Accounting Fraud

June 14, 2017

Michael Gluk, former chief financial officer of ArthroCare, pleaded guilty to conspiring with others to falsely inflate ArthroCare’s sales and revenue through a series of end-of-quarter transactions involving ArthroCare’s distributors. He further admitted that he and other co-conspirators caused ArthroCare to file a Form 10-K for 2007 and Form 10-Q for the first quarter of 2008 with the SEC that materially misrepresented ArthroCare’s quarterly and annual sales, revenues, expenses and earnings. DOJ

May 1, 2017

The Securities and Exchange Commission today announced that MagnaChip Semiconductor Corp. a South Korea-based semiconductor manufacturer and its former CFO Margaret Sakai have agreed to settle charges related to an accounting scheme to artificially boost revenue and manipulate the financial results reported to investors. The SEC’s order finds that MagnaChip overstated revenues for nearly two years in response to immense pressure placed on employees each quarter to meet revenue and gross margin targets that had been communicated to the public.  Then-CFO Sakai directed or approved several fraudulent accounting practices to make it falsely appear the company had met those targets.  For example, MagnaChip recognized revenue on sales of incomplete or unshipped products, and the company delayed booking obsolete or aged inventory to manipulate its reported gross margin.  MagnaChip also engaged in roundtrip transactions to manipulate accounts receivable balances, and concealed from auditors that there were side agreements with distributors to induce them to accept products early. “MagnaChip engaged in a panoply of accounting tricks to artificially meet its financial targets,” said Jina L. Choi, Director of the SEC’s San Francisco Regional Office.  “Companies that sell stock in the U.S. markets should prioritize a robust accounting culture that is entirely truthful with investors.” SEC

April 28, 2017

The Securities and Exchange Commission today announced charges against David Pruitt and Mark Wentlent two former executives at a government contractor that was the subject of an SEC enforcement action earlier this year and paid a $1.6 million penalty for accounting failures. The SEC Enforcement Division alleges that Pruitt, the then-vice president of finance in the Army Sustainment Division of L3 Technologies Inc., circumvented internal accounting controls and caused L3 to improperly recognize $17.9 million in revenue from a contract with the U.S. Army by creating invoices that were not actually delivered at the same time that the revenue was recorded.  The extra revenue allegedly enabled employees in that division to barely satisfy an internal target for management incentive bonus payments. The SEC Enforcement Division further alleges that Pruitt, a CPA, took steps on several occasions to conceal from L3’s corporate office and external auditor the fact that the invoices were not delivered.  The matter against Pruitt will be scheduled for a public hearing before an administrative law judge, who will prepare an initial decision stating what, if any, remedial actions are appropriate. The SEC separately instituted an order against Wentlent, the former president of L3’s Army Sustainment Division, finding that he failed to follow up on red flags that Pruitt had caused L3 to improperly recognize revenue.  Wentlent consented to the order without admitting or denying the findings, and he agreed to pay a $25,000 penalty.  The bonus payment that Wentlent received as a result of the misconduct already has been rescinded by L3. SEC

March 10, 2017

The SEC charged two former executives at credit card processing company iPayment with masterminding a fraudulent scheme to steal millions of dollars through phony expense reimbursements, inflated invoices, and other improper accounting tactics.  The SEC’s complaint alleges that iPayment’s then Senior Vice President of Sales and Marketing Nasir N. Shakouri and then-Executive Vice President and Chief Operating Officer Robert S. Torino routinely reimbursed themselves for payments that were never actually made to third-party vendors using their personal credit cards.  They also allegedly conspired with vendors to inflate invoices and receive kickbacks from the overpayments, and claimed improper commissions and bonuses related to other corporate funds they improperly diverted in various ways.  The SEC’s complaint also charges three other iPayment executives – Bronson L. Quon, John S. Hong, and Jonathan K. Skarie – with participating in the scheme and helping Shakouri and Torino falsify books and records to hide the theft of corporate funds.  Quoon, Hong, and Skarie were allegedly rewarded for their assistance with missapropriated iPayment funds.  According to the SEC’s complaint, the scheme caused approximately $11.6 million in damages. SEC

