SECURITIES AND EXCHANGE COMMISSION
Litigation Release No. 17891 / December 12, 2002
Accounting and Auditing Enforcement Release No. 1690 / December 12, 2002
Securities and Exchange Commission v. Safety-Kleen Corp., Kenneth W. Winger, Paul R. Humphreys, William D. Ridings, and Thomas W. Ritter, Jr., Civil Action No. 02-CV-9791 (CSH) (S.D.N.Y.) (December 12, 2002)
In the Matter of Susan Moore, Administrative Proceeding File No. 3-10970 and Securities Exchange Act Release No. 46988
SEC SUES FORMER CEO, CFO AND OTHER TOP EXECUTIVES OF SAFETY-KLEEN CORP. FOR ACCOUNTING FRAUD; COMPANY CONSENTS TO PERMANENT INJUNCTION; CRIMINAL CHARGES FILED AGAINST TWO FORMER OFFICERS
The Securities and Exchange Commission today filed a complaint in the United States District Court for the Southern District of New York charging Safety-Kleen Corp. and four of its former senior executives with perpetrating a massive accounting fraud from at least November 1998 through March 2000. The Commission alleged that these individuals materially overstated the company's revenue and earnings in periodic reports filed with the Commission and in press releases issued by the company. According to the complaint, the defendants carried out the scheme primarily by making inappropriate quarterly accounting adjustments for the purpose of meeting Wall Street pro forma earnings expectations. They are also charged with fraudulently recording approximately $38 million of cash that was generated by entering into speculative derivatives transactions.
The complaint alleges that the fraudulent scheme was orchestrated by Paul R. Humphreys, the former Chief Financial Officer. William D. Ridings, the former Controller, and Thomas W. Ritter, Jr., the former Vice President of Accounting, assisted Humphreys. As set forth in the complaint, these executives engaged in the illegal conduct to create the illusion that predicted cost savings and business synergies from two large acquisitions were being achieved. In fact, the expected savings had not materialized, the company's business was declining rapidly, and the company was facing a severe cash flow problem.
To make up for the earnings shortfall, Humphreys, Ridings and Ritter recorded, or directed others to record, numerous adjustments that were not in conformity with generally accepted accounting principles. The adjustments were made to multiple accounts and generally can be categorized as follows: (i) improper revenue recognition; (ii) improper capitalization and deferral of operating expenses; (iii) improper treatment of reserves and accruals; and (iv) improper recording of derivatives transactions. The complaint alleges that Kenneth W. Winger, the former Chief Executive Officer, signed Safety-Kleen's periodic reports and knew or was reckless in not knowing that the financial statements contained in those reports were materially false and misleading. The complaint also alleges that all of the defendants knew or were reckless in not knowing that the company's quarterly earnings press releases were materially false and misleading.
After the fraudulent scheme was discovered in late February 2000, the company began an internal investigation, which was conducted by a special committee of the Board of Directors. On July 9, 2001, Safety-Kleen filed restated financial statements for fiscal years 1997, 1998 and 1999. The company's restatement reduced net income over the three-year period by $534 million. Approximately $312 million, or 58%, of the restated net income was in fiscal 1999. Also on July 9, 2001, the company filed financial statements for fiscal year 2000 reflecting a net loss of $833 million.
According to the complaint, through this conduct, (i) Safety-Kleen violated Section 17(a) of the Securities Act of 1933 and Sections 10(b), 13(a), 13(b)(2)(A) and 13(b)(2)(B) of the Securities Exchange Act of 1934 and Rules 10b-5, 12b-20, 13a-1 and 13a-13 thereunder, (ii) Winger violated Section 17(a) of the Securities Act and Section 10(b) of the Exchange Act and Rules 10b-5 and 13b2-2 thereunder, and (iii) Humphreys, Ridings and Ritter violated Section 17(a) of the Securities Act and Sections 10(b) and 13(b)(5) of the Exchange Act and Rules 10b-5 and 13b2-1 thereunder. Humphreys and Ridings also violated Exchange Act Rule 13b2-2. As relief, the Commission is seeking permanent injunctions, disgorgement of defendants' ill-gotten gains, prejudgment interest, and the imposition of civil penalties against Winger, Humphreys, Ridings and Ritter. The Commission is also seeking officer and director bars against Winger, Humphreys and Ridings.
The United States Attorney's Office for the Southern District of New York has filed related criminal charges against Humphreys and Ridings. Ridings has entered a guilty plea and is waiting to be sentenced. Ridings also consented, without admitting or denying the allegations in the Commission's complaint, to the entry of a final judgment permanently enjoining him from violating Section 17(a) of the Securities Act, Sections 10(b) and 13(b)(5) of the Exchange Act and Rules 10b-5, 13b2-1 and 13b2-2 thereunder. He also agreed to be permanently barred from serving as an officer or director of a public company and to pay $28,476.14 of disgorgement and prejudgment interest.
Simultaneous with the filing of the complaint, and without admitting or denying the Commission's allegations, Safety-Kleen consented to the entry of a final judgment permanently enjoining it from violating Section 17(a) of the Securities Act, Sections 10(b), 13(a), 13(b)(2)(A) and 13(b)(2)(B) of the Exchange Act and Rules 10b-5, 12b-20, 13a-1 and 13a-13 thereunder. Ritter consented, without admitting or denying the allegations in the complaint, to the entry of a final judgment permanently enjoining him from violating Section 17(a) of the Securities Act, Sections 10(b) and 13(b)(5) of the Exchange Act and Rules 10b-5, and 13b2-1 thereunder. A civil penalty was not imposed against Ritter, and disgorgement and prejudgment interest were waived, based on his sworn statement of financial condition.
In a related matter, the Commission instituted a settled cease-and-desist proceeding against Susan Moore, Safety-Kleen's former financial reporting manager. Moore consented to the entry of the order instituting proceedings without admitting or denying the findings therein, including findings that, as directed by her superiors, she participated in the preparation of financial statements that, in the exercise of reasonable care, she should have known were not in conformity with generally accepted accounting principles. Moore was ordered to cease and desist from causing violations and any future violations of Sections 13(a), 13(b)(2)(A) and 13(b)(2)(B) of the Exchange Act and Rules 13a-1, 13a-13 and 12b-20 thereunder.
The Commission acknowledges the cooperation of the United States Attorney's Office for the Southern District of New York and the Federal Bureau of Investigation in this matter.