UNITED STATES OF AMERICA
In the Matter of
Surety Capital Corporation,
|ORDER INSTITUTING PROCEEDINGS, MAKING FINDINGS, AND IMPOSING A CEASE-AND-DESIST ORDER|
The Securities and Exchange Commission ("Commission") deems it appropriate that public cease-and-desist proceedings against Surety Capital Corporation ("Surety Capital" or "Respondent") be instituted pursuant to Section 21C of the Securities Exchange Act of 1934 ("Exchange Act").
In anticipation of the institution of these proceedings, Respondent has submitted an Offer of Settlement ("Offer") that the Commission has determined to accept. Solely for the purpose of these proceedings and any other proceedings brought by or on behalf of the Commission or in which the Commission is a party, and without admitting or denying the findings contained herein, except that Respondent admits the Commission's jurisdiction over it and over the subject matter of these proceedings, Respondent has consented to the entry of this Order Instituting Proceedings, Making Findings and Imposing a Cease-and-Desist Order ("Order").
On the basis of this Order and the Offer submitted by Respondent, the Commission finds:1
A. Surety Capital is a Delaware corporation headquartered in Fort Worth, Texas, whose shares are registered with the Commission under Section 12(g) of the Exchange Act and are quoted on the National Quotation Service's Pink Sheets under the symbol "SRYP." During the relevant period discussed herein, Surety Capital's common stock was traded on the American Stock Exchange. Surety Capital is a bank holding company with one subsidiary, Surety Bank, National Association ("Surety Bank"). During the relevant period, G. Matthias Heinzelmann, III was the president and a director of Surety Capital. Heinzelmann was also executive vice president and a director of Surety Bank, and manager of Surety Bank's Insurance Premium Finance ("IPF") division.
G. Matthias Heinzelmann, III Manipulates Surety Capital's Reported Income
B. Surety Bank provides retail and commercial banking services to its customers, and specializes in premium finance lending through its IPF division to businesses and individuals who are unable to pay their insurance policy premiums up front. Surety Bank policy requires IPF loans to be charged off once they are over 180 days past due. Charged-off loans are accounted for in Surety Bank's allowance for loan losses. Provisions (additions) to the allowance for loan losses are expenses and deducted from Surety Bank's gross income.
C. From 1996 through the third quarter of 1999, Heinzelmann diverted refunds due to IPF loan customers to reduce or eliminate delinquent balances in unrelated IPF loan accounts. Heinzelmann deliberately concealed the diverted refunds through improper journal entries and adjustments. In August 1999, Surety Bank's internal auditor detected unusual journal entries in the IPF division and questioned Heinzelmann. Heinzelmann was unable to explain the transactions, and resigned shortly thereafter.2
Effect of Heinzelmann's Wrongdoing
D. In September 1999, shortly following the discovery of Heinzelmann's diversions of customer refunds, Surety Capital launched an investigation into IPF loan accounts and premium refunds and, ultimately, recorded previously unrecognized losses, including interest, of $2,780,000. The losses were recognized as adjustments to prior years beginning in the first quarter of 1996 and extending through the fourth quarter of 1999. Specifically, the losses totaled $180,000 in 1996, $837,000 in 1997, $1,261,000 in 1998, and $502,000 in 1999.
Surety Capital's Reporting and Internal Control Failures
E. As a result of Heinzelmann's actions, Surety Capital included false financial statements in its Forms 10-K and 10-Q for its 1996 through 1998 fiscal years, and its Forms 10-Q for the first two quarters of 1999. Specifically, Surety Capital's financial statements in its Forms 10-K and 10-Q materially overstated its pre-tax income in 1996, and materially understated its pre-tax losses in 1997 and 1998. In addition, Surety Capital failed to file its Form 10-Q for the period ending September 30, 1999. Also, because of the misstatements, Surety Capital failed to make and keep books, records and accounts which, in reasonable detail, accurately and fairly reflected its transactions and dispositions of assets.
F. From the first quarter of 1996 through the third quarter of 1999, Surety Capital failed to maintain an adequate system of internal financial controls with respect to the accounting at Surety Bank over which Heinzelmann had direct control and responsibility. Specifically, Surety Capital failed to implement a system of controls adequate to prevent and detect the diversion of premium refunds in Surety Bank's IPF division. Prior to the discovery of Heinzelmann's diversion of customer refunds, Surety Capital received indications of possible account reconciliation and computer security problems in the IPF division. Nevertheless, Surety Capital failed to increase its scrutiny of Surety Bank's IPF division.
Surety Capital's Cooperation
G. In determining to accept Surety Capital's offer, the Commission considered (i) the
cooperation that Surety Capital afforded the Commission staff; (ii) remedial efforts taken by Surety Capital to strengthen its internal operating procedures in the areas where the misconduct occurred; and (iii) the fact that the current Board of Directors and senior management are not composed of individuals who held those positions during the relevant time.
H. As a result of the foregoing, Surety Capital violated Sections 13(a), 13(b)(2)(A) and 13(b)(2)(B) of the Exchange Act and Rules 12b-20, 13a-1 and 13a-13 thereunder.
In view of the foregoing the Commission deems it appropriate to impose the sanctions agreed to in Respondent's Offer.
Accordingly, IT IS HEREBY ORDERED, pursuant to Section 21C of the Exchange Act, that Respondent Surety Capital cease and desist from committing or causing any violation and any future violation of Sections 13(a), 13(b)(2)(A) and 13(b)(2)(B) of the Exchange Act and Rules 12b-20, 13a-1 and 13a-13 thereunder.
By the Commission.
Jonathan G. Katz
|1||The findings herein are made pursuant to Respondent's Offer of Settlement and are not binding on any other person or entity in this or any other proceeding.|
|2||On April 25, 2002, the Commission filed a civil lawsuit against Heinzelmann alleging that he violated or aided and abetted violations of Sections 10(b), 13(a), 13(b)(2)(A), 13(b)(2)(B) and 13(b)(5) of the Securities Exchange Act of 1934 and Rules 10b-5, 13a-1, 13a-13, 13b2-1 and 13b2-2 thereunder. Litigation Release No. 17491 (April 25, 2002).|
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