Category: SEC

Ex-Deloitte Partner, Son To Shell Out $1.1 Million to Settle SEC Insider Trading Charges

Last we had heard of Thomas Flanagan, Deloitte had just taken him to the woodshed, successfully suing him for breach of fiduciary duty, fraud, and breach of contract related to Tom’s insider trading activities of Deloitte clients.

Now it’s the SEC’s turn to get in on this sweet action. The Commission charged Flanagan and his son, Patrick Flanagan for insider trading of Deloitte clients including Best Buy, Sears, Walgreens and Motorola.

Why Flanagan, the 38-year veteran of Deloitte and Vice Chairman of Clients and Markets, who thought that in the twilight of his career, the best move would be to engage in some insider trading is still a mystery. Since he was presumably pushing 60, one couldn’t help but wonder if perhaps his memory was going and he just totally spaced the independence thing.

But actually, no. Turns out, Tom Flanagan is just a liar:

According to the SEC’s complaint, Thomas Flanagan concealed his trades in the securities of Deloitte’s clients and circumvented Deloitte’s independence controls. He failed to report the prohibited trades to Deloitte, lied to Deloitte about his compliance with its independence policies, and provided false information to Deloitte’s personal income tax preparers about the identity of the companies whose securities he traded.

Flanagan & Son will be paying over $1.1 million in disgorgement and fines for their little stunt. And Robert Khuzhami had a little reminder for anyone else out there that thinks they can get cute, “Flanagan’s insider trading violated one of the most fundamental rules of public accounting. All audit firms should learn from this unfortunate episode and employ vigorous controls designed to ensure compliance with the SEC’s auditor independence rules.”

SEC Charges Former Deloitte Partner and Son With Insider Trading [SEC Press Release]
SEC Complaint Against Thomas Flanagan and Patrick Flanagan [SEC Complaint]

A Few People Noticed That New Century Execs Settled with SEC

There were just a few reports late on Friday about New Century Execs settling with the SEC over the failure to make certain risk disclosures. However, it’s worth mentioning that this is still more coverage than the settlement that KPMG reached with New Century that we reported on in late June – still no press release – but that’s neither here nor there.


SEC statement:

On July 29, 2010, the Commission accepted settlement offers from three former officers of New Century Financial Corporation. Brad A. Morrice, the former CEO and co-founder; Patti M. Dodge, the former CFO; and David N. Kenneally, the former controller, consented to the relief described below without admitting or denying the allegations in the Commission’s Complaint. The settlement offers, which have been submitted to the Court for approval, are contingent upon the Court’s approval of a global settlement in In re New Century, Case No. 07-931-DDP (C.D. Cal.).

The Commission’s complaint alleges, among other things, that New Century’s second and third quarter 2006 Forms 10-Q and two late 2006 private stock offerings contained false and misleading statements regarding its subprime mortgage business. The complaint further alleges that Morrice and Dodge knew about certain negative trends in New Century’s loan portfolio from reports they received and that they participated in the disclosure process, but they did not take adequate steps to ensure that the negative trends were properly disclosed. The Commission’s complaint also alleges that in the second and third quarters of 2006, Kenneally, contrary to Generally Accepted Accounting Principles, implemented changes to New Century’s method for estimating its loan repurchase obligation and failed to ensure that New Century’s backlog of pending loan repurchase requests were properly accounted for, resulting in an understatement of New Century’s repurchase reserve and a material overstatement of New Century’s financial results.

That “material overstatement” consisted of a $90 million profit in Q3 of ’06 that was actually a $18 loss.

Morrice, Dodge and Kenneally all agreed to cough up some of their ill gotten gains and were subjected to fines but they didn’t come close to Michael Dell sized proportions.

SEC Settles with Former Officers of Subprime Lender New Century [SEC]
Ex-New Century Managers to Pay $1.5 Million Over Subprime Lender’s Failure [Bloomberg]

Dell Is the Latest to Go the SEC’s Woodshed; Settlement of $100 million for Fraudulent Accounting, Disclosure Violations

Sure, it’s not $550 million and it’s certainly not Goldman Sachs but the SEC seems to be having a pre-tay, pret-tay, pre-tay good July. On the other hand, some people think this settlement is more harsh than Goldman’s since Michael Dell was fined personally and Lloyd Blankein was not.

In addition to Dell, the man, the SEC charged former CEO Kevin Rollins and former CFO James Schneider for their roles in the disclosure violations related to payments the company received from Intel Corp. Former VP of Finance Nicholas Dunning and former Assslie Jackson were charged for their roles in the fraudulent accounting.

