SEC Charges Five Senior Executives With Financial Fraud
Five executives took advantage of their employer’s weak internal controls to repeatedly misappropriate funds, causing a loss of over $11 million over a four year period beginning in 2008. The scheme was discovered when a firm executive reported it to the CEO and CFO of the company, precipitating an internal investigation that lead to a restatement. SEC v. Shakouri, Civil Action No. 2:17-cv-01929 (C.D. Cal. Filed March 10, 2017).
The action charges five former executives of iPayment: Nasir Shakouri, senior vice president of sales and marketing; Robert Torino, at one point executive vice president and COO; Bronson Quon, vice president and corporate controller; John Hong vice president of information technology; and Jonathan Skarie, assistant vice president of merchant operations. The company provides credit and debit card payment processing services to small merchants. In May 2011 the firm completed debt offerings, registering notes with the Commission.
The scheme had three key facets:
Expense reimbursement: Beginning in February 2008, and continuing over essentially the next four years, Messrs. Shakouri and Torino, assisted by others, obtained what appeared to be reimbursements from the company totaling over $2.4 million for amounts supposedly paid to third party vendors. Firm policy at the time permitted executives to incur expenses on their personal credit cards and obtain reimbursement. Most of the fraudulent charges involved the claimed purchase of equipment supposedly from Dell computer. For example, Mr. Shakouri claimed to have made nine purchases of equipment totaling about $1.3 million. He submitted requests for repayment which were honored. Mr. Torino obtained about $350,000 of claimed reimbursements based on four fake invoices for Dell computer equipment. In addition to the Dell invoices, other fake invoices and credit card receipts were submitted to the firm to obtain reimbursements that were fraudulent.
Kickback scheme: Beginning in April 2011, and continuing for over a year, Messrs. Shakouri, Torino and Hong caused the company to significantly overpay certain vendor invoices. The overpayments, totaling millions of dollars, went to them. The scheme was implemented with the assistants of Individual A and Individual B, vendors that had a close relationship with Defendants Shakouri and Torino. Individuals A and B were provided certain IT services to the Company. The invoices were inflated. The inflated portions was kicked back to the executives.
Merchant fraud schemes: Messrs. Shakouri and Torino, assisted by others, defrauded the firm of over $6.1 million through various schemes which essentially secured the payment to themselves of certain sums related largely to the firm’s merchant accounts by falsifying the books and records. iPayment obtained merchant accounts in two ways: 1) through its salaried employees and 2) by referrals from a network of independent sales offices or ISOs. The former were house accounts. The latter were ISO accounts. On those accounts the firm paid the ISO a bonus for the account known as a residual.
Examples of these schemes include one utilized to obtain improper payments involving the discontinued merchant program. That program sought to re-sign merchants that stopped doing business with iPayment. Essentially Messrs. Torino and Shakouri caused the company books and records to be falsified in such a manner that about 40 active house accounts were reclassified as discontinued merchant accounts and that were then re-signed, generating the payment of a residual that went to the executives. A variation of this scheme involved Online Data Corporation, a division of iPayment. Messrs. Shakouri and Torino caused the house accounts at Online Data be reclassified as ISO accounts to claim the residual due after they were re-signed.
Following the internal investigation five material weaknesses were discovered in the firm’s internal controls: 1) entry level controls were not effectively designed or applied to prevent senior management from circumventing or overriding them; 2) accounts payable controls were not adequately designed; 3) the firm failed to maintain effective controls regarding the verification of ISOs; 4) personal credit cards were used for purchases rather than a centralized purchasing system; and 5) effective policies and procedures were not in place regarding the use of manual journal entries and which required adequate supporting documentation.
The complaint alleges violations of Exchange Act Sections 10(b), 13(b)(2)(A), 13(b)(2)(B), 13(b)(5), 15(d) and 20(e) and Securities Act Section 15(b). The action is in litigation. A parallel criminal action was filed by the U.S. Attorney’s Office for the Central District of California against Messrs. Shakouri and Torino. See Lit. Rel. No. 23775 (March 10, 2017).