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IN THE UNITED STATES DISTRICT COURT
COMPLAINT The United States Securities and Exchange Commission ("Commission") files this complaint against Defendant Eddy L. Patterson ("Patterson") and would respectfully show the Court as follows: SUMMARY 1. This matter involves an egregious financial-fraud scheme perpetrated by Defendant Patterson, the former chairman and CEO of Nesco, Inc. ("Nesco"), an environmental service company headquartered in Tulsa, Oklahoma. Patterson's scheme caused Nesco to grossly overstate the company's earnings by booking 28 false invoices totaling $2,153,986 in the fourth quarter of 2000 and one invoice totaling $183,385 in the first quarter of 2001. The false entries caused Nesco to overstate its pre-tax income by 400% in fiscal year 2000 and by 175% in the first quarter of 2001. Nesco included these false receivables in its filings with the Commission, i.e., its Form 10-KSB for the year ended December 31, 2000, and in its Form 10-QSB for the first quarter of 2001. 2. By knowingly or recklessly engaging in this conduct, Patterson, directly or indirectly violated, or aided and abetted violations of, the antifraud, reporting, issuer books and records and misleading an auditor provisions of the federal securities laws, specifically, Sections 10(b), 13(a), 13(b)(2) and 13(b)(5), of the Securities Exchange Act of 1934 ("Exchange Act") [15 U.S.C. §§ 78j(b), 78m(a), 78m(b)(2) and 78m(b)(5), and Rules 10b-5, 12b-20, 13a-1, 13a-13, 13b2-1, and 13b2-2, thereunder [17 C.F.R. §§ 240.10b-5, 240.12b-20, 240.13a-1, 240.13a-13, 240.13b2-1 and 240.13b2-2]. 3. The Commission brings this action pursuant to authority conferred upon it by Section 21(d) of the Exchange Act [15 U.S.C. § 78u(d)], to enjoin the defendant from future violations of the aforementioned provisions of the federal securities laws. The Commission also seeks disgorgement of the defendant's ill-gotten gains, plus prejudgment interest thereon, as wells as imposition of a civil money penalty and an officer and director bar against the defendant. JURISDICTION 4. The Court has jurisdiction over this action pursuant to Section 27 of the Exchange Act [15 U.S.C. § 78aa]. 5. The defendant, directly or indirectly, has made use of the means or instruments of transportation and communication, and the means and instrumentalities of interstate commerce, or of the mails, or of the facilities of a national securities exchange in connection with the acts, practices, and courses of business alleged herein. Certain of the transactions, acts, practices and courses of business alleged herein took place in the Northern District of Oklahoma. DEFENDANT 6. Eddy L. Patterson, age 59, resides in Bixby, Oklahoma, and is one of two co-founders of Nesco. Patterson was Nesco's chairman and chief executive officer throughout the relevant period, during which he signed the required Commission filings, including the company's original Form 10-KSB for fiscal year 2000 and its Form 10-QSB for the first quarter of 2001. Nesco demanded that Patterson resign his positions in August 2001. Patterson is no longer affiliated with the company and is currently unemployed. Patterson currently owns over three million shares of Nesco, constituting more than 30% of its issued stock. RELEVANT ENTITY 7. Nesco, Inc. is an Oklahoma corporation based in Tulsa, Oklahoma. The company performed environmental remediation services for numerous state agencies and constructed and serviced fueling systems for convenience stores, grocery stores, and gas stations. In July 2001, Fortune Small Business Magazine named Nesco one of America's 100 fastest growing small companies. At all relevant times, Nesco's common stock was quoted on the NASDAQ stock market and was registered with the Commission under Section 12(g) of the Exchange Act. In November 2001, Nesco filed a voluntary petition for reorganization pursuant to the United States Bankruptcy Code. The company remains in bankruptcy reorganization. STATEMENT OF FACTS Background 8. In 1999 and 2000, Patterson borrowed approximately $4 million to purchase approximately two million shares of Nesco stock, giving him a 32% ownership stake in the company. To obtain the loans, he gave the bank a mortgage on his primary residence and a collateral interest in the stock. As a result of these transactions, Patterson's personal financial well being became directly tied to the financial well being of Nesco, and he stood to suffer significant personal financial losses if Nesco failed or its stock declined in value. 9. Nesco began to experience severe cash-flow problems in 2000. In fact, Nesco's business operations did not produce positive cash flow for either 2000 or for the first quarter of fiscal year 2001. Consequently, Nesco relied on a credit agreement with a national bank to fund ongoing operations, though its cash-flow problems caused it to be consistently out of compliance with the agreement's terms. In December 2000, the bank advised Nesco that it would have to seek a new lender if its non-compliance continued. 