Washington, D.C., July 22, 2010 – The Securities and Exchange Commission today charged Dell Inc. with failing to disclose material information to investors and using fraudulent accounting to make it falsely appear that the company was consistently meeting Wall Street earnings targets and reducing its operating expenses.

The SEC alleges that Dell did not disclose to investors large exclusivity payments the company received from Intel Corporation to not use central processing units (CPUs) manufactured by Intel’s main rival. It was these payments rather than the company’s management and operations that allowed Dell to meet its earnings targets. After Intel cut these payments, Dell again misled investors by not disclosing the true reason behind the company’s decreased profitability.

The SEC charged Dell Chairman and CEO Michael Dell, former CEO Kevin Rollins, and former CFO James Schneider for their roles in the disclosure violations. The SEC charged Schneider, former regional Vice President of Finance Nicholas Dunning, and former Assistant Controller Leslie Jackson for their roles in the improper accounting.

Dell Inc. agreed to pay a $100 million penalty to settle the SEC’s charges. Michael Dell and Rollins each agreed to pay a $4 million penalty, and Schneider agreed to pay $3 million, to settle the SEC’s charges against them. Dunning and Jackson also agreed to settle the SEC’s charges.

“Accuracy and completeness are the touchstones of public company disclosure under the federal securities laws,” said Robert Khuzami, Director of the SEC’s Division of Enforcement. “Michael Dell and other senior Dell executives fell short of that standard repeatedly over many years, and today they are held accountable.”

Christopher Conte, Associate Director of the SEC’s Division of Enforcement, added, “Dell manipulated its accounting over an extended period to project financial results that the company wished it had achieved, but could not. Dell was only able to meet Wall Street targets consistently during this period by breaking the rules. The financial results that public companies communicate to the investing public must reflect reality.”

The SEC’s complaint, filed in federal district court in Washington, D.C., alleges that Dell Inc., Michael Dell, Rollins, and Schneider misrepresented the basis for the company’s ability to consistently meet or exceed consensus analyst EPS estimates from fiscal year 2002 through fiscal year 2006. Without the Intel payments, Dell would have missed the EPS consensus in every quarter during this period. The SEC’s complaint further alleges that Dell’s most senior former accounting personnel including Schneider, Dunning, and Jackson engaged in improper accounting by maintaining a series of “cookie jar” reserves that it used to cover shortfalls in operating results from FY 2002 to FY 2005. Dell’s fraudulent accounting made it appear that it was consistently meeting Wall Street earnings targets and reducing its operating expenses through the company’s management and operations.

According to the SEC’s complaint, Intel made exclusivity payments to Dell in order for Dell to not use CPUs manufactured by its rival – Advance Micro Devices, Inc. (AMD). These exclusivity payments grew from 10 percent of Dell’s operating income in FY 2003 to 38 percent in FY 2006, and peaked at 76 percent in the first quarter of FY 2007. The SEC alleges that Dell Inc., Michael Dell, Rollins, and Schneider failed to disclose the basis for the company’s sharp drop in its operating results in its second quarter of FY 2007 as Intel cut its payments after Dell announced its intention to begin using AMD CPUs. In dollar terms, the reduction in Intel exclusivity payments was equivalent to 75 percent of the decline in Dell’s operating income. Michael Dell, Rollins, and Schneider had been warned in the past that Intel would cut its funding if Dell added AMD as a vendor. Nevertheless, in Dell’s second quarter FY 2007 earnings call, they told investors that the sharp drop in the company’s operating results was attributable to Dell pricing too aggressively in the face of slowing demand and to component costs declining less than expected.

The SEC’s complaint further alleges that the reserve manipulations allowed Dell to materially misstate its earnings and its operating expenses as a percentage of revenue – an important financial metric that the company itself highlighted – for more than three years. The manipulations also enabled Dell to misstate materially the trend and amount of operating income of its EMEA segment, an important business unit that Dell also highlighted, from the third quarter of FY 2003 through the first quarter of FY 2005.

Without admitting or denying the SEC’s allegations, Dell Inc. consented to the entry of an order that permanently restrains and enjoins it from violation of Section 17(a) of the Securities Act of 1933 and Sections 10(b), 13(a), 13(b)(2)(A) and 13(b)(2)(B) of the Securities Exchange Act of 1934 and Rules 10b-5, 12b-20, 13a-1, and 13a-13. Dell Inc. also agreed to enhance its Disclosure Review Committee and disclosure processes, including the retention of an independent consultant to recommend improvements to those processes and enhance training regarding the disclosure requirements of the federal securities laws.

