U.S. SECURITIES AND EXCHANGE COMMISSION
Litigation Release No. 21207 / September 11, 2009
Accounting and Auditing Enforcement Release No. 3049 / September 11, 2009
SEC v. Bernard Cole, William Hennessy, Douglas Hodge and Robert Steimle, Civil Action No. 3:09-CV-2107 (N.D. Ohio) (JGC)
SEC Files Settled Accounting Fraud Case Against Four Former Employees of Dana Corporation; Dana Holding Corporation Settles to Cease-And-Desist Order for Reporting Violations
On September 11, 2009, the Securities and Exchange Commission (Commission) filed a settled civil action against four former employees of Dana Corporation (now known as Dana Holding Corporation), Bernard Cole, William Hennessy, Douglas Hodge and Robert Steimle, in connection with a financial accounting fraud scheme that occurred from 2004 through the first two quarters of 2005. According to the complaint, Commercial Vehicle Systems (CVS), a subdivision of one of Dana's two main business units, the Heavy Vehicle Technologies and Systems Group (HVTSG), improperly recognized revenue or income on several transactions and delayed recording expenses in the appropriate period. The improper accounting entries included, among other things: (1) recognizing revenue on transactions where assets were never transferred or risk of ownership never passed, (2) recognizing revenue for price increases on parts sales without agreement from the customers, (3) deferring the recognition of steel surcharge expenses, and (4) recording other improper accounting entries, including decreasing debts owed to suppliers without any contractual support or agreement from the suppliers and recording entries that increased income without any basis or supporting documentation. At the time, Cole was the President of HVTSG, Hennessy was the Vice-President of North and South America of HVTSG and CVS' General Manager, Hodge was the Vice-President and Group Controller of HVTSG and Steimle was the Controller for CVS. Dana overstated its earnings before interest and taxes (EBIT) by $31.6 million or 26.5% due to the fraud.
The complaint further alleges that as CVS' General Manager, Hennessy instructed certain Dana plant managers and controllers to record improper accounting entries. Hennessy and Hodge repeatedly directed Steimle to improperly record income or defer expenses even though Steimle expressed concerns about the propriety of the accounting treatment for a number of these entries. In turn, Steimle directed his accounting staff to make improper accounting entries despite knowing that those entries did not comply with Dana's accounting policies or with GAAP. Finally, Cole was aware that CVS had accrued income from certain proposed price increases before those increases were accepted by customers.
The complaint also alleges that Cole, Hennessy, Hodge and Steimle were each responsible for the accuracy of the financial statements of their business unit or division. They signed quarterly and year-end representations that the financial results of CVS were accurate and in accordance with GAAP. However, these statements were false.
Without admitting or denying the allegations in the Commission's complaint, Cole, Hennessy, Hodge and Steimle consented to the entry of final judgments permanently enjoining them from violating Sections 10(b) and 13(b)(5) of the Exchange Act and Rules 10b-5 and 13b2-1 thereunder and aiding and abetting violations of Sections 13(a) and 13(b)(2)(A) of the Exchange Act and Rules 12b-20, 13a-1, 13a-11, and 13a-13 thereunder; enjoining Hennessy, Hodge and Steimle from violating Section 17(a) of the Securities Act; and enjoining Hennessy and Steimle from violating Rule 13b2-2 of the Exchange Act. The final judgments impose a $65,000 civil penalty and five-year officer-and-director bar against Cole and Hodge and a $45,000 civil penalty against Hennessy and Steimle. The final judgments also order Hodge to pay $71,037 in disgorgement plus $21,420 in prejudgment interest, Hennessy to pay $44,825 in disgorgement plus $13,122 in prejudgment interest and Steimle to pay $21,744 in disgorgement and $6,449 in prejudgment interest.
In a separate action, Dana Holding Corporation was ordered by the Commission to cease and desist from committing or causing any violations and any future 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. Dana Holding Corporation consented to the issuance of the Order without admitting or denying any of the findings in the Order. The order contains findings that, in addition to the fraud, Dana's financial statements from 2004 through the first two quarters of 2005 contained accounting errors amounting to $56.4 million of EBIT. Dana failed to maintain accurate books and records. Dana also had materially deficient internal accounting controls that significantly contributed to the accounting irregularities and errors. As a result, Dana filed materially false and misleading periodic filings with the Commission for fiscal year 2004 and the first two quarters of 2005. In total, Dana materially overstated its EBIT by $88 million, or 73.9% of restated EBIT. This is equivalent to an overstatement of $43 million or 39.8% of restated net income, as reported in Dana's Form 10-K/A and Forms 10-Q/A filed in December 2005.
(Rel. 34-60657; AAE Rel. 3048; File No. 3-13614).