Three former finance executives, including two CFOs, from Diebold Inc. have been charged by the Securities and Exchange Commission with accounting fraud, the SEC announced on Wednesday. The agency has filed a separate enforcement action against the company’s former CEO seeking reimbursement of cash bonuses, stock, and stock options he received while the alleged fraud was being committed.
The SEC also announced that Diebold, an Ohio-based maker of ATMs, bank security systems, and electronic voting machines, agreed to pay a $25 million penalty to settle the agency’s charges.
In a civil lawsuit filed in federal court in Washington, the SEC contends that Diebold’s onetime CFO Gregory Geswein, former controller and later CFO Kevin Krakora, and former deputy of corporate accounting Sandra Miller inflated the company’s earnings to meet analysts’ forecasts. According to the SEC, Diebold’s management team received so-called flash reports, sometimes on a daily basis, comparing the company’s actual earnings with the analysts’ projections. If the reports showed that the company was about to miss the analysts’ mark, the finance executives allegedly reworked the books to meet the earnings expectations.
The alleged schemes included fraudulent use of bill-and-hold accounting, improper recognition of lease-agreement revenue, manipulating reserves and accruals, fraudulently delaying and capitalizing expenses, and improperly writing up the value of used inventory.
The suspected fraud occurred between 2002 and 2007. The SEC’s complaint charges that Diebold filed at least 40 annual, quarterly, and other reports with the agency during that time, as well as issued dozens of press releases that contained material misstatements and omissions related to the company’s financial performance. All told, the SEC claims that Diebold’s accounting fraud misstated the company’s reported pretax earnings by at least $127 million.
Geswein aims to fight the SEC in court, according to his attorney, Steven Scholes of law firm McDermott, Will & Emory. “We are deeply disappointed that almost five years after Mr. Geswein voluntarily left Diebold of his own initiative, the SEC has made these stale allegations,” Scholes told CFO. “Mr. Geswein strongly disputes the SEC charges and looks forward to defending himself in the courtroom, where he is confident he will successfully defend the unblemished professional reputation he has built over the years,” added the attorney.
Krakora also “strongly disagrees with the SEC’s allegations and conclusions,” said his attorney, John Carney of Baker Hostetler. “Mr. Krakora is an honest and well-respected financial professional with an unblemished record for integrity,” he continued.
Similarly, defense attorney Virginia Davidson, who is representing Sandra Miller, asserted that her client is “a good, honest hard working person,” who “did nothing wrong. “The SEC never should have dragged her into this case, and we are confident that the courts will agree,” added the lawyer from Calfee, Halter & Griswold.
To correct the company filings, Diebold restated its financial results for the years 2003 through 2006 and the first quarter of 2007. In addition, without admitting or denying guilt, Diebold’s former CEO, Walden O’Dell, agreed to reimburse the company for compensation earned during the periods of alleged fraud under the “clawback” provision of the Sarbanes-Oxley Act. O’Dell will pay back $470,000 in cash bonuses, 30,000 shares of Diebold stock, and options for 85,000 shares of company stock.
The SEC seeks monetary penalties against the three former finance executives and their disgorgement of ill-gotten gains. The agency also seeks officer and director bars against Geswein and Krakora, as well as reimbursement of their bonuses and other compensation.
Organizations around the world lose an estimated 5% of their annual revenues to fraud, according to a new survey of certified fraud examiners who investigated cases between January 2008 and December 2009. Applied to the estimated 2009 gross world product, the fraud figure translates into a potential total fraud loss of more than $2.9 trillion, says the Association of Certified Fraud Examiners, which released the poll results on Wednesday.