10. To remedy its non-compliance with the lending agreement and to alleviate its cash-flow problems, Nesco sought to raise cash through a private stock offering. In late 2000, Nesco had discussions with a venture-capital firm interested in purchasing Nesco stock, and Patterson agreed to provide the firm with Nesco's audited 2000 financial statements when they were completed. Patterson knew that these financial statements would be crucial to the firm's investment decision. However, before Nesco's financial statements were audited, Patterson learned that actual financial results for the year were poor. Given the prospect that the investment firm would decline to purchase Nesco shares and, without such a cash infusion, that the bank would withdraw its credit facility, Patterson took action. Patterson's Fraudulent Scheme 11. In January 2001, Patterson enlisted Nesco's controller and acting CFO (hereinafter "controller"), in a scheme to inflate Nesco's income for fiscal year 2000 and, thereby, to conceal its poor financial performance from the shareholders, the bank, and the venture-capital firm. The controller is now deceased. At the time, Nesco had not yet provided its outside auditor with complete financial statements for fiscal year 2000. 12. During January, Patterson and the controller caused the company to create 28 false invoices totaling $2,153,986, which were entered into Nesco's financial accounting system as accounts receivable for fiscal year 2000. Twenty-six of these invoices reflected services that had not been performed by Nesco, while the remaining two invoices were fraudulently backdated. 13. The invoices reflected false accounts receivable that were not due to Nesco as represented by the invoices. However, the resulting "phantom" revenue and income were included in Nesco's fiscal year 2000 financial statements, which were then provided to Nesco's auditor. Patterson and the controller lied to the auditor to prevent discovery of the scheme during the audit, which was completed on March 2, 2001. In fact, Patterson falsely advised the auditors in writing that the financial information provided to them regarding Nesco's fiscal year 2000 audit was accurate. 14. Subsequently, Patterson provided the audited false financial statements to the venture-capital firm and included them in Nesco's Form 10-KSB, which he signed and filed with the Commission on behalf of Nesco on April 2, 2001. As a result of the scheme, Nesco's annual pre-tax income appearing in the financial statements was overstated by more than 400%. 15. Notwithstanding the favorable false financial statements, the venture-capital firm determined not to invest in Nesco. As a result, Patterson continued to seek opportunities to raise capital in order to satisfy Nesco's bank obligations and continued his scheme to inflate Nesco's income. 16. In or about April 2001, Patterson and the controller caused another false invoice in the amount of $183,385 to be created for services that had not been performed by the company. The invoice was dated March 31, 2001, and recorded in accounts receivable in Nesco's financial accounting system for the first quarter of fiscal year 2001. Although the notation "construction and repair," was printed on the invoice, no work had been performed by the company and the invoice had not been sent to the purported customer. As a result, Nesco's falsely inflated receivables were incorporated in its financial statements that were included as part of Nesco's Form 10-QSB for the first quarter of fiscal year 2001, which Patterson signed and caused to be filed with the Commission on behalf of Nesco on May 15, 2001. Consequently, Nesco's quarterly pretax income was overstated by more than 175%. Nesco's New CFO Discovers the Scheme 17. Nesco hired a full-time CFO on May 1, 2001. In June 2001, the new CFO became concerned about the size of Nesco's aged accounts receivable and began an inquiry. As part of his inquiry, the new CFO interviewed a company employee who disclosed her role in Patterson's scheme, revealing that she had been instructed to record several invoices into the company's fiscal year 2000 accounts receivable but not to send those invoices to the customers. 18. The CFO immediately attempted to discuss the invoice matter with Patterson and the controller, both of whom repeatedly ignored his requests for a meeting. Then, in an email on July 11, 2001, the CFO alerted Patterson to possible overstatements in the company's financial statements resulting from the questionable invoices. Patterson did not respond to the email. For three weeks the CFO continued to seek --unsuccessfully-- to meet with Patterson to discuss the apparent falsification of Nesco's 2000 receivables. 19. During the last week of July, Patterson met with the CFO and other company officials. Patterson denied any knowledge of questionable invoices and assured everyone in attendance that all receivables on Nesco's books reflected valid jobs and valid services. Patterson also stated that the matter did not merit further inquiry. 20. Finding Patterson's denial and assurances unconvincing, the CFO continued his inquiry. Thereafter, at the request of Nesco's audit committee, the CFO directed Nesco's outside auditors to conduct an investigation and to perform a new audit of Nesco's financial statements. The investigation confirmed the misstatements in Nesco's accounts receivable for fiscal year 2000 and first quarter 2001, concluding that the bogus receivables significantly impacted the company's reported assets, revenue, and net income for those periods. On August 16, 2001, Nesco's board of directors demanded that Patterson resign his position. CAUSES OF ACTION FIRST CLAIM Violations of Section 10(b) of the Exchange Act and Exchange Act Rule 10b-5 21. The Commission repeats and realleges paragraphs 1 through 20 of this Complaint and incorporates them herein by reference as if set forth verbatim. 