Accounting Fraud

January 18, 2017

General Motors will pay a $1 million penalty to settle charges that deficient internal accounting controls prevented the company from properly assessing the potential impact on its financial statements of a defective ignition switch found in some vehicles.  When loss contingencies such as a potential vehicle recall arise, accounting guidance requires companies like General Motors to assess the likelihood of whether the potential recall will occur, and provide an estimate of the associated loss or range of loss or otherwise provide a statement that such an estimate cannot be made.  The SEC’s order finds that the company’s internal investigation involving the defective ignition switch wasn’t brought to the attention of its accountants until November 2013 even though other General Motors personnel understood in the spring of 2012 that there was a safety issue at hand.  Therefore, during at least an 18-month period, accountants at General Motors did not properly evaluate the likelihood of a recall occurring or the potential losses resulting from a recall of cars with the defective ignition switch.  SEC

January 18, 2017

Texas-based medical device company Orthofix International will admit wrongdoing and pay more than $14 million to settle charges that it improperly booked revenue in certain instances and made improper payments to doctors at government-owned hospitals in Brazil to increase sales.  According to the SEC’s order, Orthofix improperly recorded certain revenue as soon as a product was shipped despite contingencies requiring certain events to occur in order to receive payment in the transaction.  In other instances, Orthofix immediately recorded revenue when it had provided customers with significant extensions of time to make payments.  The accounting failures caused the company to materially misstate certain financial statements from at least 2011 to the first quarter of 2013.  Four former Orthofix executives will pay penalties to settle cases related to these accounting failures.  A separate SEC order found that Orthofix violated the Foreign Corrupt Practices ACT (FCPA) when its subsidiary in Brazil schemed to use high discounts and make improper payments through third-party commercial representatives and distributors to induce doctors under government employment to use Orthofix’s products.  Orthofix will pay a $8.25 million penalty to resolve the accounting violations and more than $6 million in disgorgement and penalties to settle the FCPA charges.  SEC

January 19, 2017

Nevada-based gaming and resort company Las Vegas Sands Corp. agreed to pay a $6.96 million criminal penalty to resolve the government’s investigation into violations of the Foreign Corrupt Practices Act (FCPA) in connection with business transactions in China and Macao. According to admissions by Sands, certain Sands executives failed to implement internal accounting controls to ensure the legitimacy of payments to a business consultant who assisted Sands in promoting its brand in China and Macao and to prevent the false recording of those payments in its books and records. Sands continued to make payments to the consultant despite warnings from its finance staff and an outside auditor that the business consultant had failed to account for portions of these funds. In addition, Sands terminated the finance department employee who raised concerns about the payments. Sands also agreed to pay a civil penalty of roughly $9 million to settle related SEC charges for a total payout of roughly $16 million. DOJ

January 12, 2016

BNY Mellon will pay a $6.6 million penalty to settle charges stemming from miscalculations of its risk-based capital ratios and risk-weighted assets reported to investors. An SEC investigation found that BNY Mellon deviated from regulatory capital rules by excluding from its calculations approximately $14 billion in collateralized loan obligation assets that the firm consolidated onto its balance sheet in 2010. BNY Mellon never obtained Federal Reserve Board approval as required under regulatory capital rules to exclude the assets from its calculations. Due to the miscalculations and the firm’s lack of internal accounting controls to ensure its financial statements were being prepared properly, BNY Mellon understated its risk-weighted assets and overstated certain risk-based capital ratios in quarterly and annual reports from the third quarter of 2010 to the first quarter of 2014. SEC

January 11, 2017

January 11, 2017 – Government contractor L-3 Technologies Inc. will pay a $1.6 million penalty to settle charges that it failed to maintain accurate books and records and had inadequate internal accounting controls. According to the SEC’s order, around August 2013, executives in L-3’s Army Sustainment Division developed a “Revenue Recovery Initiative” that identified approximately $50 million in work performed under a contract with the U.S. Army that had not been billed. Because L-3 and the Army had not reached agreement on payment, any revenue recognition for that work was improper. Nonetheless, in December 2013, a senior finance official requested that 69 invoices be generated, but not delivered, causing the division to recognize almost $18 million in revenue. Because of that revenue, division employees just satisfied an internal target for management incentive bonuses. In June 2014, L-3 hired outside consultants to conduct an internal investigation. In addition to the improper revenue recognized in association with the 69 invoices, the consultants identified additional accounting errors in the division’s books from 2011 through 2014. All together, these errors had the effect of overstating the company’s pre-tax income by $169 million. SEC

