U.S. SECURITIES AND EXCHANGE COMMISSION
Litigation Release No. 19834 / September 14, 2006
Accounting and Auditing Enforcement Release No. 2480 / September 14, 2006
SEC v. Billy David Deaton, Civil Action No. 3:06-CV-1681-K/Northern District of Texas (Dallas Division)
SEC Settles Fraud Charges Against Former Head of Sourcecorp, Inc. Subsidiary
On September 14, 2006, the Securities and Exchange Commission filed a settled civil action in Dallas federal court against Billy David Deaton, the former CEO of Image Entry, Inc., a data entry services provider with its principal office in London, Kentucky. Image Entry is a wholly owned subsidiary of Dallas-based Sourcecorp, Inc., whose common stock previously traded on the Nasdaq National Market but which now is privately owned.
Sourcecorp acquired Image Entry in 2001 from Deaton and members of his family. As part of the acquisition, Sourcecorp entered into employment agreements with Deaton providing, among other things, that Deaton would receive an annual bonus, over a three-year "earn out" period, tied to Image Entry's performance against certain earnings criteria. The Commission alleges that Deaton managed a scheme to overstate Image Entry's earnings so that he could increase the amount of this "earn out" bonus. The Commission's complaint describes an alleged scheme to inflate Image Entry's earnings from 2001 through the first quarter of 2004 by (1) recognizing unearned revenue from state and federal government data entry contracts, (2) prematurely recognizing revenue from a federal government data entry contract that Image Entry had not yet been awarded, and (3) diverting various Image Entry expenses to other companies Deaton owned to reduce Image Entry's expenses and increase its earnings. The Commission contends that Deaton's alleged misconduct artificially inflated Image Entry's earnings and, by extension, his "earn out" bonus. Moreover, because the allegedly inflated figures were included in Sourcecorp's publicly reported consolidated financial results, the Commission's complaint asserts that Sourcecorp's earnings were materially overstated.
Without admitting or denying the Commission's allegations, Deaton has consented to entry of a final judgment permanently enjoining him from violating Section 17(a) of the Securities Act of 1933 and Sections 10(b) and 13(b)(5) of the Securities Exchange Act of 1934 ("Exchange Act") and Rules 10b-5 and 13b2-1 thereunder, and aiding and abetting violations of Sections 13(a), 13(b)(2)(A), and 13(b)(2)(B) of the Exchange Act and Rules 12b-20, 13a-1, 13a-11, and 13a-13 thereunder. As part of the settlement, Deaton also will be barred from serving as an officer or director of a public company for five years and will pay a $240,000 civil penalty. Because Deaton already repaid his "earn out" bonus to Sourcecorp, plus additional costs incurred by the company, the Commission does not seek disgorgement from Deaton.
The Commission's investigation is continuing.