SEC Says Construction Co. Rife With Accounting Fraud
By Leigh Kamping-Carder
Law360, New York (November 30, 2009) -- The U.S. Securities and Exchange Commission sued Home Solutions of America Inc. on Monday, claiming executives fabricated millions of dollars in fake business and bumped up the hurricane restoration company's stock price with a host of fraudulent schemes.
In a complaint filed in the U.S. District Court for the Northern District of Texas, the SEC accused HSOA and seven individuals of improperly deferring expenses, documenting revenues for construction jobs that remained “bare-dirt lots” and reporting fictitious profits.
The misstatements inflated HSOA's net income by up to three times at different points between 2004 and 2007, according to the complaint.
"Simply put, instead of rebuilding New Orleans and other hurricane-stricken areas, they constructed a fantasyland of fraud,” Rose Romero, director of the SEC's Fort Worth Regional Office, said of the defendants in a statement.
Before officially filing the suit, the SEC negotiated deals with four of the defendants, who neither admitted nor denied the agency's allegations.
In the wake of Hurricane Katrina and other weather disasters in 2005 and 2006, HSOA and its executives touted the company's rosy financial picture, causing its stock price to climb to $13 per share, the complaint says.
But when allegations of insider trading and other fraud surfaced, partly in the form of private lawsuits, and the company announced it would restate its financial numbers for the first half of 2007, HSOA's stock price dropped.
Beginning in 2006, HSOA began recording profits from multimillion-dollar construction contracts, including two with C&B Services Inc. apparently worth $40 million, and issuing press releases boasting of the revenues, the SEC alleges.
In reality, the contracts were only billing arrangements or invoices for work that never took place and, in some cases, was not authorized by HSOA's clients, the SEC claims.
Frank Fradella, HSOA's president and CEO, further inflated earnings by expensing bonuses when they were paid, instead of when they were earned, according to the SEC. At the height of the alleged fraud, he sold off $6.8 million worth of HSOA stock, the complaint says.
Meanwhile, Brian Marshall, the president of Fireline Restoration Inc., a general contractor company and HSOA's largest subsidiary, was orchestrating his own scheme to drum up $9 million of fake business with entities he controlled, the SEC alleges.
Rick J. O'Brien, who eventually became HSOA's president and chief operating officer, agreed to pay a civil penalty of $130,000 and refrain from violating certain provisions of federal securities laws.
The former controller at Fireline agreed to a civil penalty of $25,000 and an order barring him from practicing as an accountant before the SEC for three years, while Fireline's former chief operating officer will also pay $25,000 in civil penalties and disgorge $32,850.
A business partner who worked with the president of Fireline agreed to a permanent injunction.
The SEC said its investigation into the company and the remaining defendants was ongoing.
The agency has asked the court to order the defendants to pay civil penalties, disgorge profits and benefits from the alleged scheme and to prohibit them from violating securities laws.
The SEC is also seeking a court order forcing Fradella and former HSOA chief financial officer Jeff Mattich to pay back their bonuses and to bar them from acting as the head of any company that deals in registered securities.
According to the agency, HSOA has not issued its revised financial statements, and the company's stock is now trading on the pink sheets.
An attorney with Carrington Coleman Sloman & Blumenthal LLP, who represents O'Brien, did not immediately respond to a request for comment on Monday evening. HSOA could not be reached.
Counsel for the company was not immediately available.
The case is Securities and Exchange Commission v. Home Solutions of America Inc. et al., case number 3:09-cv-02269, in the U.S. District Court for the Northern District of Texas. |
