Among recent enforcement actions, the Securities and Exchange Commission charged Computer Sciences Corp. and former executives with accounting fraud, with the company to pay a $190 million penalty to settle.
The agency also went after several entities for manipulation of Avon stock; a Canadian trader for short selling violations; a biotech employee and two stockbrokers for insider trading; and a phony hedge fund manager for stealing money invested by small businesses.
Phony Hedge Fund Manager Bilked Small Businesses to Buy a Car and Jewelry: SEC
The SEC has charged Nicholas Lattanzio of New Jersey with posing as a hedge fund manager so that he could defraud small companies looking to invest. Lattanzio got more than $4 million out of his “clients.”
According to the agency, Lattanzio promised small businesses that he would arrange project financing for them and generate substantial returns on money they invested in his Black Diamond Capital Appreciation Fund. He told them they could withdraw their money if the promised project financing didn’t materialize, and he claimed his fund had as much as $800 million under management and a proven track record of producing double-digit returns.
The reality was that the fund never had more than about $5 million, because Lattanzio simply took investor money and spent it on himself and his family. Fund assets paid for his million-dollar family home in Montclair; a $124,000 luxury car; and $100,000 worth of merchandise from Tiffany & Co. He also paid off more than $760,000 in credit card debt, withdrew approximately $570,000 in cash or checks written to himself and his girlfriend, paid more than $30,000 to a yacht broker, and funded his children’s private school tuition and his membership at an exclusive golf club.
In a parallel action, the U.S. Attorney’s Office for the District of New Jersey has announced criminal charges against Lattanzio, and the New Jersey Bureau of Securities within the State Attorney General’s Division of Consumer Affairs also announced sanctions against him.
The SEC’s complaint charges Lattanzio, Black Diamond Capital Appreciation Fund and three other Lattanzio-controlled entities with securities fraud in violation of the Securities Act of 1933 and Securities Exchange Act of 1934. The complaint also charges Lattanzio and some of the entities with investment adviser fraud in violation of the Investment Advisers Act of 1940. The SEC’s investigation is continuing.
CSC, Former Execs Charged by SEC With Accounting Fraud
Computer Sciences Corp. and former executives were charged by the SEC with manipulating financial results and hiding significant problems with the company’s biggest, highest-profile contract. In addition, the SEC charged former finance executives involved with CSC’s international businesses for ignoring basic accounting standards to boost reported profits. Five of the total of eight executives have agreed to settle, with cases proceeding against the other three; the company also agreed to settle and to pay a $190 million penalty, but those settling neither admitted nor denied the charges. According to the agency, CSC’s accounting and disclosure fraud began after the company learned it would lose money on a contract with the United Kingdom’s National Health Service (NHS) because it couldn’t meet certain deadlines. To avoid the large hit to its earnings that CSC was required to record, Robert Sutcliffe, who was CSC’s finance director for the NHS contract, added items to CSC’s accounting models that artificially increased its profits but were completely faked.
CSC, with former CEO Michael Laphen’s approval, kept stalling the financial impact of its delays by basing its models on contract amendments it was proposing to the NHS rather than the actual contract. However, NHS officials repeatedly rejected CSC’s requests that the NHS pay the company higher prices for less work.
Using the rejected proposals for its models instead of the facts, the company managed to avoid recording significant earnings reductions in 2010 and 2011. Laphen and former CFO Michael Mancuso ignored rules requiring them to disclose this situation to investors, and in fact made public statements regarding the NHS contract that disguised CSC’s performance. In addition, Mancuso hid a prepayment arrangement allowing CSC to meet its cash flow targets by effectively borrowing large sums of money from the NHS at a high interest rate. He told investors that CSC was hitting its targets “the old-fashioned hard way.”
Aside from the NHS contract, the SEC also found that CSC and finance executives in Australia and Denmark fraudulently manipulated the financial results of the company’s businesses in those regions. The agency said that Edward Parker, who served as controller in Australia, along with regional CFO Wayne Banks overstated the company’s earnings by using “cookie jar” reserves and failing to record expenses as required. They overstated CSC’s operating results by more than 5% in Q1 of fiscal year 2009; that let CSC meet analysts’ earnings targets during that period.
In CSC’s Nordic region, under finance director Paul Wakefield, the SEC found a variety of accounting manipulations to boost operating results as finance executives there tried to meet U.S. management-set budget targets. Among other things, they tried improperly accounting for client disputes, overstating assets, and capitalizing expenses. The tactics overstated CSC’s consolidated pretax income in Denmark as much as 7%. CSC’s finance manager Claus Zilmer was involved in violations of the financial reporting and books and records provisions of the securities laws.
Laphen has agreed to settle, and to return to CSC more than $3.7 million in compensation under the clawback provision of the Sarbanes-Oxley Act and pay a $750,000 penalty. Mancuso has agreed to settle and to return $369,100 in compensation and pay a $175,000 penalty.
Wakefield and Zilmer have agreed to settle, with Wakefield agreeing to accept an officer-and-director bar of at least three years as well as a bar from practicing as an accountant on behalf of SEC-regulated entities for at least three years. Banks has agreed to settle and pay disgorgement of $10,990 with prejudgment interest of $2,400, plus accept an officer-and-director bar of at least four years as well as a bar from practicing as an accountant on behalf of SEC-regulated entities for at least four years.
The SEC’s case continues against Edwards, Sutcliffe and Parker.