Closing an unpleasant chapter for ATM manufacturer Diebold, the SEC has finalized settlement papers in an accounting fraud case it brought against the company several years ago.
The SEC charged Diebold and three former financial executives with engaging in a fraudulent accounting scheme to inflate the company's earnings. The SEC separately filed an enforcement action against Diebold's former CEO seeking reimbursement of certain financial benefits that he received while Diebold was committing accounting fraud.
The SEC alleges that Diebold's financial management received "flash reports" — sometimes on a daily basis — comparing the company's actual earnings to analyst earnings forecasts. Diebold's financial management prepared "opportunity lists" of ways to close the gap between the company's actual financial results and analyst forecasts, the securities regulator says. Many of the opportunities on these lists were fraudulent accounting transactions designed to improperly recognize revenue or otherwise inflate Diebold's financial performance.
Diebold agreed to pay a $25 million penalty to settle the SEC's charges. The company expects to pay the penalty in the near term, and already recorded a $25 million charge to its 2009 first quarter earnings to cover it. Diebold's former CEO Walden O'Dell agreed to reimburse cash bonuses, stock, and stock options under the "clawback" provision of the Sarbanes-Oxley Act.
The SEC's case against Diebold's former CFO Gregory Geswein, former Controller and later CFO Kevin Krakora, and former Director of Corporate Accounting Sandra Miller is ongoing.
"Diebold's financial executives borrowed from many different chapters of the deceptive accounting playbook to fraudulently boost the company's bottom line," said Robert Khuzami, director of the SEC's Division of Enforcement, in a statement. "When executives disregard their professional obligations to investors, both they and their companies face significant legal consequences."
Section 304 of the Sarbanes-Oxley Act deprives corporate executives of certain compensation received while their companies were misleading investors, even in cases where that executive is not alleged to have violated the securities laws personally. The SEC has not alleged that O'Dell engaged in the fraud. Under the settlement, O'Dell has agreed to reimburse the company $470,016 in cash bonuses, 30,000 shares of Diebold stock, and stock options for 85,000 shares of Diebold stock.
According to the SEC's complaint, the company manipulated its earnings from at least 2002 through 2007 to meet financial performance forecasts, and made material misstatements and omissions to investors in dozens of SEC filings and press releases. Diebold's improper accounting practices misstated the company's reported pre-tax earnings by at least $127 million.
"We are pleased that the settlement with the SEC is final," said Thomas W. Swidarski, Diebold president and chief executive officer, in a statement. "Moving forward, we will continue to direct our energy and focus toward the essential work of improving our competitive position and creating value for all our stakeholders while maintaining effective financial controls within our processes.".