Michael Dell and Rollins settled the SEC’s disclosure charges, without admitting or denying the SEC’s allegations, by each agreeing to pay the $4 million penalties and consenting to the entry of an order that permanently restrains and enjoins each of them from violating Sections 17(a)(2) and (3) of the Securities Act and from violating or aiding and abetting violations of other provisions of the federal securities laws.

Schneider consented to settle the disclosure and accounting fraud charges against him without admitting or denying the SEC’s allegations, and agreed to pay the $3 million penalty, disgorgement of $83,096, and prejudgment interest of $38,640. Dunning and Jackson consented to settle the SEC’s improper accounting charges without admitting or denying the SEC’s allegations. Dunning agreed to pay a penalty of $50,000. In their settlement offers, Schneider, Dunning and Jackson consented to the issuance of administrative orders pursuant to Rule 102(e) of the Commission’s Rules of Practice, suspending each of them from appearing or practicing before the SEC as an accountant with the right to apply for reinstatement after five years for Schneider and three years for Dunning and Jackson.

The SEC’s investigation is continuing as to other individuals.

James Blenko, Shelby Hunt, Jonathan Jacobs, Ian Rupell, Robert Peak, Brian Palechek, and Jeffrey Anderson conducted the SEC’s investigation in this matter. Litigation efforts in the ongoing case will be led by Jack Worland and Richard Skaff.

The SEC acknowledges the assistance of the Federal Trade Commission in this investigation.

Dell, Man and Machine (Maker), Close to Settlement with SEC

In SEC-settlements-that-don’t-involve-Goldman Sachs news, Dell put their annual shareholders meeting on a brief kibosh because the company and founder Michael Dell are thisclose to settling charges for omitting disclosures for dealings with Intel Corp.

Dell Inc proposed a settlement with U.S. financial regulators over a long-running investigation of the computer maker’s accounting, and adjourned its annual shareholders meeting on Friday.

Dell adjourned the meeting until August 12 to give shareholders time to consider the discussions related to the settlement, which was announced shortly after the meeting convened.

It said earlier that the company and Chief Executive Michael Dell submitted a settlement proposal, which was still subject to approval by the U.S. Securities and Exchange Commission as well as a U.S. District Court.

The probe into accounting matters began in 2005. Dell later acknowledged accounting errors and restated financial results from 2003-2007.

Nothing to get too worked up over probably since the company only set aside $100 mil but if the entertainment for the meeting had to cancel (e.g. Dallas Cowboys cheerleaders), there’s probably a lot of upset people down in Round Rock.

The SEC Should Be Careful Not to Spend All $550 Million in One Place

Hopefully they’ll spread it around, you know, with lifetime memberships to: ladyboyjuice.com, kinkycomments.com, sexyavatars.net, cafebuckskin.blogspot.com et al.

Goldman Sachs has agreed to pay $550 million to the Securities and Exchange Commission, the largest penalty ever paid by a Wall Street firm, to settle charges of securities fraud linked to mortgage investments.

Under the terms of the deal, Goldman will pay $300 million in fines to the Treasury Department, with the rest serving as restitution to investors in the mortgage-linked security. Goldman will not admit wrongdoing, though it will admit that its marketing materials for the investment “contained incomplete information.”

That doesn’t sound nearly as fun but we understand a few people may have gotten hurt on this deal.

Goldman Settles With S.E.C. for $550 Million [NYT]

Despite Big Name Supporters, SEC Self-funding Falls By the Wayside

This story is republished from CFOZone, where you’ll find news, analysis and professional networking tools for finance executives.

As President Obama gearsng financial regulatory bill, one little discussed but important potential provision that did not survive the final version would have provided for self-funding by the Securities and Exchange Commission.

This is a policy advocated by people like New York Senator Chuck Schumer and Representative Barney Frank as well as SEC chairman Mary Schapiro. It would enable the agency to use some or all of the fees and/or fines it collects to pay its bills.


In fact, other financial regulators are currently self-funded, including the Federal Reserve, the Federal Deposit Insurance Corp. and the Office of the Comptroller of the Currency.

Wachtell Lipton Rosen & Katz points out that a proposal that the SEC should be able to fund itself based on the fees it collects was ultimately rejected. Instead, the conferees agreed that the SEC should continue to be subject to the Congressional appropriations process, and provided for certain baseline appropriations through 2015, according to the law firm. It adds that the proposed Act also requires the White House to submit unaltered to Congress the SEC’s annual budget, and establishes a $100 million reserve fund.

