Securities and Exchange Commission
Litigation Release No. 16297 / September 28, 1999
Accounting and Auditing Enforcement
Release No. 1167
S.E.C. V. MITCHELL C. KAHN ET. AL., (N.D. IL., CASE NO.99C 6343, FILED SEPTEMBER 27, 1999)
The Securities and Exchange Commission announced that on September 27, 1999, it filed a complaint in the U.S. District Court for the Northern District of Illinois against Mitchell Kahn (Kahn) of Deerfield, Illinois, Paul Van Eyl (Van Eyl) of Lincolnshire, Illinois and Thomas Ehmann (Ehmann) of Elmhurst Illinois. Kahn was the President and Chief Executive officer of First Merchants Acceptance Corporation (FMAC), a Deerfield, Illinois sub-prime auto lender which filed a Chapter 11 bankruptcy petition in July 1997. Van Eyl and Ehmann were Vice President of Strategic Planning and Chief Financial Officer, respectively, of FMAC. The Complaint alleges that Kahn, Van Eyl and Ehmann engaged in a scheme to make FMAC's delinquent and uncollectable accounts appear current. Specifically, Kahn and Van Eyl directed FMAC's operations manager and financial analyst to, among other things, alter payment and balance information on thousands of FMAC accounts. Ehmann discovered the scheme and, instead of reporting it, took action in furtherance of the scheme and to prevent its detection. As a result of the Defendants' actions, FMAC's books and records vastly understated the number of delinquent and uncollectable accounts, which caused FMAC to materially under reserve its allowance for credit losses and overstate its net income in filings with the Commission, which Kahn and Ehmann signed.
As alleged in the Complaint, these acts resulted in FMAC understating its allowance for credit losses by $43.4 million or 252.6%, and overstating its net income by $76.7 million or 729%, in its financial statements for year end 1996. These financial statements were included in a press release, dated February 4, 1997, which was filed as a Form 8-K on February 15, 1997 and in its 1996 Form 10-K, filed on March 31, 1997. Moreover, Kahn and Ehmann also misled First Merchants' auditors regarding the falsification of the due dates of the customer accounts in connection with the accountants' audit of FMAC's 1996 financial statements, in an attempt to cover up the fraudulent scheme. The fraudulent scheme conducted by Kahn, Van Eyl and Ehmann resulted in a fraud on the market for FMAC common stock and violated sections 10(b), 13(a), 13(b)(2) and 13(b)(5) of the Exchange Act and Rules 10b-5, 12b-20, 13a-1, 13a-11, 13b2-1 and 13b2-2 thereunder.
The Commission is seeking disgorgment of all ill-gotten gains received by Kahn, Van Eyl and Ehmann, including performance bonuses they received based on FMAC's financial performance reflected in its 1996 Form 10-K. The Commission is also seeking the imposition of civil penalties against the defendants for their fraudulent acts.
In a related proceeding, the Commission also announced the entry of an Order Instituting Public Administrative Proceedings Making Findings and Ordering Steven Zemaitis and Julie Freisinger to Cease and Desist. The Commission accepted settlement offers submitted by Zemaitis and Freisinger, two former low-level FMAC employees, wherein they consent to cease and desist from committing or causing violations of Sections 10(b) and 13(b)(5) of the Exchange Act and Rules 10b-5 and 13b2-1 promulgated thereunder and causing violations of Sections 13(a) and 13(b)(2) of the Exchange Act and Rules 12b-20, 13a-1 and 13a-11 promulgated thereunder, for their role in the scheme.