Litigation Release No. 18104 / April 24, 2003
Accounting and Auditing Enforcement Release No. 1763 / April 24, 2003
SEC Sues Former Top Officers, Directors and Auditors of Chancellor Corporation for Financial Fraud
Securities and Exchange Commission v. Brian Adley et al. (United States District Court for the District of Massachusetts C.A. No. 03-10762 MEL)
The Securities and Exchange Commission today charged Chancellor Corporation, a Boston MA transportation equipment company, four of the company's former senior officers, a former outside director, the company's audit firm and the audit firm's engagement partner with securities fraud. The action, filed in federal court in Boston, alleges that from 1998 through 2001, Brian Adley, Chancellor's former Chairman, CEO and controlling shareholder, orchestrated a scheme to inflate Chancellor's reported assets, revenue and profits using fabricated documents and fraudulent accounting. Former officers of the company named as defendants in the civil suit were Chancellor's former President and Chief Operating Officer, Franklyn E. Churchill, its former acting Chief Financial Officer and consultant, David C. Volpe, and Jonathan Ezrin, who variously served as the company's Principal Accounting Officer, Corporate Treasurer and Controller. Also named as defendants were a former director of the company, Rudolph Peselman, BKR Metcalf Davis, an Atlanta GA accounting firm that served as Chancellor's auditors from 1999 to 2001, and Gregory Davis, a partner and CPA at the firm. Simultaneously with the filing of the Commission's civil action, Chancellor Corporation, Volpe and Ezrin entered settlements with the Commission. The Commission also instituted and simultaneously settled administrative cease and desist proceedings against Michael Marchese, a second outside director of Chancellor, and against David Decker, a member of the audit team who performed the year-end audit for Chancellor's 1998 results, and Theodore Fricke, who served as the concurring partner for the audit.
The Commission charges that Adley caused Chancellor to file false financial statements in 1999 and 2000 by directing the wholesale fabrication of corporate documents, by instructing that the fabricated documents be given to the company's auditors, and by coordinating the filing of false financial statements with the Commission. Former officers Churchill, Volpe and Ezrin allegedly participated in the scheme by assisting with the preparation of, and in some instances signing, false, fabricated or misleading financial documents. According to the suit, Peselman, a member of the Board of Director's Audit Committee from June 1999 to October 2001, violated antifraud provisions of the securities laws by signing a number of false financial statements and, as an outside director with fiduciary responsibilities, by ignoring clear warning signs that financial improprieties were ongoing at the company and by failing to ensure that the company's public filings were accurate.
The Commission further charges that Gregory Davis and his firm, BKR Metcalf Davis, which became Chancellor's auditors when Adley and Churchill fired an initial audit firm after the firm refused to report suspect financial results and information proposed by Adley, enabled the fraudulent scheme to proceed by conducting deficient audits of the company's financial statements, by falsely representing in public filings that Chancellor's financial statements were presented in conformity with generally accepted accounting principles (GAAP) and by failing to detect and report likely violations of the anti-fraud provisions of the securities laws by Chancellor. Gregory Davis, the concurring partner on the Chancellor audits performed by his firm, oversaw and signed the deficient, misleading audit reports.
Relief Sought
With respect to the relief being sought, the Commission seeks final judgments of permanent injunction and other relief enjoining each of the defendants from violating or aiding and abetting violations of the anti-fraud and periodic reporting provisions of the federal securities laws, Sections 10(b) and 13(a) of the Securities Exchange Act of 1934 and Exchange Act Rules 10b-5, 12b-20, 13a-1 and 13a-13, and additionally as to Chancellor, Adley, Churchill and Volpe, Rule 13a-11, which requires prompt and accurate disclosure of material events in Commission filings. Additionally as to the Chancellor defendants, the Commission seeks injunctions from violations of the record-keeping and internal controls provisions, Sections 13(b)(2)(A), 13(b)(2)(B) and, as to the individuals, 13(b)(5) of the Securities Exchange Act of 1934 and Exchange Act Rules 13b2-1, and additionally as to Adley, Churchill, Volpe and Ezrin, Rule 13b2-2, which prohibits officers of a company from lying to auditors. The Commission also seeks to enjoin Metcalf Davis and Davis from violating Section 10A of the Exchange Act, which requires auditors to take adequate steps to detect and report suspected fraud by management of companies they audit. In addition, the Commission seeks an order requiring Adley to disgorge at least $1.1 million in improper payments he caused Chancellor to make to an entity he controlled, and the value of a $3.71 million interest-free loan he improperly obtained by diverting proceeds of a business loan to Chancellor to his own account. The Commission also seeks disgorgement by Churchill of his compensation from Chancellor, and by Davis and BKR Metcalf Davis of the $120,000 in fees they received for their services to Chancellor. The Commission seeks civil monetary penalties from each of those individual defendants and from Metcalf Davis. It also seeks an order permanently barring Adley, Churchill and Peselman from acting as officers or directors of any public company.
Settled Actions
Chancellor Corporation, Volpe and Ezrin entered settlements with the Commission in which, without admitting or denying the allegations of the Commission's Complaint, they consented to entry of permanent injunctions against violations of the anti-fraud, reporting, record-keeping and internal controls provision of the federal securities laws. Volpe and Ezrin each agreed to pay a $25,000 civil monetary penalty, with the amount of Volpe's penalty based on Volpe's sworn representations in financial statements submitted to the Commission.
Marchese, without admitting or denying the Commission's findings, consented to anorder requiring him to cease and desist from committing or causing any violation, and any future violation, of the anti-fraud, periodic reporting, record keeping and internal controls provisions of the federal securities laws, Sections 10(b), 13(a), 13(b)(2)(A) and 13(b)(2)(B) of the Exchange Act, and Rules 10b-5, 12b-20 and 13a-1. Marchese was a director of Chancellor from 1996 to June 1999. The Commission found that Marchese acted recklessly in signing Chancellor's Form 10-K for 1998, which contained materially misleading financial statements, and did not fulfill his responsibility as a director to ensure that Chancellor maintained accurate books and records and adequate internal controls.
In addition, Decker and Fricke consented to an order pursuant to Rule 102(e) of the Commission's Rules of Practice, suspending them from appearing or practicing before the Commission as accountants and providing that Decker may apply for reinstatement after three years and Fricke after two years. The order also requires them to cease and desist from committing or causing any violation, and any future violation, of Sections 10A and 13(a) of the Exchange Act and Rules 12b-20 and 13a-1.
