SEC Charges Hurricane Restoration Company and Executives in Post-Katrina Accounting Fraud
FOR IMMEDIATE RELEASE
Washington, D.C., Nov. 30, 2009 — The Securities and Exchange Commission today charged a Dallas and New Orleans-based hurricane restoration company and several executives for lying about non-existent business deals in the wake of Hurricane Katrina, and fraudulently inflating the company's stock price before the company's CEO sold millions of dollars in company shares.
The SEC alleges that Home Solutions of America, Inc. recorded millions of dollars in bogus revenue and issued a series of materially false press releases boasting robust financial results following Katrina and other weather-related disasters, thus inflating the company's stock price. The stock price later plummeted after large insider stock sales, the filing of private securities lawsuits alleging fraud, and the company's public announcement that it would restate its financial statements. Home Solutions then-CEO Frank Fradella, who is among seven individuals charged by the SEC in the scheme, dumped approximately $6.8 million worth of stock into the inflated market.
"The company's financial results were largely fabricated and its public statements were intended to deceive," said Rose Romero, Director of the SEC's Fort Worth Regional Office. "Simply put, instead of rebuilding New Orleans and other hurricane-stricken areas, they constructed a fantasyland of fraud."
According to the SEC's complaint, filed in U.S. District Court for the Northern District of Texas, several different illicit maneuvers were used by Home Solutions at various times between 2004 to 2007 at the direction of Fradella and other executives in order to mislead the public about the company's true financial condition. The SEC alleges that Fradella initiated an expense-deferral scheme to inflate earnings by expensing year-end bonuses when paid rather than when earned. Fradella, Home Solutions CFO Jeff Mattich, and Brian Marshall (who became a Home Solutions director and president of its largest subsidiary, Fireline Restoration Inc., after its acquisition by Home Solutions) together engaged in a series of revenue-inflation schemes, booking millions of dollars of bogus revenue by invoicing and recording receivables on work that never occurred. They also improperly caused millions of dollars of revenue from another public company to be booked as Home Solutions revenue.
The SEC further alleges that Marshall engaged in a separate revenue-inflation scheme at Fireline, booking more than $9 million of fake construction revenue from undisclosed, related-party contracts with entities that Marshall controlled. In fact, at the time Fireline caused Home Solutions to record the revenue, very little work had been performed on the projects and most remained bare-dirt lots.
The SEC's complaint charges Home Solutions, Fradella, Marshall and Mattich with violations of the antifraud, reporting, books and records and internal control provisions of the federal securities laws and seeks permanent injunctive relief, financial penalties, and as to the individuals, full disgorgement with interest and officer and director bars. Based on the failure of Home Solutions to file periodic reports since August 2007, the Commission also instituted separate administrative proceedings against the company, seeking revocation or suspension of each class of its securities.
Four others charged today by the SEC simultaneously agreed to settle on the following terms, without admitting or denying the allegations in the complaint:
- Former Home Solutions CFO and COO Rick O'Brien consented to a permanent injunction and a $130,000 penalty.
- Former Fireline controller Stephen Gingrich consented to a permanent injunction, a $25,000 penalty, and an administrative order barring him from practicing before the Commission as an accountant for at least three years.
- Former Fireline COO Thomas Davis consented to a permanent injunction, a $25,000 penalty, and payment of disgorgement and interest of $32,850.
- Jeff Craft, a business partner of Marshall, consented to a permanent injunction.
The SEC's investigation is continuing.
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For more information about this enforcement action, contact:
Regional Director — SEC's Fort Worth Regional Office
Associate Director, Enforcement — SEC's Fort Worth Regional Office