U.S. SECURITIES AND EXCHANGE COMMISSION
Litigation Release No. 20199 / July 18, 2007
Accounting and Auditing Enforcement Release No. 2642 / July 18, 2007
SEC v. James M. Materna, John R. Holtzhauser, and Paul R. Venesky, 1:07-CV-01274 (D.D.C.)(HHK)
SEC Files Settled Accounting Fraud Charges Against the Former CFO and Former Controller of OM Group, Inc. and Former Controller of OMG Americas and Also Files Settled Cease-and-Desist Proceedings Against OM Group, Inc.
On July 18, 2007, the Securities and Exchange Commission filed civil fraud charges in the U.S. District Court for the District of Columbia against James Materna, the former chief financial officer of OM Group, John Holtzhauser, the former controller of OM Group, and Paul Venesky, the former controller of OMG Americas, a subsidiary. According to the Complaint, Materna and Holtzhauser engaged in accounting fraud by recording and directing numerous adjustments to the consolidated financials ("top-side adjustments"), which were wholly unsupported and often duplicative of entries already recorded at the operating unit level. The Complaint alleges that Venesky made improper accounting entries at OMG Americas. According to the Complaint, the improper accounting practices were done with the intent to manage earnings. The scheme resulted in the filing of materially false and misleading financial statements in the company's annual report on Form 10-K for the fiscal years ended December 31, 2001 and December 31, 2002, and in the company's quarterly reports on Form 10-Q for the first three quarters of 2002, and the fourth quarter results on Form 10-K, and the first three quarters of 2003 filed on Form 10-Q. In March 2005, after conducting an internal investigation, OM Group issued a restatement reducing its retained earnings for the relevant period by $64 million as a result of the fraud. The Commission's Complaint charges Materna and Holtzhauser with violating, among others, the antifraud provisions of the federal securities laws. The Commission's Complaint charges Venesky with aiding and abetting violations of the antifraud provisions, among others. On July 18, 2007, the Commission issued a settled cease-and-desist order that finds that OM Group violated the antifraud, reporting, books and records, and internal controls provisions. OM Group produces value-added, metal based specialty chemicals and related materials.
According to the Commission's Complaint:
At the end of each quarter and fiscal year, OM Group consolidated the financial statements of its operating entities into one consolidated financial statement, which was reported on OM Group's Forms 10-K and 10-Q. During the close process, Holtzhauser and Materna made more than 700 top-side adjustments to OM Group's consolidated financial statement. The adjustments were across the divisions and the support for the adjustments was either inadequate or did not exist. Many of the improper accounting practices included, among other things, overcapitalizing overhead costs, inflated inventory recovery yields, improper supplier receivables and interest receivables, duplicating entries already made at the operating unit level, recording inaccurate inventory estimates, and recording expenses out of period. Venesky, the Controller of OMG Americas, was responsible for consolidating OMG Americas' financial results. Venesky used inaccurate estimates to record inventory. More often than not, Venesky's estimates increased following feedback from Holtzhauser and Materna.
E-mails reflect the intent to adjust numbers to meet earnings targets or to enhance OM Group's performance. E-mails also show that there was a concerted effort by Materna, Holtzhauser, and Venesky to conceal material information from auditors. In one e-mail, Venesky wrote to Materna and Holtzhauser that "My concern about inventory is that going too heavy in WIP [work-in-process] or others will trigger even greater scrutiny. Truth is, we have a fresh set of auditors, and I have no idea how much conversational auditing this group will take ." The documents also reflect a pattern of recording almost random round numbers to journal entries to try to manage earnings, and to look for "other candidates," i.e., other accounting categories in which to make more adjustments. In addition, certain journal entries were made at locations that auditors would not likely visit during audits. During the relevant period, OM Group did not have an adequate system of internal controls that would detect and prevent the improper accounting practices.
Materna and Holtzhauser, without admitting or denying the allegations in the Commission's complaint, each consented to the entry of a final judgment permanently enjoining each from violating Section 17(a) of the Securities Act, and Sections 10(b) and 13(b)(5) of the Exchange Act and Rules 10b-5, 13b2-1, and 13b2-2 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; imposes a $100,000 civil penalty; and a five-year officer-and-director bar; and consented to the issuance of an order imposing a five-year 102(e) suspension. Holtzhauser will also pay disgorgement of $76,707. Venesky, without admitting or denying the allegations in the Commission's complaint, consented to the entry of a final judgment permanently enjoining him from aiding and abetting violations of Section 10(b), 13(a), 13(b)(2)(A), 13(b)(2)(B), and 13(b)(5) of the Exchange Act and Rules 10b-5, 12b-20, 13a-1, 13a-11, and 13a-13 thereunder, and violating Rules 13b2-1 and 13b2-2 thereunder, and imposing a $25,000 civil penalty; and consented to the issuance of an order imposing a three-year 102(e) suspension. OM Group consented, without admitting or denying the findings by the Commission, to an order to cease-and-desist from committing any future violations of Section 17(a) of the Securities Act and Sections 10(b), 13(a), 13(b)(2)(A), and 13(b)(2)(B) of the Exchange Act, and Rules 10b-5, 12b-20, 13a-1, 13a-11, and 13a-13 thereunder.
The Commission considered remedial acts promptly undertaken by OM Group and cooperation afforded the Commission staff.