A former Symmetry Medical (NYSE:SMA) executive and 3 former employees fingered for accounting fraud consented to judgment this week, looking to close the book on a scheme that inflated the company’s share value by up to 20% and potentially cost shareholders up to $120 million.
All 4 defendants belonged to Thornton Precision Components, a British company that Symmetry acquired in December 2004.
The SEC charged them with orchestrating a scheme to hide losses by underestimating expenses and inflating revenues and assets, sometimes by more than 60%, to give the impression that Thornton was meeting expectations.
The plan was led by Richard Senior, who began his career at TPC as an apprentice at age 16, working his way up the ranks to senior VP and general manager for European operations by the time the fraud was uncovered in 2007, according to court documents.
"Beginning as early as 1999 – 4 years before TPC was acquired by Symmetry and 5 years before Symmetry’s IPO – Senior orchestrated a scheme designed to create the false appearance that TPC was achieving its monthly financial performance targets," according to the SEC’s official complaint. "Defendants concealed their fraud by falsifying corporate books and records and by lying to Symmetry’s auditors. The scheme stopped only when, in late September 2007, a manager at TPC disclosed the scheme to Symmetry’s CEO."
Senior, 48, involved TPC controller Lynne Norman from the beginning. In 2002 the duo targeted Matthew Bell, who had recently been appointed TPC’s financial director. Bell initially objected to the scheme, according to SEC documents, but was coaxed into playing along at Senior’s insistence that the jobs of TPC personnel depended on maintaining the appearance that the company was doing well.
Norman and Bell then enlisted the aid of Shaun Whiteley, a management accountant, who helped cook the books periodically after leaving the company in 2006, according to the settlement.
The company’s books were liberally falsified, including revenue and inventory figures that were fattened by between 30% and nearly 65%.
In fiscal year 2005, 38% of the listed $17 million in revenue for TPC was fake, as was 63% of the reported $15.5 million in assets. In 2006 the figures were further inflated with 48% of the $19.7 million in sales fabricated as well as 66% of the $17.4 million in assets, according to the securities regulator.
The net effect was an inflation of Symmetry’s stock value of as much as 20% – and damage to investors to the tune of roughly $120 million, figures the SEC calculated, based on how far SYM stock fell between the time the fraud was first made public on Oct. 4, 2007, when shares closed at $17.74, to the time Symmetry published its restated financials on April 25, 2008, when shares closed at $13.05.
Symmetry’s restated figures for 2004 took it from profits of $11.7 million to $8.4 million. Things looked even worse for 2005, when the company restated its bottom line from $31.8 million earned to $9.9 million lost, 80% of which was attributed to a write-down of goodwill associated with the TPC acquisition.
"The accounting fraud orchestrated by TPC executives had a ripple effect right up to the financials of the parent company," SEC Division of Enforcement associate director Stephen Cohen said in prepared remarks. "Symmetry shareholders were investing their money – and Symmetry and TPC executives were collecting their bonuses – based in part on inflated numbers."
"This settlement agreement allows the company to move beyond the accounting irregularities at our Sheffield, U.K., facility several years ago," Symmetry president & CEO Thomas Sullivan said in prepared remarks. "We will now be able to direct our full focus on executing our business strategies."
All in all, the SEC charged the 4 defendants, settled with Symmetry in a separate administrative proceeding and accepted suspensions for 2 outside auditors (who worked for Ernst & Young at the time) for their "deficient audits."
"Accountants who practice before the SEC, including those who audit foreign subsidiaries of U.S. registrants, need to make sure their audits conform to U.S. auditing standards or they won’t be allowed to practice before the SEC," Cohen said.
In addition, the SEC reached settlements with Symmetry’s former CEO, Brian Moore, and current CFO, Fred Hite, who were not involved or aware of the scheme at TPC, to recover bonuses and stock profits they received while the fraud was occurring, according to an agency release.
There was no fraud charge against the company or any civil penalty as a result of the settlement, according to a press release.