SECURITIES AND EXCHANGE COMMISSION
LITIGATION RELEASE NO. 17042 \ June 20, 2001
ACCOUNTING AND AUDITING ENFORCEMENT
SECURITIES AND EXCHANGE COMMISSION V. RON MESSENGER, JAMES T. RUSH, SCOTT K. BARTON AND GARY HUBSCHMAN, Civil Action No. H-01-2022
Fraudulent earnings management scheme subject of Commission civil action. On June 18, 2001, the Commission announced the filing of its action in the United States District Court for the Southern District of Texas (Houston Division), seeking an injunction and civil penalties against Ron Messenger ("Messenger"), James T. Rush ("Rush"), Scott K. Barton ("Barton") and Gary Hubschman ("Hubschman") (collectively, the "Defendants"), all former officers of Paracelsus Healthcare Corporation, a former NYSE-listed company ("Paracelsus").
According to the Commission's complaint, the Defendants engaged in various earnings management schemes and caused Paracelsus to materially overstate its annual and quarterly earnings in periodic reports and registration statements filed with the Commission. Under Messenger's direction, the Defendants ignored Generally Accepted Accounting Principles ("GAAP") to accumulate $16 million in "cookie jar" reserves, and then draw upon them to conceal a decline in Paracelsus' earnings. Messenger, Rush and Hubschman also ignored GAAP in connection with their failure to properly write off $15 million in uncollectible accounts receivable. Furthermore, to conceal their conduct, Defendants supplied Paracelsus' auditors with false and misleading information concerning the reserves and receivables. As a result, between 1993 and 1996 Paracelsus overstated income from 9 percent to 303 percent.
In settling this matter, the Defendants have agreed to accept permanent injunctions barring future violations of the anti-fraud, record-keeping, and reporting provisions of the federal securities laws. Additionally, Messenger, the former chief executive officer of Paracelsus, has consented to a $100,000 penalty, Hubschman, a former vice president of operations finance, has consented to a $75,000 penalty, Rush, the former chief financial officer, has consented to a $50,000 penalty and Barton, the former controller, has consented to a $25,000 penalty. Separately, Rush and Barton have also agreed to Commission orders under Rule 102(e) barring them from practicing before the Commission as accountants for three years
The Commission's complaint charges that the Defendants violated Section 17(a) of the Securities Act of 1933 ("Securities Act"), and Sections 10(b), 13(b)(5) of the Securities Exchange Act of 1934 ("Exchange Act") and Rules 10b-5, 13b2-1, 13b2-2 thereunder, and aided and abetted violations of Sections 13(a) and 13(b)(2) of the Exchange Act and Rules 12b-20, 13a-1 and 13a-13 thereunder.http://www.sec.gov/litigation/litreleases/lr17042.htm