SECURITIES AND EXCHANGE COMMISSION
Litigation Release No. 17736 / September 19, 2002
Accounting and Auditing Release No. 1629 / September 19, 2002
SEC v. MOTORCAR PARTS & ACCESSORIES, INC. AND PETER BROMBERG (U.S. District Court for the Central District of California, Civil Action No. CV02-7269 DT (SHx))
COMMISSION FILES FINANCIAL FRAUD CASE AGAINST SOUTHERN CALIFORNIA MANUFACTURER AND ITS FORMER CFO; FORMER CFO ALSO AGREES TO PLEAD GUILTY IN ACTION BROUGHT BY UNITED STATES ATTORNEY'S OFFICE
The Securities and Exchange Commission and the United States Attorney's Office for the Central District of California announced today the filing of civil and criminal charges in Los Angeles against Peter Bromberg, the former CFO of Motorcar Parts and Accessories, Inc., and civil charges against Motorcar, alleging financial fraud. Motorcar settled the Commission's action without admitting or denying the complaint's allegations.
The Commission's complaint and the Justice Department's criminal charges allege that Bromberg engaged in fraudulent accounting practices and falsified Motorcar's books and records, thereby causing Motorcar to issue false and misleading financial information to the investing public. The Commission's complaint alleges that Motorcar and Bromberg overstated the company's pre-tax earnings for fiscal year 1997 by $3,391,000 (59.8%) and for fiscal year 1998 by $3,576,000 (49.6%), that the overstated earnings figures were reported to the public in Motorcar's annual reports on Form 10-K filed with the Commission for the fiscal years ended March 31, 1997 and 1998, and that Motorcar included its false 1997 financial statements in a registration statement filed with the Commission in October 1997, for an offering that raised $19.8 million.
In a criminal information filed today against Bromberg, the United States Attorney's Office alleges that Bromberg knowingly made false and misleading statements about Motorcar's financial condition and performance in its 1997 and 1998 Forms 10-K. Bromberg has agreed to plead guilty to these charges, which are based on fraudulent conduct similar to that described in the SEC's civil complaint.
The two defendants are:
The criminal and civil charges against Motorcar and Bromberg focus on how Motorcar accounted for and credited customers for returned parts. Motorcar's remanufacturing business starts when customers return used alternators and starters, called "cores." Motorcar gives its customers credit for the returned cores, but does not issue these credits to the customers until after Motorcar checks the cores in to its inventory. Because there was a delay in checking returned product in to inventory and processing the related credits, Motorcar's policy was to establish reserves for credits due to its customers. The effect of this reserve on Motorcar's financial statements was to reduce its earnings. The Commission alleges that Motorcar and Bromberg committed financial fraud through two schemes relating to returned cores and customer credits:
Finally, the Commission's complaint alleges that in April 1999, Bromberg improperly reversed $544,000 of accounts payable that Motorcar had properly recorded in the fourth quarter of fiscal 1999. Bromberg allegedly reversed the accounts payable to enhance the company's earnings. Motorcar did not issue any financial statements that included these improperly reversed amounts. In 1999, Motorcar notified the Commission of a report from its independent auditors indicating that an illegal act had or may have occurred.
The Commission charged Motorcar and Bromberg with violating or aiding and abetting violations of numerous provisions of the federal securities laws, including the antifraud provisions (Section 17(a) of the Securities Act of 1933 and Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder), reporting provisions (Section 13(a) of the Exchange Act and Rules 12b-20 and 13a-1 thereunder), record-keeping provisions (Section 13(b)(2)(A) of the Exchange Act, and additionally as to Bromberg, Rule 13b2-1 thereunder), internal controls provisions (Section 13(b)(2)(B) of the Exchange Act, and additionally as to Bromberg, Section 13(b)(5) of the Exchange Act), and that Bromberg also violated the lying-to- the-auditors provisions (Rule 13b2-2 under the Exchange Act).
Simultaneously with the filing of the complaint in the United States District Court for the Central District of California, Motorcar settled the Commission's action without admitting or denying the complaint's allegations. Motorcar agreed not to commit future violations of the charged federal securities laws. As to Bromberg, the Commission seeks a permanent injunction, an order barring him from serving as an officer or director of a public company, disgorgement of ill-gotten gains, and civil penalties.
In the related criminal case, Bromberg has agreed to plead guilty to a two-count information charging him with making false statements in two Form 10-K reports that were filed with the Commission. In a plea agreement filed this morning, Bromberg admitted that he directed Motorcar employees to engage in fraudulent accounting practices and to falsify Motorcar's books and records, thereby causing false and misleading statements to be made to the investing public about Motorcar's revenues and income. Bromberg's plea results from conduct similar to that alleged in the Commission's complaint.
This case is the product of an investigation by the Securities and Exchange Commission, the United States Attorney's Office in Los Angeles, the Federal Bureau of Investigation, and the U.S. Postal Inspection Service. The Commission's investigation is continuing.