LITIGATION RELEASE NO. 17589 /June 27, 2002
UNITED STATES v. G. MATTHIAS HEINZELMANN, III, No. 302-CR-178-R, USDC, NDTX (Dallas Division)
SECURITIES AND EXCHANGE COMMISSION V. G. MATTHIAS HEINZELMANN, III, No. 402-CV-0403-A, USDC, NDTX (Fort Worth Division)
On June 21, 2002, G. Matthias Heinzelmann, III entered into a plea agreement with the United States Attorney for the Northern District of Texas (Dallas Division), in which he pleaded guilty to one count of conspiracy to make false entries in the books and records of a bank, in connection with violations of the federal securities laws that were the subject of an earlier-filed Commission action. Heinzelmann faces up to five years in prison and a substantial fine.
The indictment against Heinzelmann alleges, and in the plea agreement Heinzelmann has admitted, that he agreed to divert money owed to certain customers of Fort Worth, Texas based Surety Bank, N.A. to other Surety Bank customers who were indebted to Surety Bank. Surety Bank is a wholly-owned subsidiary of Surety Capital Corporation, a bank holding company whose securities are registered with the Commission. During the relevant period, Surety Capital's common stock was traded on the American Stock Exchange. The diversion allowed Surety Bank to avoid writing off bad loans, which caused Surety Bank's profits to be overstated, and its losses to be understated.
On April 25, 2002, the Commission filed a civil injunctive action against Heinzelmann, of Fort Worth, Texas, seeking a permanent injunction, an officer and director bar, and a third-tier civil money penalty. According to the Commission's complaint, from 1996 through September 1999, Heinzelmann, while president and director of Surety Capital, engaged in an elaborate scheme to hide loan losses experienced by Surety Bank. The scheme had a material impact on financial statements included in Surety Capital's Forms 10-K and 10-Q. Specifically, Surety Capital overstated its pre-tax income by 7% in 1996, and understated its pre-tax losses by 16% in 1997 and 97% in 1998. Further, Surety Capital failed to file its Form 10-Q for the period ending September 30, 1999. Because of the misstatements, Surety Capital failed to make and keep books, records and accounts that, in reasonable detail, accurately and fairly reflected its transactions and dispositions of assets. Surety Capital also failed to maintain an adequate system of internal financial controls with respect to the IPF Division at Surety Bank.