Two Financial Fraud Cases: A Victory In Court and A Settlement
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.