This is a controversial issue and current and past commissioners are divided over whether this is a good idea.

Opponents say self-funding would create a conflict of interest because it would increase the SEC’s incentive to seek the largest possible fines. Former commissioner Luis Aguilar, who supports self-funding, is sensitive to these concerns. So, he supported self funding, but only based on fees and registrations, not fines.

He had pointed out that the 2010 budget of slightly more than $1 billion is well below the $1.4 billion or so the SEC figures to bring in from those fee sources. Self-funding could also enable the SEC to attract better candidates by increasing the pay scale, something Representative Frank says he supports.

One former chairman told me last year he doubts Congress would go along with self-funding. He asserts the system of campaign finance has given the business community leverage over Congress, whose main lever of control over the SEC is its budget. “When big patrons come to see them and say stop the SEC, the power of the purse is critical to them,” the former chairman insists.

Back in June, 40 prominent securities lawyers fired off a letter asserting that a self-financed SEC “is one of the most important parts of the financial services reform legislation presently before you.”

They pointed out that from 2005 to 2009, the SEC collected about $7.4 billion from transaction and registration fees, which were turned over to the government, but Congress appropriated just $4.5 billion for the agency’s budget during that period. “The chronic under-funding of the SEC has severely impeded the SEC’s ability to keep pace with market and technology changes,” the lawyers stated. “After shrinking in size for a number of years, the SEC is only now beginning to grow again. Meanwhile, the securities industry and corporate activities it regulates have grown tremendously in size and sophistication over the last two decades.”

They noted that between 2004 and 2007 SEC enforcement and examination staff declined 10 percent and its information technology initiatives plunged 50 percent, while at the same time, trading volume doubled, the number of investment advisers jumped 50 percent and the funds they manage grew almost 60 percent.

In a speech in June, Schapiro insisted that self funding ensures independence, facilitates long-term planning, and closes the resource gap between the agency and the entities the SEC regulate. “In the process, it allows the SEC to better protect millions of investors whose savings are at stake,” she added.

Self funding also ensures an SEC that is more effective at identifying and addressing the kinds of risk that dealt a significant blow to the American economy, she told her audience.

Schapiro pointed out that in the immediate post-Enron era, the SEC saw significant increases in its budget. But funding dropped just as markets were growing in size and complexity. At the height of the pre-financial crisis frenzy, Schapiro added, the SEC was actually forced to reduce staff. “Only now can we afford to begin to develop the new technology that will allow us to evaluate, store and retrieve the kind of tip information that might stop the next major fraud,” she said.

Schapiro said self funding would have many benefits for investors: It would allow the SEC to increase its professional and technical capacity, to keep up with the financial industry’s rapid growth; It would enhance our long-term planning process, allowing the SEC to address the increasingly sophisticated technologies, products, and trading strategies adopted by the financial services industry; and, It would provide the flexibility to react to developing risks in the same way that our domestic and foreign counterparts did during the recent financial crisis, with rapid staffing and strategic responses that help control systemic damage.

She added: “To truly protect investors to the best of their abilities, they need the independence, planning ability and resources that self funding provides.”

What’s the Next Move in This PCAOB Situation?

Jonathan Weil over at Bloomberg has a new column up today and he is less enthusiastic about the Supreme Court decision in FEF v. PCAOB than say, everyone else.

JW is mostly wondering why we should keep having an “independent” PCAOB inside the SEC since the board members will now be at the mercy of the towing the political line inside the Commission, “While the court

Were PwC and Grant Thornton Ignoring Overstock.com’s Accounting Issues?

Yesterday we briefly picked up the Overstock beat as Sam Antar pointed out that everyone’s favorite Salt Lake City resident got a little confused about when they knew about their gain contingency existed that resulted in some contradictory disclosures.

As you may misremember, this arose from the company for recoveries from underbilled fulfillment partners by improperly claiming that a ‘gain contingency’ existed under accounting rules.”

Now Sam has pointed us to some correspondence between the SEC and Overstock that indicates that PwC wasn’t concerned about the issue until the Commission pointed it out and succeeding auditor Grant Thornton was unmoved until Overstock brought it up:

Please tell us if, and the extent of, your auditors’ national accounting office involvement in these issues during audit of your 2008 financial statements or the reviews of your fiscal 2009 quarterly filings.

