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U.S. Securities and Exchange Commission


Litigation Release No. 21314 / November 30, 2009

Accounting and Auditing Enforcement Release No. 3071 / November 30, 2009

SEC v. Home Solutions of America, Inc., Frank J. Fradella, Brian M. Marshall, Jeffrey M. Mattich, Rick J. O'Brien, Stephen C. Gingrich, Thomas L. Davis and Jeffrey T. Craft, Civil Action No. 3:09-cv-02269 (DCG) (N.D. Tx. Nov. 30, 2009)

SEC Charges Hurricane Restoration Company and Executives In Post-Katrina Accounting Fraud; Four Individuals Settle

On November 30, 2009, the Securities and Exchange Commission filed a civil injunctive action in the U.S. District Court for the Northern District of Texas charging a Dallas and New Orleans-based hurricane restoration company and several executives for lying about non-existent business deals in the wake of Hurricane Katrina, and fraudulently inflating the company's stock price before the company's CEO sold millions of dollars in company shares.

The SEC alleges that Home Solutions of America, Inc. recorded millions of dollars in bogus revenue and issued a series of materially false press releases boasting robust financial results following Katrina and other weather-related disasters, thus inflating the company's stock price. The stock price later plummeted after large insider stock sales, the filing of private securities lawsuits alleging fraud, and the company's public announcement that it would restate its financial statements. Home Solutions then-CEO Frank Fradella, who is among seven individuals charged by the SEC in the scheme, dumped approximately $6.8 million worth of stock into the inflated market.

According to the SEC's complaint, several different illicit maneuvers were used by Home Solutions at various times between 2004 to 2007 at the direction of Fradella and other executives in order to mislead the public about the company's true financial condition. The SEC alleges that Fradella initiated an expense-deferral scheme to inflate earnings by expensing year-end bonuses when paid rather than when earned. Fradella, Home Solutions CFO Jeff Mattich, and Brian Marshall (who became a Home Solutions director and president of its largest subsidiary, Fireline Restoration Inc., after its acquisition by Home Solutions) together engaged in a series of revenue-inflation schemes, booking millions of dollars of bogus revenue by invoicing and recording receivables on work that never occurred. They also improperly caused millions of dollars of revenue from another public company to be booked as Home Solutions revenue.

The SEC further alleges that Marshall engaged in a separate revenue-inflation scheme at Fireline, booking more than $9 million of fake construction revenue from undisclosed, related-party contracts with entities that Marshall controlled. In fact, at the time Fireline caused Home Solutions to record the revenue, very little work had been performed on the projects and most remained bare-dirt lots.

The SEC's complaint charges Home Solutions, Fradella, Marshall and Mattich with violating Section 17(a) of the Securities Act of 1933 (the "Securities Act") and Section 10(b) of the Securities Exchange Act of 1934 (the "Exchange Act") and Rule 10b-5 thereunder. The complaint also charges Home Solutions with violating, and Fradella, Marshall and Mattich with aiding and abetting Home Solutions' violations 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. The complaint further charges Fradella and Mattich with violating Section 13(b)(5) of the Exchange Act, Rules 13a-14, 13b2-1, and 13b2-2 thereunder and Section 304 of the Sarbanes-Oxley Act of 2002; and Marshall with violating Section 13(b)(5) of the Exchange Act and, Rules 13b2-1, and 13b2-2 thereunder, and aiding and abetting Home Solutions' violations of Section 10(b) of the Exchange Act and Rule 10b-5 thereunder.

The complaint seeks permanent injunctive relief and financial penalties against Home Solutions, Fradella, Marshall and Mattich, as to all the individuals, full disgorgement with interest and officer and director bars, and as to Fradella and Mattich, reimbursement of bonuses and stock sale profits under Section 304 of the Sarbanes-Oxley Act. Based on the failure of Home Solutions to file periodic reports since August 2007, the Commission also instituted separate administrative proceedings against the company, seeking revocation or suspension of each class of its securities.

Four others charged today by the SEC simultaneously agreed to settle on the following terms, without admitting or denying the allegations in the complaint.

  • Former Home Solutions CFO and COO Rick O'Brien agreed to pay a $130,000 penalty.
  • Former Fireline controller Stephen Gingrich agreed to pay a $25,000 penalty and to an administrative order barring him from practicing before the Commission as an accountant for at least three years.
  • Former Fireline COO Thomas Davis agreed to pay a $25,000 penalty and to pay disgorgement and interest of $32,850.
  • In addition, O'Brien, Gingrich and Davis each consented to final judgments permanently enjoining them from violating Sections 17(a)(2) and (3) of the Securities Act and from aiding and abetting violations of Sections 13(a) and 13(b)(2)(A) of the Exchange Act and Rules 12b-20, 13a-1, and 13a-13 thereunder.
  • Finally, Jeff Craft, a business partner of Marshall, consented to a final judgment permanently enjoining him from violating Rule 13b2-2 under the Exchange Act.

The SEC's investigation is continuing.

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SEC Complaint



Modified: 11/30/2009