U.S. SECURITIES AND EXCHANGE COMMISSION
Litigaton Release No. 18519 / December 22, 2003
Accounting and Auditing Enforcement
Release No. 1933 / December 22, 2003
UNITED STATES V. EDDY LYNN PATTERSON (U.S.D.C., District of Oklahoma) Criminal Action No. 03-CR-55-ALL
SECURITIES AND EXCHANGE COMMISSION V. EDDY L. PATTERSON Defendant, Civil Action No. 03 cv-302 (U.S.D.C./N.D. OK)(Tulsa Division)
JURY CONVICTS FORMER CHAIRMAN AND CEO OF NESCO, INC., OF FINANCIAL FRAUD
On December 16, a federal jury in Tulsa, Oklahoma, convicted Eddy L. Patterson, the former chairman and chief executive officer of Tulsa-based Nesco, Inc., of securities fraud, bank fraud and tax-relegated offenses. Patterson, 59, was convicted for his role in fraudulently inflating the accounts of Nesco, a former NASDAQ company once recognized by Fortune Small Business Magazine as one of America's 100 fastest growing small companies (OTC: NESCQ). Patterson is scheduled to be sentenced in March 2004. Patterson's wife, Judith Ray Patterson, was also convicted of tax-related offenses.
On May 7, 2003, the U.S. Securities and Exchange Commission filed a civil securities fraud case in the United States District Court for the Northern District of Oklahoma (Tulsa Division) against Patterson (see Lit. Rel No. 18125). The SEC charged Patterson with financial fraud and other securities law violations related to his orchestration of a false invoice scheme that inflated Nesco's assets and revenue for its fiscal year 2000 and first quarter 2001 by over $2 million. The SEC's action was brought in close coordination with the U. S. Attorneys' Office in Tulsa, Oklahoma and the Internal Revenue Service-Criminal Investigation Division.
According to the SEC's complaint, Patterson was Nesco's chairman and CEO at all relevant times until August 16, 2001, when the company's board of directors forced him to resign. Assisted by Nesco's now deceased former controller, Patterson grossly overstated the company's earnings by booking 28 bogus customer invoices totaling $2,153,986 in the fourth quarter of 2000 and one invoice totaling $183,385 in the first quarter of 2001. These false invoices resulted in overstatements to Nesco's pretax income for those periods of 400% and 175%, respectively. Nesco included these false figures in its annual and quarterly reports filed with the SEC. The complaint further alleges that Patterson, who had borrowed heavily to acquire large amounts of Nesco stock, devised the fraudulent scheme to conceal the company's dismal financial performance from investors, bolstering Nesco's share price and preventing his personal financial ruin. The SEC's complaint further alleged that Patterson lied to Nesco's auditor to prevent discovery of the scheme during its audit of the company's 2000 fiscal year.
According to the SEC's complaint, Nesco's management became suspicious of the company's financial statements for the 2000 fiscal year and commenced an internal investigation in May 2001. This investigation ultimately revealed Patterson's fraud and caused Nesco to compel his immediate resignation from the company on August 16, 2001. Further, Nesco voluntarily issued a press release disclosing its financial overstatements, restated its financial results for its fiscal year 2000 and first quarter 2001, and continued its internal investigation to ensure that it had uncovered the whole scheme and any other financial mismanagement. Nesco also fully cooperated with the SEC in its investigation of the matter.
The SEC's case, which is continuing, requests that Patterson be permanently enjoined from future securities violations, that a civil monetary penalty be assessed against him, that he be ordered to disgorge the full amount of compensation he received from Nesco during the relevant period, including salary and bonuses, with prejudgment interest, and that he be barred from serving in the future as an officer or director of a public company.
On May 7, 2003, the SEC also announced the institution of cease-and-desist proceedings against Nesco based on the aforementioned misconduct. The SEC simultaneously accepted Nesco's offer to consent to a cease-and-desist order. The order, in charging violations of Sections 13(a) and 13(b)(2) of the Exchange Act and Rules 12b-20, 13a-1, and 13a-13 thereunder, orders Nesco to cease and desist from committing or causing any future violations of the above books and records, reporting, and internal controls provisions.
Additional information can be found in Litigation Release No. 18125 (May 7, 2003).