U.S. SECURITIES AND EXCHANGE COMMISSION
Litigation Release No. 20173 / June 29, 2007
Accounting and Auditing Enforcement Release No. 2625 / June 29, 2007
SEC v. Michael W. Sulfridge, Civil Action No. 307-CV-1173-L Northern District of Texas (Dallas Division)
SEC Settles Fraud Charges Against Former Controller of Sourcecorp, Inc. Subsidiary
On June 28, 2007, the Securities and Exchange Commission filed a settled civil action in Dallas federal court against Michael W. Sulfridge, the former controller of Image Entry, Inc., a data entry services provider with its principal office in London, Kentucky. Image Entry is a wholly owned subsidiary of Dallas-based Sourcecorp, Inc., whose common stock previously traded on the Nasdaq National Market but which now is privately owned.
Sourcecorp acquired Image Entry in 2001 from Image Entry's CEO, Bill Deaton, and members of Deaton's family. As part of the acquisition, Sourcecorp entered into employment agreements with Deaton in which Sourcecorp agreed to pay Deaton an annual bonus, over a three-year "earn out" period, tied to Image Entry's performance against certain earnings criteria. The Commission alleges that Sulfridge and Deaton — who previously settled Commission charges — planned and executed a scheme to overstate Image Entry's earnings to increase the amount of Deaton's "earn out" bonus. The Commission alleges that Sulfridge received approximately $585,000 from Deaton for his involvement. The Commission's complaint describes an alleged scheme to inflate Image Entry's earnings from 2001 through the first quarter of 2004 by (1) recognizing unearned revenue from state and federal government data entry contracts, (2) prematurely recognizing revenue from a federal government data entry contract that Image Entry had not yet been awarded, and (3) diverting various Image Entry expenses to other companies Deaton owned to reduce Image Entry's expenses and increase its earnings. The Commission contends that this alleged misconduct artificially inflated Image Entry's earnings and, by extension, Deaton's "earn out" bonus. Moreover, because the allegedly inflated figures were included in Sourcecorp's publicly reported consolidated financial results, the Commission's complaint asserts that Sourcecorp's earnings were materially overstated.
Without or admitting or denying the Commission's allegations, Sulfridge has consented to entry of a final judgment permanently enjoining him from violating Section 17(a) of the Securities Act of 1933 and Sections 10(b) and 13(b)(5) of the Securities Exchange Act of 1934 ("Exchange Act") and Rules 10b-5 and 13b2-1 thereunder, and aiding and abetting violations of Sections 13(a), 13(b)(2)(A), and 13(b)(2)(B) of the Exchange Act and Rules 12b-20, 13a-1, 13a-11, and 13a-13 thereunder. As part of the settlement, Sulfridge also will be barred from serving as an officer or director from a public company for five years. In addition, Sulfridge will disgorge $50,000 of his improper compensation. The Commission has waived the remainder of Sulfridge's disgorgement and not assessed a financial penalty based on Sulfridge's sworn financial statements and other documents submitted to the Commission.
For additional information, see Commission Litigation Release No. 19834, SEC v. Billy David Deaton (Sept. 14, 2006).