22. Patterson directly or indirectly, in connection with the purchase and sale of securities, by use of the means and instrumentalities of interstate commerce and by use of the mails has: (a) employed devices, schemes and artifices to defraud; (b) made untrue statements of material facts and omitted to state material facts necessary in order to make the statements made, in light of the circumstances under which they were made, not misleading; and (c) engaged in acts, practices and courses of business which operate as a fraud and deceit upon purchasers, prospective purchasers and other persons. 23. As part of and in furtherance of the scheme, Patterson directly and indirectly, together with Nesco's former controller grossly overstated the company's earnings by booking 28 false invoices totaling $2,153,986 in the fourth quarter of 2000 and one invoice totaling $183,385 in the first quarter of 2001. The false entries caused Nesco, a company whose common stock was quoted on the NASDAQ stock market and was registered with the Commission under Section 12(g) of the Exchange Act, to overstate its pretax income by 400% in fiscal year 2000 and 175% in the first quarter of 2001. Nesco included these false receivables in its filings with the Commission, i.e., its Form 10-KSB for the year ended December 31, 2000, and in its Form 10-QSB for the first quarter of 2001, which were signed by Patterson. 24. Patterson engaged in the above-described conduct knowingly or with reckless disregard for the truth. 25. By reason of the foregoing Patterson violated and, unless enjoined, will continue to violate the provisions of Section 10(b) of the Exchange Act [15 U.S.C. § 78j(b)] and Rule 10b-5 thereunder [17 C.F.R. § 240.10b-5]. SECOND CLAIM Violations of Section 13(b)(5) of the Exchange Act and Rule 13b2-1, thereunder 26. The Commission repeats and realleges paragraphs 1 through 20 of this Complaint and incorporates them herein by reference as if set forth verbatim. 27. Section 13(b)(5) of the Exchange Act prohibits any person from knowingly circumventing or failing to implement a system of internal accounting controls or knowingly falsifying any book, record, or account subject to Section 13(b)(2). Section 13(b)(2) of the Exchange Act requires issuers to "make and keep books, records and accounts which, in reasonable detail, accurately and fairly reflect the transactions and disposition of the assets of the issuer." Rule 13b2-1 prohibits any person from falsifying any books, records, or accounts subject to Section 13(b)(2). 28. Patterson violated Section 13(b)(5) and Rule 13b2-1 by falsifying Nesco books, records, and accounts in connection with his false-invoice scheme. Specifically, his scheme caused Nesco to record over $2 million in completely false revenue and receivables in fiscal year 2000 and the first quarter of 2001. This knowing falsification of revenue and assets directly resulted in the inaccuracy of the books, records, and accounts that Nesco was required to maintain pursuant to Section 13(b)(2). 29. By reason of his foregoing acts and practices, Patterson violated and, unless enjoined, will continue to violate Section 13(b)(5) of the Exchange Act [15 U.S.C. § 78(b)(5)], and Rule 13b2-1, thereunder [17 C.F.R. § 240.13b2-1]. THIRD CLAIM Violations of Exchange Act Rule 13b2-2 30. The Commission repeats and realleges paragraphs 1 through 20 of this Complaint and incorporates them herein by reference as if set forth verbatim. 31. Rule 13b2-2, promulgated under Section 13(b) of the Exchange Act, prohibits any officer or director of an issuer from making or causing to be made to an accountant, a materially false or misleading statement, or a statement that omits to state any material fact, in connection with (1) any audit or examination of the financial statements of the issuer required to be made; or (2) the preparation or filing of any document or report required to be filed with the Commission. 32. In approximately February and March, 2002, in connection with the required audit of Nesco's 2000 financial statements, Patterson violated Rule 13b2-2 by providing to Nesco's auditor, Nesco's fiscal year 2000 financial statements that included the phantom revenue and income from Patterson's fraudulent invoice scheme, described in detail above. In fact, Patterson falsely advised the auditors in writing that the financial information provided to them regarding Nesco's fiscal year 2000 audit was accurate, and that all of Nesco's material transactions had been disclosed and accounted for in accordance with generally accepted accounting principles. 33. Further, Patterson concealed from the auditor key facts that were critical to its fiscal year 2000 audit of Nesco, including that he and the controller had purposefully inflated Nesco's revenue through millions of dollars in false invoices. 34. By reason of his foregoing acts and practices, Patterson violated and, unless enjoined, will continue to violate Exchange Act Rule 13b2-2 [17 C.F.R. § 240. 