UNITED STATES SECURITIES AND EXCHANGE COMMISSION
LITIGATION RELEASE NO. 18125 / May 7, 2003
ACCOUNTING AND AUDITING ENFORCEMENT RELEASE NO. 1776 / May 7, 2003
SECURITIES AND EXCHANGE COMMISSION V. EDDY L. PATTERSON, Defendant, Civil Action No. 03 cv-302 (U.S.D.C./N.D. OK)(Tulsa Division)
SEC CHARGES FORMER CHAIRMAN AND CEO OF NESCO, INC. WITH FINANCIAL FRAUD
On May 7, 2003, the U.S. Securities and Exchange Commission filed a civil securities fraud case in the United States District Court for the Northern District of Oklahoma (Tulsa Division) against Eddy L. Patterson, the former chairman and chief executive officer of Tulsa-based Nesco, Inc., a former Nasdaq company once recognized by Fortune Small Business Magazine as one of America's 100 fastest growing small companies (OTC: NESCQ)("Nesco" or "the company"). The SEC charged Patterson with financial fraud and other securities law violations related to his orchestration of a false invoice scheme that inflated Nesco's assets and revenue for its fiscal year 2000 and first quarter 2001 by over $2 million. This action was brought in close coordination with the U. S. Attorneys' Office in Tulsa, Oklahoma and the Internal Revenue Service-Criminal Investigation Division, which simultaneously announced Patterson's indictment and arrest on related criminal securities fraud charges and bank and tax fraud charges. Patterson, age 59, resides in Bixby, Oklahoma.
According to the SEC's complaint, Patterson was Nesco's chairman and CEO at all relevant times until August 16, 2001, when the company's board of directors forced him to resign. Assisted by Nesco's now deceased former controller, Patterson grossly overstated the company's earnings by booking 28 bogus customer invoices totaling $2,153,986 in the fourth quarter of 2000 and one invoice totaling $183,385 in the first quarter of 2001. These false invoices resulted in overstatements to Nesco's pretax income for those periods of 400% and 175%, respectively. Nesco included these false figures in its annual and quarterly reports filed with the SEC. The complaint further alleges that Patterson, who had borrowed heavily to acquire large amounts of Nesco stock, devised the fraudulent scheme to conceal the company's dismal financial performance from investors, bolstering Nesco's share price and preventing his personal financial ruin.
The SEC alleges that Patterson created the majority of the false invoices in January 2001 and backdated them to December 2000 to permit their inclusion in Nesco's 2000 financial results. The invoices reflected false accounts receivable that were not due to Nesco and were completely unrelated to services actually performed by the company or billed to its customers. The resulting phantom revenue and assets, however, were included in Nesco's fiscal year 2000 financial statements. The complaint further alleges that Patterson lied to Nesco's auditor to prevent discovery of the scheme during its audit of the company's 2000 fiscal year. The complaint also alleges that Patterson included these fictitious invoices in the financial statements contained in Nesco's Form 10-KSB, which he signed and filed with the SEC on behalf of Nesco on April 2, 2001.
According to the complaint, Nesco's management became suspicious of the company's financial statements for the 2000 fiscal year and commenced an internal investigation in May 2001. This investigation ultimately revealed Patterson's fraud and caused Nesco to compel his immediate resignation from the company on August 16, 2001. Further, Nesco voluntarily issued a press release disclosing its financial overstatements, restated its financial results for its fiscal year 2000 and first quarter 2001, and continued its internal investigation to ensure that it had uncovered the whole scheme and any other financial mismanagement. Nesco also fully cooperated with the SEC in its investigation of the matter.
Nesco's continuing internal investigation revealed a number of additional material misstatements in the company's financial statements as a result of inadequate internal controls. First, Nesco overstated revenue from work in process by $923,244. Second, Nesco overstated lease-contracts receivable by $460,466, due to a recording error. Finally, Nesco overstated other accounts receivable by an additional $575,252, as a result of a recording error and a failure to write off uncollectible accounts. These misstatements, combined with the bogus-invoice scheme, overstated Nesco's 2000 pretax income by over 840%.
The specific charges brought by the SEC against Patterson include securities fraud, circumventing internal controls, falsifying books and records, lying to auditors, and violations of periodic reporting and books and records requirements, in violation of, or aiding and abetting violations of, Sections 10(b), 13(a), 13(b)(2), and 13(b)(5) of the Securities Exchange Act of 1934 and Exchange Act Rules 10b-5, 12b-20, 13a-1, 13a-13, 13b2-1, and 13b2-2. In its complaint, the SEC requests that Patterson be permanently enjoined from future securities violations, that a civil monetary penalty be assessed against him, that he be ordered to disgorge the full amount of compensation he received from Nesco during the relevant period, including salary and bonuses, with prejudgment interest, and that he be barred from serving in the future as an officer or director of a public company.
On May 7, 2003, the SEC also announced the institution of cease-and-desist proceedings against Nesco based on the aforementioned misconduct. The SEC simultaneously accepted Nesco's offer to consent to a cease-and-desist order. The order, in charging violations of Sections 13(a) and 13(b)(2) of the Exchange Act and Rules 12b-20, 13a-1, and 13a-13 thereunder, orders Nesco to cease and desist from committing or causing any future violations of the above books and records, reporting, and internal controls provisions.