by T. GormanPosted on Posted in SECActions

The Commission concluded two financial fraud cases yesterday, one with a jury verdict and the other with a consent decree. SEC v. Miller, Civil Action No. 1:04-cv-1655 (N.D. Ga. Filed June 14, 2004); SEC v. United Rentals, Inc., Civil Action No. 3:08-cv-1354 (D. Conn. Filed Sept. 8, 2008).

Miller is an accounting fraud case brought against John P. Miller, the former president, CEO and COB of Master Graphics, Inc., a printing company that traded on the NASDAQ National Marketing System, but was defunct by the time the action was brought. According to the complaint, Mr. Miller devised and implemented a scheme to inflate income to meet Wall Street Expectations. Specifically, the company reclassified rent and salary expenses that had been paid to division presidents in the first quarter to assets on the balance sheets. As a result of this scheme, Master Graphic’s net income was over stated by 628%, 46% and 10% in the first, second and third quarters, respectively, in its 1999 filings.

The jury concluded that Mr. Miller violated the antifraud and books and records and internal control provisions of the securities laws. It also concluded that Mr. Miller aided and abetted the making of false filings with the Commission. Remedies will be considered at a separate hearing.

Previously, the SEC settled related actions against Lance Turner Fair and Paul Melvin Henson Jr., the CFO and Chief Accounting Officers, respectively, of Master Graphics. Messrs. Fair and Henson consented to the entry of cease and desist orders in an administrative proceeding. In addition, in a related court action, each former officer consented to the entry of an order requiring each to pay a $25,000 civil penalty. In the Matter of Paul Melvin Henson, Jr., Rel. No. 8425 (May 19, 2004); In the Mater of Lance Turner Fair, Rel. No. 8424 (May 19, 2004); SEC v. Henson, Civil Action No. 04-2394 (W.D. Tenn. Filed June 2, 2004).

United Rentals is a settled financial fraud case based primarily on conduct which occurred from late 2000 through 2002, but which also incorporated claimed wrongful conduct that traces back to 1997. Although the company settled yesterday, the SEC’s investigation continues.

The complaint alleges that two former officers of the company, when faced with deteriorating business conditions, engaged in a fraudulent scheme to meet Wall Street expectations. Specifically, the complaint alleges that between 2000 and 2002 the company carried out a series of interlocking three-party sale-leaseback transactions. In these transactions, United Rentals sold used equipment to a finance company, and then leased it back for a short period. The two former officers secured a third party to guarantee the finance company against loss to induce it to enter into the transactions. United Rentals, in turn, guaranteed the third party against loss. These transactions, the Commission alleged, were fraudulent, inflating the income of the company for the fourth quarter and full year 2000, the second quarter 2001, the fourth quarter and full year 2001 and the first quarter of 2002.

During the same period, the company also improperly inflated its revenue by selling used equipment at a premium in return for concessions to the suppliers. When recognizing this income, the concessions were not disclosed.

Finally, from 1997 to 2000 when the company was growing by acquisition, United Rentals engaged in a series of improper accounting practices. Those practices related to the valuation of assets, the use of acquisition reserves and accounting for customer relationships.

To resolve the case, United Rentals consented to the entry of a permanent injunction prohibiting future violations of the antifraud and reporting provisions of the securities laws. In addition, the company consented to the entry of an order requiring that it pay a $14 million civil penalty which the Commission intends to place in a Fair Fund for distribution to affected investors. According to the SEC’s Release, the Commission considered the cooperation of the company and its remedial action.

by T. GormanPosted on Posted in SECActions

The Commission filed a settled accounting fraud case on Friday which had shades of Enron, Homestore, and Stoneridge. SEC v. Retail Pro, Inc., Case No. CV 08-1620 (S.D. Cal. Sept. 5, 2008). Each of those massive financial fraud cases involved at least in part barter deals later clamed to be sham transactions. At the time, of course, the deals helped inflate the revenue and profits of the company to make Wall Street expectations.

Retail Pro, while clearly not on the same scale as these massive cases, is based on the same kind of accounting scheme: a sham barter transaction. The Commission’s complaint names as defendants the company; Barry Schechter, at times an officer of the company, but during the relevant period a consultant the SEC claims is a control person, de facto officer and a South African Chartered Accountant; Ran Furman, the former CFO; and Harvey Braun, another former CFO. It alleges that the defendants engaged in a scheme to improperly inflate the revenue of the company for the second and third quarters and at fiscal year end.

Specifically, in the second quarter of 2004, the three individual defendants caused Island Pacific to improperly record $3.9 million in revenue from a sham transaction with an Australian software company that was a start up, QQQ Systems Pty Limited. Under the terms of the agreement, Island Pacific licensed certain software to QQQ in return for either $3.25 million to be paid in two installments or 20% of QQQ’s net sub-licensing fees up to $4 million. A side agreement executed at the same time called for Island Pacific to purchase certain software from QQQ.

According to the Commission, the transaction did not have any economic substance and was a sham. Including this transaction in the financial statements of Island Pacific caused its revenues to be overstated by 140% in the second quarter of 2004, 29% for the nine months ended third quarter 2004 and 22% for the 2004 fiscal year.

To conceal the scheme from the outside auditors, the complaint alleges that the three individual defendants forged and backdated documents in an effort to demonstrate that the revenue had been properly recognized. Mr. Schechter also sold 637,750 shares during the period for more than $1.5 million.

To resolve the case with the company and two of the individual defendants:

• Island Pacific consented to the entry of a permanent injunction prohibiting future violations of the antifraud and reporting provisions;

• Mr. Schechter consented to the entry of a permanent injunction prohibiting future violations of the antifraud and reporting provisions, the entry of an order requiring him to pay disgorgement of over $488,000 plus prejudgment interest and a civil penalty of $120,000, barring him from serving as an officer or director of a public company for ten years and agreed to the entry of an administrative order suspending him form practicing before the Commission as an account; and

• Mr. Braun consented to the entry of a permanent injunction prohibiting future violations of the antifraud and books and records provisions and an order requiring him to pay a civil penalty of $75,000 and barring him from serving as an officer or director of a public company for a period of five years.