by Texas A&M finance professor Robert Watson and Houston attorney and CPA Daniel J. Petroski using Global One. SEC v. PrivateFX Global One Ltd., S.A., Case No. 09-CV-1541 (S.D. Tex. Filed May 26, 2009). According to the complaint, from mid-2006 to the present, defendants Watson and Petroski have raised at least $19.5 million from more than 60 investors in this country and others.

Investors purchased shares in Global One under a private placement memorandum. The PPM claimed that investor money would be used to speculate in foreign currency inter-bank markets using a proprietary intra-day and weekly dealing model called Alpha One. One graph in the PPM depicts profits ranging from 6% to 10% between January 2000 and June 2006. Another graph shows that “Simple Cumulative Returns” were over 180% in client accounts during the same period. Overall, from August 2006 to February 2009, defendants claim that Global One never had a losing month. From inception through February 2009 the Fund claimed it had annualized returns of over 23%.

Bank records for the Fund however, failed to substantiate the claims in the PPM. During the SEC’s investigation, defendants produced records apparently from Deutsche Bank and LGT Bank. The records appeared to support the claims in the PPM. Both sets of records were fake, according to the SEC’s complaint.

Actual bank records establish that investor funds were not used in accord with the PPM. The funds were supposed to be 80% held in Swiss Banks and 20% in various other banks and brokerages. In fact, the funds were scattered about and commingled in various accounts.

The Commission sought and obtained an emergency asset freeze order. The case is in litigation.

Fake records, coupled with the identity of the defendants – a professor from a well-known university and an attorney/CPA – certainly helped induce investors to purchase shares. Fake bank records and the phony account statements sent to investors periodically also facilitated the fraud.

At the same time, this scheme has a common thread with many others: Investment returns that are not only better than those of most others, but which are incredible. Nobody wins every time. Everyone knows that. Yet such claims are a recurring theme in these cases. Every investor wants safety with good returns. What every investor needs to remember however is that when the returns are too good – like never losing through the worst market crisis in decades – then they probably are not true.