SEC's Accounting Fraud Push Hitting Some Executives Personally
Washington, Dec. 1 (Bloomberg) -- Six years after Livent Inc. executives are alleged to have started a scheme to inflate the theater company's revenue, Livent accountant Tony Fiorino sold 500 company shares, for a $4,050 profit that got Fiorino in trouble with U.S. regulators.
The Securities and Exchange Commission charged Fiorino with insider trading, saying he sold stock in December 1996 when he knew something other investors didn't -- that Livent had misrepresented its financial condition since 1990.
Fiorino's not alone. Executives entangled in alleged accounting chicanery are paying a personal price as SEC Chairman Arthur Levitt campaigns against companies that manipulate their books to meet market pressures. On top of accounting fraud charges, the SEC often is seeking potentially steep insider- trading penalties against executives who traded company shares at any time when they allegedly knew earnings were being rigged.
''The SEC is trying to send a message to executives,'' said Washington securities attorney Peter Romeo. ''That message is: 'If you cook the books, we're going to go after you personally.' ''
Some defense lawyers say the SEC is ''piling on'' in those sorts of cases, stretching the reach of insider-trading laws.
'Piling On'
''Even if an accounting employee who has learned of a financial fraud cashes in a small percent of his stock options each Christmas, he can be accused of insider trading,'' said Steven M. Cohen, a former SEC staff attorney who now is a partner at the Kronish Lieb Weiner Hellman law firm in New York. ''In this case, insider trading allegations don't properly characterize the misconduct.''
Cohen, who represents Fiorino, wouldn't comment on his client's specific case. Livent's co-founders Garth Drabinsky and Myron Gottlieb are fighting U.S. fraud and conspiracy charges related to the financial manipulation allegations. They haven't been charged with insider trading.
In his own case, Fiorino agreed to a settlement of SEC charges that imposed $5,200 in penalties. He wasn't required to pay because the SEC ruled he didn't have the money.
The SEC has pursued accounting-related insider-trading cases through the years, most notably against Crazy Eddie Inc.'s former Chief Executive Eddie Antar, who paid $77.5 million in 1994 to settle charges he overstated the discount retailer's income so he and his family could sell their stock at a profit.
The risk of accounting-related insider trading sanctions is taking on new significance because of two converging developments.
Accounting-Fraud Push
SEC regulators last year declared war on executives who cook the books, calling accounting fraud a top SEC enforcement priority. That campaign against questionable accounting comes as employees at many companies are more likely to get stock and options as part of their pay packages, boosting the odds executives will have traded stock at some point if the SEC later questions the books.
''In any kind of accounting-fraud case we always look at insider trades,'' said SEC associate enforcement director William Baker. ''Insider trading is another way these people benefit from their illegal activity.''
Fiorino's case shows that, in the SEC's view, it doesn't matter if stock sales took place months or even years after alleged accounting hocus-pocus began. The commission argues it simply has to show that insiders possessed non-public information that the company's financial figures were false when they traded their shares.
That position could face legal questions. The SEC's push against accounting violations comes as two federal appeals courts in recent cases have backed a tougher legal standard for proving insider-trading cases. The government, those courts have said, must prove that executives actually used non-public information as a basis for decisions to buy or sell securities -- and not just that they knew something others didn't at the time they traded.
Legal Questions
The legal impact of those decisions hasn't yet been tested in accounting-related cases, where executives may have sold stock long after alleged fraud began. Before that happens, a case will have to reach a decision in court, which isn't common because most defendants in accounting-fraud cases have negotiated settlements of SEC allegations before a trial.
''It's always easier (for the SEC) to push the law in cases that are settled,'' Cohen said.
The SEC's determination to hit executives in their own pocketbooks sometimes can be costly. In insider trading cases, the SEC generally seeks fines and repayment, with interest, of alleged ill-gotten trading profits or losses that were avoided. In a high-profile example, the SEC is seeking as much as $21.5 million in penalties for trading by former Donnkenny Inc. Chairman Richard Rubin and his wife during a period when the sportswear company's results were allegedly inflated. The penalty would be one of the largest imposed by the SEC on a company chief executive in recent years, according to SEC officials.
Rubin's attorney, Barry Slotnick of Slotnick Shapiro & Crocker in New York, said he plans to seek dismissal of the case because he said ''the SEC has been too aggressive with the law.''
Smaller Trades
The agency has pursued more than just big sales by top executives. Kymberlee W. Kulis, Donnkenny's former assistant controller, paid about $34,600 to settle SEC charges that she sold 900 company shares -- for a $10,600 gain -- while helping manipulate the company's books. Kulis' attorney declined comment.
In a September enforcement ''sweep'' that brought charges of accounting fraud and other financial reporting violations involving 15 companies, the SEC included insider-trading charges in three cases, alleging that senior managers traded company shares while they knew the companies' financial reports weren't correct.
The SEC, in one example, alleged three current or former Itex Corp. executives made more than $7.7 million in illegal profits from trading company shares while they and other senior management were manipulating earnings and hiding suspect barter deals between Itex and offshore entities controlled by former chairman Terry L. Neal.
Neal and Michael T. Baer, Itex chief executive, sold stock to the market ''to cash in on their fraud,'' the SEC alleged in its complaint.
A third man, Itex chief financial officer Joseph M. Morris, also was charged with insider trading for exercising stock options during the period of the accounting fraud, resulting in illegal profits of $45,000, the SEC alleged.
Their lawyer, Howard Schiffman of the Dickstein Shapiro Morin & Oshinsky firm in Washington, said the charges are factually untrue ''both in respect to the accounting fraud and that they knew non-public information when they traded.''
Romeo, the Washington securities lawyer who advises corporations on how to comply with the SEC's rules, said the SEC's approach may work to change executive behavior.
''It may scare people into making sure they can't be accused of improper accounting practices,'' he said.
Dec/01/1999 11:17
For more stories from Bloomberg News, click here.
(C) Copyright 1999 Bloomberg L.P.
|
