U.S. SECURITIES AND EXCHANGE COMMISSION
Litigation Release No. 18511 / December 18, 2003
Accounting and Auditing Enforcement
Release No. 1925 / December 18, 2003
SEC v. Richard Marks, Civil Action No. CV 03-9196 CBM (MCx) (C.D. Cal.)
SEC AND U.S. ATTORNEY FILE CHARGES AGAINST FORMER PRESIDENT OF MOTORCAR PARTS & ACCESSORIES, INC.
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, respectively, against Richard Marks, the former President and Chief Operating Officer of Motorcar Parts and Accessories, Inc. Motorcar, a public company based in Torrance, California, remanufactures automotive alternators and starters. Motorcar's stock previously traded on Nasdaq and now trades on the over-the-counter market.
The SEC's civil complaint and the Justice Department's criminal action, filed today in federal district court in Los Angeles, allege that Marks 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 in its 1997 and 1998 Forms 10-K filed with the SEC. Marks, 51, of Los Angeles, has agreed to plead guilty to the criminal charges and, in settlement of the SEC's action, to pay over $1.2 million and to be permanently barred from serving as an officer or director of a public company.
The criminal charges against Marks focus on his false inflation of Motorcar's revenues and profitability for fiscal year 1997 by falsely reporting as revenues sales that in fact were shipped after year-end, a practice sometimes known as leaving a period "open." The charges against Marks also stem from a double-counting of inventory in connection with the audit at fiscal year-end 1998. While Motorcar's public accountants were not on the premises, Marks caused Motorcar personnel to move truckloads of goods that had already been counted and included in inventory at one warehouse to another warehouse so that they would be included a second time in the auditors' test counts the following day. By causing the transferred inventory to be double-counted, unbeknownst to the auditors, Marks fraudulently caused the amount of Motorcar's inventory to be materially overstated in Motorcar's financial statements for the fiscal year ended March 31, 1998.
The SEC's civil complaint alleges that Marks directed two fraudulent schemes at the end of fiscal years 1997 and 1998 relating to returned alternators and starters and customer credits. First, Marks hid product returns from Motorcar's independent auditor by shipping the returns to offsite storage. After completion of the audit, Marks allowed the returns to be checked into inventory. Second, Marks caused Motorcar to understate its reserve for returns and to delay issuing credits to customers by directing his staff to prepare false schedules for the auditor that supported an understated reserve for credits that the company had not yet processed. The SEC's complaint further alleges that Marks lied to Motorcar's independent auditors when he caused transferred inventory to be double counted.
The SEC's complaint alleges that his actions resulted in the company overstating its pre-tax earnings for fiscal year 1997 by $3,391,000, or 59.8%, and for fiscal year 1998 by $3,576,000, or 49.6%; that the overstated earnings figures were reported to the public in Motorcar's annual reports on Form 10-K; and that Motorcar included its false 1997 financial statements in a registration statement filed with the SEC in October 1997 for an offering that raised $19.8 million.
The SEC charged Marks with violations or aiding and abetting violations of the antifraud, corporate reporting, books and records, internal controls, and lying to the auditor provisions of the federal securities laws. Specifically, Marks was charged with violating or aiding and abetting violations of Section 17(a) of the Securities Act of 1933 and Sections 10(b), 13(a), 13(b)(2)(A) and 13(b)(5) of the Securities Exchange Act of 1934 and Rules 10b-5, 12b-20, 13a-1, 13b2-1 and 13b2-2. Marks simultaneously settled the SEC's action without admitting or denying the complaint's allegations. As part of his settlement, Marks agreed (1) to be permanently enjoined from committing future violations of the charged provisions of the federal securities laws, (2) to pay disgorgement of $651,500, consisting of 1997 and 1998 bonuses of $254,000 and $397,500 in ill-gotten gains from his sale of Motorcar stock, as well as prejudgment interest of $239,188, (3) to pay a $330,000 civil penalty, and (4) to be permanently barred from serving as an officer or director of a public company.
In the related criminal case, Marks 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 SEC. In a plea agreement filed this morning, Marks 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 income. The two charges against Marks each carry a maximum possible penalty of 10 years in federal prison and a $1 million fine.
On September 18, 2002, the U.S. Attorney's Office for the Central District of California filed criminal charges against Peter Bromberg, Motorcar's former CFO, relating to his role in directing Motorcar employees to engage in fraudulent accounting practices and in causing false and misleading statements to be made to the investing public about Motorcar's revenues and income. Bromberg has pled guilty to these criminal charges and is awaiting sentencing.
Also on September 18, 2002, the SEC filed a civil suit against Motorcar and Bromberg arising out of the SEC's investigation into Motorcar's financial statements and reporting practices for fiscal years 1997 and 1998. Both Motorcar and Bromberg have settled the SEC's action.
The civil case was investigated by the SEC. The criminal case was investigated by the United States Attorney's Office in Los Angeles, the Federal Bureau of Investigation, and the U.S. Postal Inspection Service.
SEC Complaint in this matter is in PDF format.