The SEC Concludes A Financial Fraud Case; PCOB Staff Guidance For Small Companies
The SEC: On Friday the SEC announced the conclusion of a case arising out of the financial fraud at Hayes Lemmerz International, Inc. The court entered judgments against Ranko Cucuz, the former CEO, and William D. Shovers, the former CFO of the company.
The action centered on a financial fraud which took place at Hayes from 1999 through 2001. According to the Commission’s complaint, senior officers of the company engaged in a scheme to meet earnings targets and disguise the declining operating results at the company. Key elements of the scheme included: 1) inappropriately deferring operating expenses to balance sheet accounts; 2) failing to process vendor invoices; 3) understating employee fringe benefits; and 4) improperly recording certain customer discounts to balance sheet accounts. As a result, Hayes made materially false filings with the Commission for the fiscal years 1999 and 2000 and the first quarter of 2001.
On April 25, 2006, the Commission brought an enforcement action against the company and four former senior officers. In addition to Messrs. Cucuz and Shovers, the SEC named as defendants Ronald Kolakowski, former President of the North American Wheel Group, and Jesus Bonilla-Valdez, former Vice President of the Aluminum Wheel Group. SEC v. Cucuz, Civil Action No. 2:06-CV-11935 (E.D. Mich. Filed April 25, 2006)
The company settled at the time the complaint was filed, consenting to the entry of a permanent injunction prohibiting future violations of the antifraud, reporting and internal control provisions of the federal securities laws. Mr. Kolakowski also settled at that time, consenting to the entry of a permanent injunction prohibiting future violations of the same statutory sections as the company. In addition, Mr. Kolakowski consented to the entry of an order baring him from being an officer or director for ten years and requiring him to the pay a $75,000 civil penalty. Defendant Jesus Bonilla-Valdez settled with the Commission on January 14, 2007. He consented to the entry of a permanent injunction containing the same provisions as the earlier settlements. In addition, he consented to the entry of an order requiring him to pay a $30,000 civil penalty. Four other employees settled with the Commission in administrative proceedings. These actions are listed in Release No. 20864.
Messrs. Cucuz and Shovers were found liable by a jury on August 20, 2008. Based on the verdict of the jury, the court entered final judgments against each defendant. The judgment against Mr. Shovers imposed a permanent injunction prohibiting future violations of the antifraud and reporting provisions of the federal securities laws, barred him from acting as an officer or director for a period of five years and imposed a civil penalty of $50,000. The judgment against Mr. Cucuz also contained a permanent injunction which barred him from future violations but only of the antifraud provision of the Securities Act. The judgment also imposed a $10,000 civil penalty. The Commission’s complaint had charged Mr. Cucuz with violations of a the antifraud and reporting provisions of the Securities Exchange Act including Sections 10(b), 13(a), 13(b)(2)(A) and 13(b)(2)(B) as well as Rule 13b2-2, lying to auditors.
PCAOB: The Public Company Accounting Oversight Board on Friday published “An Audit of Internal Control Over Financial Reporting That is Integrated with An Audit of Financial Statements: Guidance for Auditors of Smaller Public Companies.” This staff guidance explains how auditors can apply the principles of Auditing Standard No. 5 to audits of smaller public companies.