13b2-2]. FOURTH CLAIM Aiding and Abetting Violations of Sections 13(a), 13(b)(2)(A) and 13(b)(2)(B) of the Exchange Act and Exchange Act Rules 13a-1, 13a-13 and 12b-20 35. The Commission repeats and realleges paragraphs 1 through 20 of this Complaint and incorporates them herein by reference as if set forth verbatim. 36. Section 13(a) of the Exchange Act requires issuers such as Nesco to file periodic reports with the Commission containing such information as the Commission prescribes by rule. Exchange Act Rule 13a-1 requires issuers to file annual reports, and Rule 13a-13 requires issuers to file quarterly reports. Under Exchange Act Rule 12b-20, such reports must contain, in addition to disclosures expressly required by statute and rule, any other information that is necessary to ensure that statements made are not, under the circumstances, materially misleading. Further, the obligation to file reports embodies the requirement that such reports be true and correct. 37. Nesco filed materially false and misleading periodic reports with the Commission. Nesco's 10-KSB for fiscal year 2000 and its 10-QSB for first quarter 2001 materially overstated the company's revenue and pre-tax income for those periods. Accordingly, Nesco violated Section 13(a) and Rules 13a-1, 13a-13, and 12b-20 thereunder. 38. Patterson aided and abetted Nesco's violations of Section 13(a) and Rules 13a-1, 13a-13, and 12b-20 thereunder. His substantial assistance of the violations is established by his orchestration of the scheme to overstate Nesco's revenue through the bogus invoices described in detail, above. 39. By reason of his foregoing acts and practices, Patterson aided and abetted violations of, and, unless enjoined, will continue to aid and abet violations of Section 13(a) of the Exchange Act [15 U.S.C. § 78(a)], and Rules 13a-1, 13a-13 and 12b-20, thereunder [17 C.F.R. §§ 240.13a-1, 240.13a-13 and 240.12b-20]. FIFTH CLAIM Aiding and Abetting violations of Section 13(b)(2) of the Exchange Act 40. The Commission repeats and realleges paragraphs 1 through 20 of this Complaint and incorporates them herein by reference as if set forth verbatim. 41. Section 13(b)(2)(A) of the Exchange Act requires issuers to "make and keep books, records and accounts which, in reasonable detail, accurately and fairly reflect the transactions and disposition of the assets of the issuer." 42. From approximately January through June 2001, Nesco violated Section 13(b)(2) of the Exchange Act by failing to make and keep books, records and accounts which, in reasonable detail, accurately and fairly reflected its transactions and the disposition of its assets. As a result of Patterson's invoice scheme, Nesco's books and records failed to accurately and fairly reflect the transactions and disposition of its assets in fiscal year 2000 and the first quarter of fiscal year 2001. Specifically, the scheme overstated Nesco's accounts receivable by $2,153,986 in fiscal year 2000 and by $183,385 in the first quarter of 2001. 43. Patterson aided and abetted Nesco's violations of Section 13(b)(2). Patterson clearly had knowledge of Nesco's inaccurate books and records, in that he was instrumental in creating them. Indeed, creating false books and records was central to his scheme to hide Nesco's poor performance. Furthermore, Patterson substantially assisted Nesco's violations by his orchestration of the scheme to overstate Nesco's revenue and accounts receivable through the creation of false invoices and the falsification of Nesco's books and records. 44. By reason of the foregoing acts and practices, Patterson aided and abetted Nesco's violations, and, unless enjoined, Patterson will continue to aid and abet violations of Section 13(b)(2) of the Exchange Act [15 U.S.C. § 78(b)(2)]. PRAYER FOR RELIEF WHEREFORE, Plaintiff Securities and Exchange Commission respectfully requests that this Court: I. Enter an Order permanently enjoining Defendant Patterson from violating or aiding and abetting violations of Sections 10(b), 13(a), 13(b)(2) and 13(b)(5), of the Exchange Act [15 U.S.C. §§ 78j(b), 78m(a), 78m(b)(2) and 78m(b)(2)(5)], and Rules 10b-5, 12b-20, 13a-1, 13a-13, 13b2-1, and 13b2-2, thereunder [17 C.F.R. §§ 240.10b-5, 240.12b-20, 240.13a-1, 240.13a-13, 240.13b2-1 and 240.13b2-2]. II. Enter an Order requiring Defendant Patterson to disgorge an amount equal to the funds and benefits he obtained as a result of the violations alleged herein, including any salary and bonuses, plus prejudgment interest on that amount. III. Enter an Order imposing civil penalties against Defendant Patterson pursuant to Section 21(d) of the Exchange Act [15 U.S.C. § 78u(d)], for the violations alleged herein. IV. Enter an Order barring Defendant Patterson from acting as an officer or director of any issuer required to file reports pursuant to Sections 12(b), 12(g) or 15(d) of the Exchange Act, pursuant to Section 21(d)(2) of the Exchange Act [15 U.S.C. § 78u(d)(2)], as a result of his violations, as set forth above. V. Enter an Order for such further relief as this Court may deem just and proper. For the Commission, by its attorneys: Dated this _________ day of May 2003.
http://www.sec.gov/litigation/complaints/comp18125.htm
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