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  • CFO.com | US

Fix or Fraud?

The CFO says he was making a good-faith effort to straighten out a serious ERP problem. The SEC says he committed financial fraud. And right in the middle of the whole mess, Sarbanes-Oxley passed.

A little more than five years ago, Richard E. Fresia was part of a new management team brought into the telecommunications subsidiary of utility company NorthWestern Corp. to help straighten out an ERP implementation gone horribly awry. On Monday, he was charged by the Securities and Exchange Commission with violating securities laws for his actions during that time. If he loses the case, he faces civil penalties, fines, and a permanent bar against acting as an officer of a public company.

According to the SEC, Fresia, CFO of NorthWestern’s telecommunications subsidiary Expanets, failed to properly account for ongoing problems with receivables created by a failed new billing and accounting system. The regulator says he and NorthWestern senior executives deliberately concealed the resulting overstatement of income in the first and second quarters of 2002, allowing the parent company to raise more than $800 million from securities offerings in September and October. Two months later, NorthWestern disclosed a $50 million charge for uncollectible accounts receivable. The following year, NorthWestern declared bankruptcy.

Fresia says he sent “E-mail after E-mail” and other information to the parent company. He says he was not responsible for publicly reporting the financials, and unsuccessfully petitioned NorthWestern’s controller to disclose the computer problems in the parent company’s second-quarter report. He says he eventually turned over a thick binder of E-mails, time lines, and other information to the SEC, and was startled when the regulator decided to charge him.

“For the first two years of this, I thought I was going to be the [SEC's] star witness,” he told CFO.com. “I was more surprised than anyone when they turned on me as well.” Fresia left Expanets in 2003, and is currently CFO of ACT Teleconferencing Inc., a public company in Golden, Colorado.

Fresia joined Expanets in April 2002 as part of a new management team — which also included a CEO and CIO — hired by NorthWestern, he says, to “come in and get things straight” after it became clear that the company’s ERP system was not working properly.

Like many electric and gas utilities at the time, NorthWestern formed Expanets in 1998 in hopes of cashing in on the lucrative telecommunications boom. But by 2002, according to the SEC’s account, the utility had sunk more than $314 million into Expanets and had seen little return. Moreover, in February 2002, NorthWestern acquired Montana Power Co. for $1.1 billion, financing almost two-thirds of the acquisition with debt. With its historically stable liquidity and credit ratings at risk, NorthWestern announced plans to conduct an equity offering to pay down some of the debt.

At the same time, Expanets was struggling with its “EXPERT” system, which was intended to handle sales, inventory, project management, billing, collections, and financial-statement preparation. By both Fresia’s own account and the SEC’s complaint, the system was a mess. He says that when he arrived in April, the company hadn’t rendered a bill in a month and had not been able to collect on bills in a month and a half. In addition, he says, the system was not providing the proper aging of receivables.

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