Securities and Exchange Commission
Litigation Release No. 16296 / September 28, 1999
Accounting and Auditing Enforcement
SECURITIES AND EXCHANGE COMMISSION V. LAWRENCE BOROWIAK, U.S. District Court for the Northern District of Illinois, Civil Action No. 99 C 6348 (N.D. Ill. September 28, 1999)
The Securities and Exchange Commission announced that on September 28, 1999, it filed a Complaint for Permanent Injunction, Civil Penalties and Other Equitable Relief ("Complaint") in the U.S. District Court for the Northern District of Illinois against Lawrence Borowiak ("Borowiak"), a resident of Mundelein, Illinois. The Complaint alleges that Borowiak violated the federal securities laws by engaging in an elaborate fraudulent scheme to overstate Mercury Finance Company's ("Mercury") earnings by $22.7 million in 1995 and $14 million in 1996 by, among other things, inflating income accounts, failing to charge off losses incurred, reducing expenses and otherwise falsifying company records. At the time, Mercury was a sub-prime auto lender based in Lake Forest, Illinois, and Borowiak was an assistant vice president and accounting manager for the company. Mercury filed for bankruptcy in 1998 and has been reorganized as MFN Financial Corporation. The Complaint alleges that, as a result of Borowiak's false entries, Mercury's press releases for 1995 and 1996 as well as its financial statements for the fiscal year ending December 31, 1995 and for the three quarters of 1996 were materially misstated. In addition, the Complaint alleges that upon the discovery of the accounting problems at Mercury by the auditors, Borowiak sold most of his family's holdings of Mercury stock thereby avoiding a loss of over $550,000 when the news was made public. The Complaint also names Borowiak's wife, Joanne Borowiak, as a relief defendant.
According to the Complaint, from 1995 to February 1997, Borowiak and others increased income accounts $3 million in March 1995 and $25.75 million in December 1995 and reduced expense accounts $6.1 million in December 1995. These spurious 1995 adjusting entries resulted in an overstatement of Mercury's earnings by $22.7 million. The Complaint also alleges that in 1996 Borowiak fraudulently reclassified $26 million in losses as an asset. The fraudulent entries had an effect of overstating assets by $26 million and concurrently understating expenses by the same amount, resulting in an overstatement of Mercury's earnings by approximately $14 million. The Complaint alleges that Borowiak then attempted to conceal this information from the auditors by altering reports at Mercury.
The Complaint also alleges that on January 27 and 28, 1997, Borowiak attempted to sell all of his families holdings of Mercury stock before public disclosure of Mercury's accounting problems. The Complaint further alleges that Borowiak and his wife sold 45,018 shares of Mercury thereby avoiding losses of over $550,000 when the information became publicly known.
The Complaint alleges that Borowiak violated Section 17(a) of the Securities Act of 1933, Section 10(b) of the Securities Exchange Act of 1934 ("Exchange Act") and Rule 10b-5 promulgated thereunder. The Complaint also alleges that Borowiak violated Section 13(b)(5) of the Exchange Act and Rule 13b2-1, promulgated thereunder, by circumventing Mercury's system of internal accounting controls and falsifying Mercury's books, records and accounts.