Accounting Fraud
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July 14, 2022
Jesus Jose Mendez, co-owner of J&J Drywall, Inc., was sentenced to 3 years probation and ordered to pay $2.8 million to the IRS, and $62,730 to the MA DOL for evading income and employment taxes, and not making the requisite state unemployment contributions. From 2013 to 2017, defendants cashed over $16 million in business checks at check-cashing businesses and would leave cash-filled backpacks at their worksites from which to pay their employees. Meanwhile, deposits into the J&J bank account during this same timeframe equaled only $4 million, and deposits were frequently structured in amounts less than $10k, evading reporting requirements. Federal tax losses are estimated at just over $2.8 million, and the loss to MA DOL equaled nearly $63,000. Jamie Zambrano, Mendez’s business partner, is currently a fugitive. USAO RIJune 28, 2022
In response to SEC charges, audit firm Ernst & Young LLP admitted that its employees cheated on CPA exams and in continuing professional education courses, and that the firm withheld evidence of this misconduct during the SEC’s investigation. EY agreed to pay a $100 million penalty and undertake extensive remedial measures. The cheating took place on the ethics component of CPA exams and in courses required to maintain CPA licenses, including ones designed to ensure that accountants can properly evaluate whether clients’ financial statements comply with Generally Accepted Accounting Principles. SECJune 28, 2022
Paulette Carpoff will spend over 11 years in prison for her role in DC Solar’s billion-dollar Ponzi scheme. Between 2011 and 2018, DCS manufactured and sold trailer-mounted mobile solar generators, using the available federal solar tax credit to lure investors. In a leaseback arrangement, investors paid a percentage of the cost and financed the rest via DCS. Instead, DCS paid early investors with new investors’ money. Carpoff controlled the Ponzi-like payments, generated fake engineering reports for nonexistent MSGs, and lied to investors about DCS’ success. Carpoff enjoyed the spoils of the fraud, which included over 150 luxury and collector vehicles, lavish jewelry, and a private subscription jet service. USAO EDCAJune 7, 2022
Synchronoss Technologies, Inc. and seven senior employees were charged with accounting improprieties running from 2013 to 2017, including improperly accounting for numerous transactions, filing with the SEC materially misleading financial statements, and having material weaknesses in its internal financial reporting controls. Synchronoss will pay a civil penalty of $12.5 million. SECMay 23, 2022
Art dealer Inigo Philbrick will spend 7 years in prison and forfeit over $86 million for defrauding investors to finance his art business. Over a 3-year period, from 2016 through 2019, Philbrick misrepresented the ownership of certain artworks, selling multiple ownership interests in an artwork totaling more than 100%; created fraudulent contracts and records to further the scheme; made material misrepresentations and omissions to collectors, investors, and lenders; and sold or used artworks as collateral on loans without the knowledge of the artworks’ co-owners. The fraud was eventually exposed when investors learned of the fraudulent records and material misrepresentations Philbrick had made, and a lender notified Philbrick that he was in default on a $14 million loan. USAO SDNYApril 12, 2022
Robert A. Karmann, a CPA and former CFO of DC Solar, was sentenced to 6 years in prison and ordered to pay $624 million for his role in perpetrating a Ponzi-style scheme, by taking new investor money to pay older investors, and deploying circular transactions to cover up their illicit behavior. DC Solar manufactured trailer-mounted solar generators and marketed them as having extensive third-party lease demand. Karmann and his co-conspirators offered falsified financial statements and operation reports and provided fabricated revenue summaries to victims of the scheme. Karmann oversaw the hidden transfers of funds, gave false information to investor representatives, and instructed a subordinate to “make it up” when asked by a customer for reports on the location of their solar generators. USAO EDCAFebruary 22, 2022
Healthcare company Baxter International Inc. and two of its former executives have settled claims with the SEC related to reporting of its intra-company foreign exchange transactions. Baxter agreed to pay a penalty of $18 million; the company’s former treasurer and assistant treasurer will pay penalties of $125,000 and $100,000, respectively. The SEC alleged that in recording foreign currency transactions recognized by its subsidiaries, Baxter used a foreign exchange rate convention that was not in accordance with U.S. generally accepted accounting principles; the company then leveraged this FX convention by engaging in intra-company transactions for the sole purpose of generating FX gains or avoiding FX losses, resulting in material misstatements of its net income. SECTop Ten SEC and CFTC Recoveries of 2021
Posted 01/7/22
