New Charges, a Trial, a Probe, a Verdict

Securities and Exchange Commission files fraud charges against another KPMG partner over Xerox audits; former Tyco execs ''stole the jackpot,'' says prosecutor; SEC opens probe into El Paso accounting; ex-CEO found guilty of insider trading; and more.


The SEC has brought fraud charges against a fifth KPMG LLP partner, Thomas J. Yoho, in connection with KPMG’s audits of Xerox Corp. from 1997 through 2000. The SEC originally filed fraud charges against KPMG and four of its partners on January 29.

Yoho was the “concurring review” partner for KPMG on the Xerox audit from 1994 until after the 2000 audit was completed and KPMG was replaced as Xerox’s outside audit firm. In that role, explained the SEC, his responsibilities included reviewing audit work papers and audit reports and conferring with the rest of the team to give additional assurance that Xerox’s financial statements conformed to accounting, reporting, and regulatory requirements.

As in the January 29 filing, the amended complaint alleges that KPMG and its partners permitted Xerox to manipulate its accounting practices to close a $3 billion gap between actual operating results and results reported to the investing public.

“Year after year, the KPMG partners falsely represented to the public that their audits were conducted in accordance with generally accepted auditing standards (GAAS),” the commission stated in its complaint, “and that Xerox’s financial reports fairly represented the company’s financial condition and were prepared in accordance with generally accepted accounting principles (GAAP).”

The complaint against Yoho alleges he reviewed and evaluated the work of the KPMG audit team, and Yoho signed off on the Xerox audit team’s audit despite his knowledge of Xerox’s fraudulent accounting practices. Yoho signed audit work papers year after year, added the SEC, attesting that no matters had come to his attention that caused him to believe that the financial statements covered by the firm’s audit reports did not conform with GAAP.

Yoho also attested that KPMG’s audits of Xerox were performed in accordance with GAAS, alleged the SEC. The commission’s amended complaint also alleges that from 1997 to 2001, Yoho learned that Xerox used a series of non-GAAP accounting practices and regularly made significant top-side accounting adjustments in order to compensate for poor operational performance.

After this fraudulent conduct was investigated and exposed, Xerox, employing a new auditor, issued a $6.1 billion restatement of its equipment revenues and a $1.9 billion restatement of its pre-tax earnings for the years 1997 through 2000.

The commission’s amended complaint also alleges that the KPMG partner’s fraudulent conduct allowed Xerox to inflate equipment revenues by about $3 billion and inflate pre-tax earnings by about $1.2 billion in the company’s financial results from 1997 through 2000.

A KPMG spokesman stated that ” We will defend our firm and our partners against these unfounded charges and look forward to vindication.”

Former Tyco Execs ”Stole the Jackpot,” Says Prosecutor

Two former Tyco International executives lavishly spent money like they won the lottery, but they “didn’t win the jackpot, they stole it,” a prosecutor said Tuesday in opening arguments during the trial against former CEO L. Dennis Kozlowski and former CFO Mark Swartz, according to published reports.

“These defendants were trusted with the assets of their company, and they abused that trust,” said prosecutor Kenneth Chalifoux, who accused the duo of raiding the company’s bank accounts to steal $600 million and then lying about their actions.

Chalifoux described Kozlowski and Swartz as highly paid executives who dipped into Tyco’s coffers while misrepresenting their actions to the company’s board and shareholders, according to Dow Jones.

The prosecutor reportedly asked the jurors to look at the men as they sat apart in the courtroom, surrounded by lawyers. “That’s not the way it was when they were committing the crimes,” he said. “They were the bosses; they spent a lot of time together. They spent a lot of money together. They stole a lot of money together.”

The prosecutor then accused Kozlowski and Swartz of recruiting others to engage in “enterprise corruption,” arguing that “the defendants couldn’t do this alone. They used their positions of trust to corrupt other employees.”

Chalifoux said some Tyco employees joined the alleged scheme, many as “unwitting” agents. He told jurors that current and former Tyco employees would testify as witnesses during the trial, which is expected to last three to four months.

If convicted, Kozlowski and Swartz each face up to 30 years in prison.

SEC Opens Probe into El Paso Accounting

El Paso Corp. announced that the Securities and Exchange Commission has launched an investigation into its accounting treatment of power-plant contracts.

In a press release, the natural-gas pipeline company said the investigation appears to be focused principally on the company’s power-plant contract restructurings and the related disclosures and accounting treatment for the restructured contracts, including the “Eagle Point” restructuring transaction completed in 2002.

In August 2002, El Paso filed an amended report for the quarter ended March 31, 2002, following press reports concerning the Eagle Point restructuring transaction and the related disclosure, and discussions with the SEC.

El Paso said it continues to believe that its accounting treatment is appropriate. The company added that it intends to cooperate fully with the SEC investigation.

Power contract restructurings, which entail converting future earnings from long-term power contracts into income that was immediately recorded by the company in its financial statements, were a big source of profits for El Paso, according to Reuters.

Former CEO Found Guilty of Insider Trading

Former Computer Horizons Corp. chief executive officer John Cassese faces a possible 10 years in prison and a fine of $1 million after being found guilty of insider trading.

Cassese, who took a one-month leave of absence in March and left Computer Horizons for good in April, illegally earned more than $150,000 trading the stock of Data Processing Resources based on nonpublic information, according to published reports.

Cassese had been negotiating a possible sale of his company to Compuware, which subsequently began negotiating to buy Data Processing Resources. According to the reports, which cited the indictment, he bought 15,000 shares of Data Processing Resources in late June 1999 and sold them two days later, after Compuware announced that it would buy Data Processing Resources, resulting in a profit of $150,937.

In 2002 Cassese agreed to pay more than $300,000 to settle insider-trading charges by the SEC related to the transaction.

Health Benefits at Small Businesses

In a survey of 2,000 companies by Small Business Digest, 20 percent plan to significantly change their employee medical programs in 2004.

Of those planning a change, 37.4 percent said they expected to decrease the company’s contribution when its policy came up for renewal. Only 24.4 percent indicated that they would increase the contribution.

A majority of the companies — 56 percent — contributed at least half of their employees’ health-care costs; 32.3 percent provided all or almost all of the premiums.

Other findings:

  • 60 percent said that medical costs represented a major problem for their company.
  • In companies with fewer than 25 employees that provided health-care coverage, costs averaged 14.2 percent of total pre-tax expenses; for all companies, the average was 15.6 percent.
  • About one-third of companies — 33.8 percent — did not provide coverage of any sort. However, 5 percent of these companies indicated they were planning to do so next year.

Short Takes

  • Greater Bay Bancorp said chief financial officer Steven C. Smith will retire at the end of the year. The company heavily credited Smith for the formation of the financial services company in 1996, which was the result of a merger between Cupertino National Bancorp and Mid-Peninsula Bancorp.
  • Safeco named Maurice Hebert corporate controller. He was previously at AIG SunAmerica, most recently as vice president and controller.
  • JetBlue Airways Corp. on Tuesday said its board declared a three-for-two stock split.
  • Goldman Sachs Group Inc. issued $1.75 billion in 10-year global notes in a self-led deal. They were priced to yield 5.258 percent, 105 basis points more than comparable Treasurys and were rated Aa3 by Moody’s and A-plus by Standard & Poor’s.

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