United States Securities and Exchange Commission
Litigation Release No. 18292 / August 18, 2003
Securities and Exchange Commission v. Sherry L. Gibson, Civil Action No. C2-03-737 (FROST) (S.D. Ohio) (August 18, 2003)
SEC Sues NCFE Executive for Role in $1 Billion Fraud
The Securities and Exchange Commission today filed a civil injunctive action in the United States District Court for the Southern District of Ohio, alleging that Sherry L. Gibson, an Executive Vice President at National Century Financial Enterprises, Inc. (NCFE), participated in a scheme to defraud investors in securities issued by subsidiaries of NCFE. NCFE, a private corporation located in Dublin, Ohio, and its subsidiaries collapsed suddenly in October 2002 when investors discovered that the companies had hidden massive cash and collateral shortfalls from investors and auditors. The collapse caused investor losses exceeding $1 billion. Gibson, a resident of Hilliard, Ohio, consented to a permanent injunction prohibiting her from violating the federal securities laws; an order barring her from serving as an officer or director of a public company; and disgorgement, prejudgment interest, and a civil penalty, with those amounts to be determined at a later hearing.
The complaint alleges that two wholly-owned subsidiaries of NCFE purchased medical accounts receivable from health-care providers and issued notes that securitized those receivables. Between 1999 and 2002, the subsidiaries offered and sold at least $3.25 billion in total notes through private placements to institutional investors.
The complaint further alleges that Gibson and other senior NCFE officials improperly "advanced" to health-care providers $1 billion or more of the capital raised from investors without receiving required medical accounts receivable in return. These advances were essentially unauthorized, unsecured loans to distressed or defunct health-care providers-many of which were partly or wholly owned by NCFE or its principals. The unsecured advances were inconsistent with representations made by Gibson and other senior NCFE officials in offering documents provided to investors.
According to the complaint, Gibson and other senior NCFE officials concealed their fraud from trustees, investors, potential investors, and auditors by: (1) repeatedly transferring funds between the subsidiaries' bank accounts to mask cash shortfalls of as much as $400 million; (2) recording $1 billion or more in non-existent or ineligible medical accounts receivable on the subsidiaries' books; (3) creating and distributing false offering documents, false monthly investor reports, and false accounting records to trustees, investors, potential investors, and auditors; and (4) misrepresenting the status of the programs' cash accounts and collateral base to trustees, investors, potential investors, and auditors.
Without admitting or denying the allegations in the complaint, Gibson consented to the entry of an order that: (1) permanently enjoins her from violating the antifraud provisions of the federal securities laws, specifically Section 17(a) of the Securities Act of 1933 and Section 10(b) of the Exchange Act of 1934 and Rule 10b-5 promulgated thereunder; (2) permanently bars her from serving as an officer or director of a public company; and (3) orders her to pay disgorgement, prejudgment interest, and a civil monetary penalty, with those amounts to be determined at a later hearing.
The Commission filed its action at the same time that the U.S. Attorney's Office for the Southern District of Ohio unsealed a criminal information against Gibson for the conduct that is the subject of the Commission's complaint. The Commission thanks the United States Attorney's Office and the Federal Bureau of Investigation for their assistance in this investigation.
The Commission is continuing its investigation in this matter as to other parties.