U.S. SECURITIES AND EXCHANGE COMMISSION
Litigation Release No. 19373 / September 13, 2005
Accounting and Auditing Enforcement
Release No. 2310 / September 13, 2005
Securities and Exchange Commission v. Martin E. Kenney, Jr., Civil Action No. 05-CV-7944 (S.D.N.Y. Sept. 13, 2005)
SEC FILES ACCOUNTING FRAUD CHARGES AGAINST MARTIN E. KENNEY, JR., CEO OF WRC MEDIA, INC.
The Securities and Exchange Commission announced today the filing of a civil action against Martin E. Kenney, Jr., the Chief Executive Officer and a former Director of WRC Media, Inc. ("WRC"), in the United States District Court for the Southern District of New York. WRC sells educational materials for the kindergarten through high school market and had $152 million of publicly traded debt securities registered with the Commission until July 2005 when WRC repurchased its debt securities.
The Commission's complaint alleges that Kenney orchestrated WRC's fraudulent recognition of $1.2 million in revenue from a purported fourth quarter 2002 sale of educational software to the Monroe City, Louisiana School District. At the time, WRC was millions of dollars behind its fourth quarter 2002 revenue expectations and was in danger of defaulting on its public debt covenants. The complaint alleges that to facilitate the fraud, Kenney procured an unauthorized sales contract from the superintendent of the Monroe City School District that was contingent upon approval by the entire school board. According to the complaint, the contract failed to reflect the school board contingency and omitted the standard representation by the superintendent that he was authorized to bind the school district and that all requirements necessary for authorization had been satisfied. The complaint further alleges that Kenney concealed the contingency from WRC's internal accountants and independent auditors so they would not reject fourth quarter 2002 revenue recognition. As a result, the complaint alleges that WRC filed financial reports with the Commission, certified by Kenney, that materially misstated its fourth quarter results. After learning that the school district would not proceed with the transaction, Kenney permitted WRC to record a bad debt reserve for the purported Monroe receivable in the first quarter of 2003, when it should have restated fourth quarter 2002 results. In March 2004, WRC restated its fiscal 2002 results to correct for the improper accounting related to the Monroe transaction.
Due to Kenney's actions, the complaint alleges that WRC Media filed materially false and misleading periodic and current reports with the Commission. As a result, the complaint alleges that Kenney violated or aided and abetted violations of Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder. The Commission is seeking a permanent injunction, civil penalty and an officer and director bar.
