U.S. SECURITIES AND EXCHANGE COMMISSION
Litigation Release No. 20185 / July 9, 2007
Accounting and Auditing Release No. 2632 / July 9, 2007
SEC v. Brightpoint, Inc., American International Group, Inc., Phillip Bounsall, John Delaney and Timothy Harcharik, Case No. 03 CV 7045 (S.D.N.Y.) (HB)
Following Jury Verdict in First Case to Be Tried Involving Finite Insurance, Court Enters Final Judgment Imposing Injunction and Civil Penalty Against Former Brightpoint Director of Risk Management Timothy Harcharik for Role in Accounting Fraud
The Securities and Exchange Commission announced that on July 6, 2007, following a jury verdict, the United States District Court for the Southern District of New York entered a Final Judgment against Timothy Harcharik (Harcharik), former director of risk management for Brightpoint, Inc. (Brightpoint) enjoining Harcharik for a period of five years from future violations of the antifraud, books-and-records, and internal controls provisions of the federal securities laws and ordering him to pay $50,000 in civil penalties. This final judgment follows a jury verdict on May 25, 2007, in favor of the Commission, rendered after a four-day trial before the Honorable Harold Baer, Jr., United States District Judge for the Southern District of New York. Harcharik played a key role in a fraudulent scheme involving a purported insurance policy that enabled Brightpoint to conceal $11.9 million in losses that it sustained in 1998.
In its complaint, filed on September 11, 2003, the Commission alleged that Harcharik and other co-defendants, including John Delaney, Brightpoint's former corporate controller, devised and executed an accounting fraud scheme in order to keep escalating losses at Brightpoint within a previously announced range. Specifically, the complaint alleged that Harcharik negotiated and executed a sham insurance policy issued by American International Group, Inc. (AIG) for the sole purpose of allowing Brightpoint to write off these losses as covered by insurance. The complaint further alleged that the purported policy was simply a vehicle that masked a round trip of cash between Brightpoint and AIG, rather than real insurance. As a result of the scheme, Brightpoint's pre-tax net income for 1998 was overstated by 61 percent.
This was the first case to go to trial involving the fraudulent use of finite insurance. The jury found Harcharik liable for aiding and abetting securities fraud in violation of Section 10(b) and Rule 10b-5 of the Securities Exchange Act of 1934 (Exchange Act), and aiding and abetting violations of Exchange Act Section 13(b)(5) (internal controls and books-and-records provision) and Exchange Act Rule 13b2-1 (books-and-records provision).
The final judgment entered against Harcharik concludes the Commission's litigation in this matter. Previously, all of the defendants except Harcharik had agreed to settle the Commission's charges. In connection with the settlements, AIG paid a civil penalty of $10 million, Brightpoint paid a civil penalty of $450,000, Delaney paid a civil penalty of $100,000 and consented to the entry of a Final Judgment that permanently enjoined him from future violations of the securities laws and permanently barred him from serving as an officer or director of any public company, and Brightpoint's former chief financial officer, Phillip Bounsall (Bounsall), agreed to pay a civil penalty of $45,000.
AIG, Brightpoint and Bounsall also consented to the issuance of separate cease-and-desist orders by the Commission. In a related criminal case, Delaney pled guilty to securities fraud and, as a result, was sentenced to 12 months probation, including eight months of home detention.
For additional information, see Litigation Release No. 18340.