SEC Files Accounting Fraud Action

Financial fraud has long been a key focus of SEC enforcement. Traditionally, many of the cases brought followed from restatements of the financial statements. Since a restatement is predicated on an admission of an error by the issuer followed by the issuance of new, corrected financial statements, the follow-on case by the SEC was straight forward.

In recent years, however, the agency has often had difficulty developing financial fraud cases. Frequently new cases were developed from data analytics and other sources. Those cases were often more difficult to develop that those stemming from the traditional model. The most recent case of the agency in this area, however, represents a combination of approaches – the scheme was uncovered following a letter from the staff which was followed by a restatement. SEC v. American Renal Associates Holdings, Inc., Civil Action No. 21-cv-10366 (S.D.N.Y. Filed December 6, 2021).

The action names as defendants: the company, a firm whose shares are listed on the NYSE and provides dialysis services; Jonathan Wilcox, a CPA who served as the firm’s CFO for a period; Jason Boucher, a CPA who served as the VP of Finance and CFO for a period; and Karen Smith, a CPA who served as VP of Finance for a period.

Over a period of about 18 months, beginning in 2017, Defendant’s manipulated the revenue of the firm by making what they called “top side” adjustments. American Renal operated by partnering with documents who required renal services. Under the terms of the partnerships the physicians furnished the medical services. American Renal provided accounting and bookkeeping services, a business model that facilitated the scheme.

Since American Renal could not always estimate the amount various insurance carriers would pay for the services, the amounts were estimated in two steps. The initial estimate was what the firm called a “contractual allowance.” The later adjustments could be positive or negative, depending on the circumstances. It was called a “top side” adjustment.

The adjustments made at the second step were not based on patient level data. Rather, a variety of other metrics were used to adjust the revenue. In the end, however, after all the adjustments the revenue was sufficient to hit the pre-determined metrics. In addition, the increases ensured payments to the individual defendants – and were inconsistent with the firm’s internal controls which required patient level data.

The scheme to adjust revenue was discovered after the company received an inquiry from the Commission staff. At that point the company was forced to undertake a restatement of the firm’s financial statements for 2017 and the first three quarters of 2018. The restatement acknowledged a weakness in internal controls. The complaint alleges violations of Securities Act Section 17(a), Exchange Act Sections 10(b), 13(a) 13(b)(2)(A), 13(b)(2)(B), 13(b)(5) and Sox Section 304(a).

The company settled with the Commission, consenting to the entry of permanent injunctions based on the Sections cited in the Order except Exchange Act Section 13(b)(5). The case is pending as to each of the individual defendants. See Lit. Rel. No. 25282 (December 6, 2021).

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