PwC served as our auditor during the audit of our 2008 financial statements. PwC has informed us that it did not consult with its national accounting office regarding the above issues when they were identified in Q4 2008 or Q1 2009. However, in connection with this response to your letter dated November 3, 2009, PwC has consulted with its national office in regard to both the fulfillment partner under billing and partner overpayment issues and based on context of this being an area that is a highly facts and circumstances based issue that requires significant judgment where reasonable parties have different views, PwC continues to concur with our accounting and disclosure consistent with its reflection of the underlying economics and our past practices of not billing or collecting for our billing errors, rather negotiating for future price concessions that were contingent on future sales.

Grant Thornton (“GT”) reviewed our Q1 and Q2 2009 quarterly filings. To our knowledge the GT local engagement team did not review these issues with its national accounting office at the time of our Q1 and Q2 2009 quarterly filings. In early October, as we prepared our response to your October 1 letter, we asked GT for its national office’s opinion. It was our understanding at the time that GT’s national office concurred that we had used an appropriate (if not preferred) accounting treatment. Only after we received your November 3 letter, did we become aware that GT’s previous “national office” opinion had in fact been an “informal request” only, and not a “formal request.”

In the case of PwC, it’s entirely possible that they just trusted that OSTK knew what they were doing and went along with it. Obviously a huge mistake. When the SEC came calling however, they moseyed through it again and rang up the accounting wonks at 300 Mad.

But the Grant Thornton engagement team, who came in after all this went down was seemingly on board with it without consulting with its own national accounting gurus even though the SEC was already on this like stink on a monkey. GT making an “informal request” of its national office on an SEC inquiry seems a little tepid.

HOWEVER! You have to remember that this is all in the words of Overstock which hasn’t always been forthcoming/reliable/truthful in its filings. Then again, maybe there’s something to this whole auditor “Yes men” thing.

Does Anyone Have a Crayon for Mary Schapiro?

“The SEC’s efforts are, and will always be, a work in progress. We will continually refocus our energies as circumstances warrant, as new ideas are offered and considered, as we consider your opinions and suggestions. But the outlines are emerging, the colors are being filled in, and I am hopeful that a portrait of a financial marketplace more stable and efficient than the one we saw in 2008 is beginning to emerge.”

SEC Chair Mary Schapiro at CEO Quarterly Meeting of the Business Roundtable on the SEC’s ongoing efforts to color inside the lines. Apparently the Commission was free-handing all this time.

Mary Schapiro Isn’t Too Concerned About the Convergence Delay

Earlier in the week we heard the devastating news that the FASB and IASB’s convergence efforts, despite a good hustle, would not meet the G20’s deadline of June 2011.

FASB Chairman Bob Herz indicated that this was a serious case of the Boards having bigger eyeshades than their double-entry stomachs could handle but he tried to squelch the disappointment by assuring everyone that the mission is not a failure and the Boards would “get most if not all of [the accounting standard proposals] done by the end of 2011.”

Roberto and IASB Chair Sir David Tweedie, feeling bad about how the whole thing turned out, decided to send a letter to the G20, presumably to keep them from getting their panties in knot:

It is expected that this action by the FASB and IASB will not negatively impact the Securities and Exchange Commission’s work plan, announced in February, to consider in 2011 whether and how to incorporate IFRS into the US financial system.

We appreciate the support of the G20 for the development of a single set of high quality global accounting standards. The two boards remain committed to achieving that objective. We shall continue to provide timely updates regarding our progress.

Ohhh, right. The SEC. What do they think about all this? Judging by Mary Schapiro’s attitude of “assuming completion of the convergence projects” as a precursor to IFRS, she’s totally cool with it, making her thoughts known in a statement yesterday:

The boards believe that the modified plan will contribute to increased quality in the standards because it provides additional time for stakeholders to thoroughly consider the proposals and give both boards quality feedback. I view this as time that is well invested.

Quality financial reporting standards established through an independent process are threshold criteria against which the Commission’s future consideration of the role of IFRS in the U.S. reporting system will be based. I foresee no reason that the adjustment to the targeted timeline for certain joint projects should impact the staff’s analyses under the Work Plan issued in February 2010, particularly when that adjustment is designed to enhance the quality of the standards. Indeed, focused efforts on those standards the boards consider highest priority for the improvement of U.S. GAAP and IFRS will facilitate the staff’s analyses.

Accordingly, I am confident that we continue to be on schedule for a Commission determination in 2011 about whether to incorporate IFRS into the financial reporting system for U.S. issuers.

In other words, no rush guys. Take it from Mary, this happens all the time.

IASB and FASB update to G20 Leaders [IASB]
Chairman Schapiro Statement on FASB-IASB Decision to Modify Timing of Certain Convergence Projects [SEC]