U.S. SECURITIES AND EXCHANGE COMMISSION
Litigation Release No. 20547 / May 1, 2008
Accounting and Auditing Enforcement Release No. 2819 / May 1, 2008
SEC v. Interpublic Group of Companies, Inc. and McCann-Erickson Worldwide, Inc., No. 08-CV-4075 (GBD)(S.D.N.Y.) (May 1, 2008)
SEC v. Salvatore LaGreca and Brian Watson, No. 08-CV-4076 (GBD) (S.D.N.Y.) (May 1, 2008)
SEC CHARGES McCANN- ERICKSON WORLDWIDE, INC., INTERPUBLIC GROUP OF COMPANIES AND TWO FORMER EXECUTIVES
DEFENDANTS AGREE TO SETTLE; McCANN AGREES TO PAY $12 MILLION PENALTY
The Securities and Exchange Commission today filed a civil injunctive action against McCann-Erickson Worldwide, Inc. (“McCann”) and the Interpublic Group of Companies, Inc. (“IPG”). The Commission alleged that McCann committed securities fraud when it misstated its financial results by failing to expense properly intercompany charges. IPG negligently failed to address the intercompany problems at its largest subsidiary, McCann. IPG also violated the reporting, internal controls and books and records provisions of the securities laws in connection with a variety of issues that were reflected in various restatements IPG issued from August 2002 through September 2005 totaling more than $600 million. IPG and McCann agreed to settle the Commission’s charges, and McCann agreed to pay a $12 million civil penalty.
The Commission’s complaint named the following defendants.
The Commission also brought settled charges against Salvatore LaGreca and Brian Watson (in a separate complaint) for their role in failing to reconcile intercompany accounts that resulted in the 2002 restatement.
The Commission’s complaints alleged the following:
From August 2002 through September 2005, IPG issued numerous restatements that together totaled more than $600 million. The restatements corrected misstatements in IPG’s financial statements that emanated from numerous substantive areas in a variety of geographic regions, and reflected conduct ranging from inaccurate books and records and lack of internal controls to fraud.
Initially, in the Fall of 2002, IPG restated its financial results in an amount of $181 million for the period 1997 to 2002. The largest component of this restatement (approximately $101 million) was attributable generally to the fact that McCann recorded as receivables intercompany charges that should have been expensed. McCann officers and employees, including LaGreca and Watson, failed to ensure McCann reconciled its intercompany accounts for at least six years. At times, LaGreca and Watson purposely delayed reconciling intercompany accounts because they knew a reconciliation would result in write-offs that would interfere with McCann’s efforts to hit internal annual profit targets. Because McCann never fully reconciled its intercompany accounts and failed to expense properly intercompany charges, McCann’s financial results were inaccurate. By 2002, McCann’s intercompany accounts were misstated by approximately $101 million. As LaGreca and Watson knew, IPG then incorporated McCann’s financial results in IPG’s consolidated financial statements.
IPG’s financial management negligently ignored indications McCann was improperly accounting for intercompany transactions. Accordingly, IPG negligently ignored the risk that McCann’s results were materially misstated, with the result that IPG’s own financial results were materially misstated.
IPG’s financial reporting problems were not resolved in 2002. In September 2005, IPG again restated its pre-tax income for the years 2000 through 2003, and the nine months ended 2004, in the amount of $420 million. According to the complaint, a large portion of this restatement was related to $199 million of improperly recognized revenue related to Agency Volume Bonifications (AVBs) and other vendor discounts and credits that IPG took in violation of its contracts with certain of its clients. The 2005 restatement was necessary because there had been a substantial breakdown of internal controls at IPG, and its numerous subsidiaries, including McCann.
IPG filed numerous Forms 10-K, Forms 10-Q, Forms 8-K, and registration statements that contained misrepresentations due to the intercompany issues, the AVB issues, and the various other issues that were reflected in the 2002 and 2005 restatements. For example, in its 2002 Form 10-K, IPG reported net income of $99.5 million. This figure, however, was improperly inflated by $82.8 million, and IPG’s actual income, as reflected in the restatements, was only $16.7 million (a 496% overstatement).
IPG, McCann, LaGreca and Watson settled the Commission’s charges without admitting or denying the allegations in the Commission's complaints. IPG agreed to consent to a final judgment permanently enjoining it from future violations of Sections 17(a)(2) and (3) of the Securities Act of 1933 (Securities Act) and Sections 13(a) and 13(b)(2)(A) and (B) of the Securities Exchange Act of 1934 (Exchange Act) and Rules 12b-20, 13a-1, 13a-11 and 13a-13 thereunder
McCann agreed to consent to a final judgment permanently enjoining it from future violations of Sections Section 17(a) of the Securities Act and Section 10(b) of the Exchange Act and Rule 10b-5 thereunder and aided and abetted IPG’s violations of Sections 13(a) and 13(b)(2)(A) and (B) of the Exchange Act, and Rules 12b-20, 13a-1, 13a-11 and 13a-13. McCann also agreed to pay a $12 million penalty and $1 in disgorgement for its role regarding intercompany accounts resulting in the 2002 restatement.
LaGreca and Watson agreed to settle this matter by consenting to final judgments permanently enjoining them from future violations of Section 10(b) of the Exchange Act and Rule 10b-5 thereunder, and from aiding and abetting violation of Sections 13(a) and 13(b)(2)(A) and (B) of the Exchange Act and Rules 12b-20, 13a-1, 13a-11, and 13a-13. LaGreca and Watson also agreed to pay a civil penalty, in the amounts of $25,000 and $50,000, respectively, and to disgorge all gains derived from their violative conduct plus pre-judgment interest, in the amounts of $46,947 and $17,325, respectively.
In related administrative proceedings, LaGreca consented to an order under Rule 102(e) of the Commission’s Rules of Practice suspending him from appearing or practicing before the Commission as an accountant for five years based on the entry of an injunction against him.