December 29, 2016

Kentucky-based wire and cable manufacturer General Cable Corporation will pay more than $75 million to resolve parallel SEC and DOJ investigations related to its violations of the Foreign Corrupt Practices Act.  General Cable will also pay an additional $6.5 million penalty to the SEC to settle separate accounting-related violations.  According to the SEC’s order, General Cable’s overseas subsidiaries made improper payments to foreign government officials for a dozen years to obtain or retain business in Angola, Bangladesh, China, Egypt, Indonesia, and Thailand.  The company’s weak internal controls also failed to detect improper inventory accounting at its Brazilian subsidiary, causing the company to materially misstate its financial statements from 2008 to the second quarter of 2012.  Karl Zimmer, General Cable’s then-senior vice president responsible for sales in Angola will also pay a $20,000 penalty to settle charges of knowingly circumventing internal accounting controls and causing FCPA violations when he approved certain improper payments.  SEC

December 19, 2016

The SEC charged Mark Nordlicht, founder of hedge fund firm Platinum Partners, and two of Platinum’s flagship hedge fund advisory firms, Platinum Management (NY) LLC and Platinum Credit Management LP, with conducting a fraudulent scheme to inflate asset values and illicitly move investor money to cover losses and liquidity problems.  SEC examiners uncovered suspicious activity during an examination of the firms and referred it to SEC enforcement staff for further investigation.  The SEC’s complaint alleges that Nordlicht and the Platinum funds overstated the value of an oil company that was among their largest assets, and concealed a growing liquidity crisis by transferring money between the funds, making preferential redemptions to favored investors, and using misrepresentations to attract new investors to the struggling funds.  The SEC’s complaint further alleges that Nordlicht schemed with colleagues and Jeffrey Shulse, CFO of Black Elk Energy, Platinum’s other major oil investment, to divert almost $100 million from Black Elk Energy to help boost the Platinum funds.  Others charged in the SEC’s complaint include Shulse, David Levy (Platinum Owner and Co-Chief Investment Officer), Daniel Small (former Managing Director and Portfolio Manager of certain Platinum funds), Uri Landesman (former Managing General Partner of certain Platinum funds), Joseph Mann (employee of Platinum’s Investor Relations Department), and Joseph SanFilippo (CFO of a Platinum hedge fund).  Funds managed by Platinum Management are currently in a liquidation proceeding in the Cayman Islands.  SEC

December 2, 2016

The parent company for United Airlines will pay $2.4 million to settle charges that it violated the books and records and internal accounting controls provisions when it reinstituted a poorly-performing flight route to curry favor with a public official.  According to the SEC’s order, United reinstated a nonstop flight between Newark, N.J. and Columbia, S.C. at the behest of David Samson, the then-chairman of the Port Authority of New York and New Jersey, who wanted a more direct route to his home in South Carolina.  The route had experienced poor financial performance and was canceled by Continental Airlines prior to its merger with United.  Additionally, a preliminary analysis conducted after Samson began privately advocating for the route’s return revealed it would likely lose money again.  Nevertheless, the SEC’s order finds that United officials feared Samson’s influence could jeopardize United’s business interests before the Port Authority, including the approval of a hangar project to help the airline at Newark’s airport.  The route was approved on the same day that the Port Authority’s board approved the lease agreement related to the hangar project.  The route lost approximately $945,000 before it ceased again, roughly around the time of Samson’s resignation from the Port Authority.  SEC

October 20, 2016

Houston-based technology solutions company FMC Technologies will pay a $2.5 million penalty to settle charges that it overstated profits in one of its business segments.  Former Controller, Jeffrey Favret, and business unit controller, Steven Croft, will pay $40,000 collectively to settle charges that they caused these accounting violations in order to meet internal targets.  The SEC’s order finds that after being pressured to improve performance in the Energy Infrastructure Segment at FMC, Favret and Croft artificially reduced the value of a liability the company recorded for employee paid time off, thus overstating the segment’s pre-tax operating profits by $800,000.  This enabled an internal target to be met for the first quarter of 2013.  The SEC’s order also found that Croft failed to comply with internal accounting controls when he directed that his business unit switch to a new accounting system without taking reasonable steps to ensure that errors would not arise.  Errors did occur, causing the overstatement  of the segment’s results in two consecutive quarters in 2014.  SEC