March 3, 2017

Mexico-based homebuilding company Desarrolladora Homex S.A.B. de C.V. has agreed to settle charges that it reported fake sales of more than 100,000 homes to boost its claimed revenues by more than 355% (about $3.3 billion) over a three year period.  The SEC used satellite imagery to help uncover the accounting scheme and illustrate its allegation that Homex had not even broker ground on many of the homes for which it reported revenue.  According to the SEC’s complaint, Homex filed for the Mexican equivalent of bankruptcy protection in April 2014 and emerged in October 2015 under new equity ownership.  The SEC separately issued a trading suspension in the securities of Homex.  As part of the settlement, Homex has agreed to be prohibited from offering securities in the U.S. markets for at least five years. SEC

January 23, 2017

Shipping conglomerate Overseas Shipholding Group (OSG) and its former CFO Myles R. Itkin will pay $5 million and $75,000 respectively for to settle charges that they failed to recognize hundreds of millions in tax liabilities in OSG’s financial statements.  According to the SEC’s order, OSG’s credit agreements from 2000 to the second quarter of 2012 contained a provision making OSG’s controlled foreign subsidiary Overseas International Group Inc. (OIN) and another subsidiary Overseas Bulk Ships (OBS) jointly and severally liable for OSG’s debt.  The provision triggered current income tax liability under Section 956 of the Internal Revenue Service Code which addresses “investments in United States property” for amounts that OSG borrowed, and deferred tax liabilities for amounts not borrowed but available under the credit agreements.  During this period, OSG and Itkin, who participated in the negotiation of the credit agreements and signed them, failed to recognize OSG’s tax liability despite significant indicia that the structure of its credit agreements in effect made OIN a guarantor under the agreements and could trigger tax consequences, including tax memos from outside counsel and communications with the banks during the negotiation phase of the credit agreements.   As a result of the misconduct, OSG materially understated its income tax liabilities by approximately $512 million (17% of its total liabilities).  In November 2012, following discovery of the tax liabilities, OSG filed for bankruptcy protection.  SEC

January 19, 2017

Seattle-based financial services company HoneStreet Inc. will pay a $500,000 penalty to settle charges that it conducted improper hedge accounting and later took steps to impede potential whistleblowers.  HomeStreet’s treasurer Darrell van Amen will pay a $20,000 penalty to settle charges that he caused the accounting violations.  According to the SEC’s order, HomeStreet originated approximately 20 fixed rate commercial loans and entered into interest rate swaps to hedge the exposure.  The company elected to designate the loans and the swaps in fair value hedging relationships, which can reduce income statement volatility that might exist absent hedge accounting treatment.  Companies are required to periodically assess the hedging relationship and must discontinue the use of hedge accounting if the effectiveness ration falls outside a certain range.  The SEC’s order finds that in certain instances from 2011 to 2014, van Armen saw to it that unsupported adjustments were made in HomeStreet’s hedge effectiveness testing to ensure the company could continue using the favorable accounting treatment.  The test results, based on altered inputs, were provided to HomeStreet’s accounting department, resulting in inaccurate accounting entries.  The SEC’s order further found that after HomeStreet employees reported concerns about accounting errors to management, the company concluded the adjustments to its hedge effectiveness tests were incorrect.  When the SEC contacted the company in April 2015 seeking documents related to hedge accounting, HomeStreet presumed it was in response to a whistleblower complaint and began taking actions to determine the identity of the “whistleblower.”  It was suggested to one individual considered to be a whistleblower that the terms of an indemnification agreement could allow HomeStreet to deny payment for legal costs during the SEC’s investigation.  HomeStreet also required former employees to sign severance agreements waiving potential whistleblower awards or risk losing their severance payments.  SEC