The SEC Files Two Financial Fraud Cases

Financial fraud cases continue to be a staple of SEC enforcement. Two financial fraud cases were filed by the Commission recently. One is in litigation. The other settled on filing, which is more typical.

SEC v. Fraser, Case No. 2:09-cv-00442 (D. Ariz. Filed March 6, 2009) named four former officers of CSK Auto Corporation as defendants. They are former senior officers Martin Fraser and Don Watson, the former controller Edward O’Brien and a former supervisor, Gary M. Opper.

The complaint claims that from 2002 to 2004, the defendants engaged in an accounting scheme to inflate the financial results of the company. CSK had a program under which it obtained allowances from its vendors. Those allowances decreased the cost of goods sold for the company, thereby increasing pre-tax income. During the time period of the scheme, Messrs. Watson, O’Brien and Opper concealed the fact that CSK could not collect millions of dollars in vendor allowances. Those allowances should have been written off.

The complaint also claims that all of the defendants participated in the preparation of false financial statements. Those financial statements overstated pre-tax income in 2002 by about $11 million or 47%, in 2003 by about $34 million and in 2004 by about 65% or $21 million. Defendants allegedly lied to the independent auditors to conceal their scheme. In addition, defendants failed to write off all of the uncollectible vendor allowances in a 2005 restatement. In issuing that restatement defendants also lied about the reasons for its publication.

The complaint seeks permanent injunctions, disgorgement, prejudgment interest and civil penalties against all defendants. The Commission is also seeking an officer director bar against Messrs. Fraser, Watson and O’Brien. The case is in litigation.

SEC v. Barnett, Civil Action No. 1:09-cv-00457 (D.D.C. Filed March 9, 2009) is a settled financial fraud case brought against Allen Barnett, the former CEO and Thomas Stiner, the former CFO of AstroPower, Inc., a defunct manufacturer of solar electric power products. Defendants Barnett and Thomas are alleged to have directed the improper recognition of approximately $4 million in revenues from four transactions in the second and third quarters of 2002. This resulted in overstating income by about 80% in the second quarter and 113% in the third quarter in filings made with the Commission.

To resolve the case, both defendants consented to the entry of permanent injunctions prohibiting future violations of the antifraud and books and records provisions of the federal securities laws, barring them from serving as officers and directors and requiring them to pay civil penalties. Mr. Stiner also agreed to settle an administrative proceeding in which he would be barred under 102(e) from appearing or practicing before the Commission as an accountant.