Two Settled Financial Fraud Cases

The Commission has filed two settled financial fraud cases this week. In both, the company consented to injunctions which included the antifraud provisions. Only one involved a corporate penalty. Only one involved cooperation.

SEC v. Apogee Technology, Inc., Civil Action No. 09 cv 10286 is an action against the company, its former COO, David Meyers and controller, Annette Jaynes. The complaint centers on a scheme to inflate the revenues of the company in 2003 and 2004 by improperly recognizing income in violation of GAAP using a variety of techniques. According to the complaint, the recorded revenues were overstated by 7% in the second quarter of 2003. This resulted from improperly recognizing income from transactions where there was a right of return. Revenue was also improperly recognized on transactions where the goods were shipped after the end of the quarter.

In other quarters, similar techniques were used to inflate income. For the fourth quarter of 2003 for example, revenue was overstated by 45% by improperly backdating transactions to include them in the quarter and recognizing revenue on sales with a right of return. Revenue was also recognized from arrangements where the contract terms were uncertain, which is contrary to GAAP. Improper revenue recognition techniques were used to inflate revenue for the second quarter of 2004 by 31% and for the third quarter of 2004 by 15%.

To resolve the case, each defendant consented to the entry of a permanent injunction prohibiting future violations of the antifraud and books and records provisions. Mr. Myers also agreed to pay disgorgement of $9,356 plus prejudgment interest representing his gains on the sale of company stock during the period. Payment, however, was waived based on his financial condition. Mr. Myers also consented to be barred from serving as an officer or director of a public company for five years. Ms. Jaynes agreed to the entry of an order requiring the payment of a civil penalty of $30,000. No corporate penalty was imposed.

A second settled financial fraud case was brought only against the company. It concluded with the entry of a permanent injunction prohibiting future violations of the antifraud and reporting provisions and the payment of a $10 million civil penalty by the company. The Commission acknowledged the cooperation of the company. SEC v. WellCare Health Plans, Inc., Civil Action No. 8:09 cv 00910 (M.D. Fla. Filed May 18, 2009).

The complaint alleges that over a four year period from 2003 through 2007, the company engaged in a fraudulent scheme which inflated its reported profits by $40 million by retaining funds it was contractually required to reimburse to agencies of the state of Florida. The reimbursements were required under two arrangements. First, under contracts with the Florida Agency for Health Care Administration, the company received funds or premiums from the state to be used to provide medical and health benefits to qualified participants. Under the agreements and applicable state statutes, the company was required to spend 80% of the funds on certain medical expenses. Second, under contracts with the Florida Health Kids Corporation, the company also received funds or premiums. Those funds were supposed to be used to provide medical and health benefits to qualified participants. Under this program WellCare was obligated to spend at least 85% or refund 50% of the difference.

WellCare did not spend the required amount under either program or rebate the funds in accord with its obligations. Rather the funds were retained, resulting in an overstatement of income for the company.

In October 2007, after the company became aware of a government investigation, the New York Stock Exchange halted trading in its shares. The share for the company price fell 63% from $115 to about $18. Following an investigation by a special board committee, the company restated its financial statements for FY 2004 through 2006 and for the first two quarters of FY 2007. In the restatement the company acknowledged a material weakness in its internal controls.