SECURITIES AND EXCHANGE COMMISSION
LITIGATION RELEASE NO. 16734 /September 27, 2000
Accounting and Auditing Enforcement Release No. 1328 / September 27, 2000
SEC Charges Former President and Controller of OakGrigsby, Inc. with Financial Fraud
SECURITIES AND EXCHANGE COMMISSION v. MATTHEW R. WELCH AND JAMES C. HORNE (United States District Court for the Northern District of Illinois, Civ. No. 00-C-5935)
Today, the Commission filed a complaint in the U.S. District Court for the Northern District of Illinois alleging that between July 1995 and January 3, 1997, defendants James Horne and Matthew Welch, respectively the former president and controller of OakGrigsby, Inc., engaged in a scheme to falsify certain of OakGrigsby's financial records in order to make the company appear more profitable than it was. Due to the defendants' falsifications, OakGrigsby, which was a Sugar Grove, Illinois division of Oak Industries, Inc., reported operating profits during the period of the fraud that were overstated by 108% to 371%. Oak Industries incorporated OakGrigsby's inflated numbers in its periodic reports and press releases and, as a result, Oak Industries' income and earnings per share during this period were overstated in amounts ranging from 2% to 15%.
Specifically, the Complaint alleges that Defendants Welch and Horne engaged in a scheme to inflate OakGrigsby's reported earnings by making a series of improper entries on OakGrigsby's books that improperly increased the division's reported profits. As part of this scheme, Welch fraudulently concealed expenses such as salaries, shipping and travel. The Complaint alleges that several of these fraudulent entries were made with the knowledge and approval of Defendant Horne, the divisional president of OakGrigsby until March 1996. OakGrigsby's results were consolidated with other Oak divisions and incorporated into Oak's periodic reports and press releases. As a result of Welch and Horne's actions, Oak's income per share for the quarter ended December 31, 1995 and the quarters ended March 31, June 30 and September 30, 1996 were materially overstated.
According to the Complaint, Welch, a Naperville, Illinois resident, and Horne, a Lake Bluff, Illinois resident, inflated reported OakGrigsby's profits to ensure that the division met specified earnings targets which allowed Horne and Welch to earn bonuses of $55,000 and $15,000, respectively.
Welch's fraud was discovered by the company in January 1997, and on February 10, 1997, Oak filed restated reports covering the fourth quarter of 1995 and the first three quarters of 1996. In January 2000, Oak, whose shares had been publicly traded on the New York Stock Exchange, was acquired by Corning, Incorporated.
As a result of the conduct described in the Complaint, the Commission has charged Welch and Horne with violations of Sections 10(b) of the Securities and Exchange Act of 1934 ("Exchange Act") and Exchange Act Rule 10b-5 thereunder (antifraud provisions) and Exchange Act Rule 13b2-1 (prohibiting falsification of issuer books and records). The defendants are also charged with aiding and abetting 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 thereunder (issuer books and records and internal accounting controls provisions), and, in addition, Welch is charged with violating Section 13(b)(5) of the Exchange Act (prohibiting knowing falsification of issuer books and records and evasion of internal accounting controls). The Commission's Complaint seeks injunctive relief, disgorgement and civil penalties of bonuses received by Horne and Welch, plus prejudgment interest.