U.S. SECURITIES AND EXCHANGE COMMISSION
Litigation Release No. 18935 / October 20, 2004
Accounting and Auditing Enforcement
Release No. 2126 / October 20, 2004
Securities and Exchange Commission v. John Mervyn Nabors and Eric J. McCracken, Civil Action No. 8:04-CV-02288-SDM-MAP (M.D. FL)
SEC Sues Former CEO and Former CFO of a Florida Airplane Instrument Manufacturer in Financial Fraud Spanning Over Five Years
The Securities and Exchange Commission (SEC) filed fraud charges on Monday against John Mervyn Nabors, the former Chief Executive Officer, and Eric J. McCracken, the former Chief Financial Officer, of Aerosonic Corporation (Aerosonic), a Clearwater, Florida airplane instrument manufacturer. Nabors, who resides in Clearwater Beach, Florida, has settled this action with the SEC. McCracken, formerly of Clearwater, Florida, currently resides in New York. The case, filed in the United States District Court for the Middle District of Florida, has been assigned to Judge Steven D. Merryday.
According to the SEC's Complaint, from January 1999 through December 2002, Nabors and McCracken implemented various accounting schemes designed to artificially inflate Aerosonic's reported pre-tax earnings. Among their schemes, Nabors and McCracken allegedly caused Aerosonic to overstate inventory by falsifying inventory records and by failing to provide adequate reserves for Aerosonic's obsolete and slow moving inventory. In addition, Nabors and McCracken allegedly caused Aerosonic to report inflated earnings by recording fictitious and premature revenue. As a result of these and other accounting tricks, Aerosonic reported earnings in its periodic filings with the SEC that were overstated by at least 35% to as much as 825%. The Complaint further alleges that during the same time period, Nabors and McCracken caused Aerosonic to issue a series of false press releases touting the Company's strong financial performance when, in fact, the Company had actually suffered losses totaling over $3.9 million. Both Nabors and McCracken financially benefited from their fraudulent activities by reaping lucrative bonuses and, in the case of McCracken, selling his Aerosonic stock while its price was artificially inflated as a result of Aerosonic's false filings and press releases. Both Nabors and McCracken resigned from Aerosonic in December 2002.
After Nabors and McCracken resigned, Aerosonic's new management discovered inventory and other accounting improprieties totaling in the millions. On March 17, 2003, Aerosonic issued a press release announcing approximately $3 million in overstated revenue and inventory for its fiscal years ended 2001 through 2003, and its ongoing internal investigation to identify additional accounting misstatements. In November 2003, Aerosonic restated over $8.6 million in revenue and inventory-related items for its fiscal years ended 1999 through 2002, and for its first three quarters of 2003.
Nabors has reached a settlement of this matter with the SEC. Accordingly, concurrently with its Complaint, the SEC filed Nabor's Consent, without admitting or denying the allegations of the SEC's Complaint, and proposed Final Judgment of Permanent Injunction and Other Relief (Final Judgment), and has requested that the District Court enter the Final Judgment. The Final Judgment will permanently enjoin Nabors from violating the antifraud provisions, requirements that public companies maintain accurate books and records, and provisions prohibiting public companies from making false filings. The Final Judgment will further bar Nabors from serving as an officer or director of a public company and will order Nabors to pay disgorgement of $210,200 and civil money penalties of $50,000. The SEC intends to direct that disgorgement and penalties paid in this case be paid to a Fair Fund for the benefit of defrauded investors, including those who held Aerosonic's shares during the time period alleged in the SEC's Complaint, pursuant to Section 308 (Fair Funds for Investors) of the Sarbanes-Oxley Act of 2002. The SEC's case against McCracken is pending.
The SEC's Complaint alleges that, as a result of their conduct, Nabors violated Sections 10(b) and 13(b)(5) of the Securities Exchange Act of 1934 ("Exchange Act") and Rules 10b-5, 13b2-1, 13b2-2, and 13a-14, thereunder, and that he aided and abetted Aerosonic's violations of Sections 13(a), 13(b)(2)(A) and 13 (b)(2)(B) of the Exchange Act and Rules 12b-20, 13a-1, and 13a-13, thereunder. The Complaint also alleges that McCracken violated Section 17(a) of the Securities Act of 1933 ("Securities Act"), and Sections 10(b) and 13(b)(5) of the Exchange Act and Rules 10b-5, 13b2-1, 13b2-2, and 13a-14, thereunder, and, that he aided and abetted Aerosonic's violations of Sections 13(a), 13(b)(2)(A) and 13 (b)(2)(B) of the Exchange Act and Rules 12b-20, 13a-1, and 13a-13, thereunder. The SEC's Complaint seeks injunctive relief, disgorgement, civil money penalties, and officer and director bars against Nabors and McCracken.
SEC Complaint in this matter