Matthew W. Hardey, the former CFO of Newpark Resources, a Houston-based oil and gas company, was ordered by a federal judge to pay a $75,000 civil penalty for participating in a fraudulent accounting scheme.
U.S. District Judge Martin L.C. Feldman also barred Hardey from serving as an officer or director of a public company. Hardey consented to the entry of the order on Thursday without admitting or denying the allegations in a Securities and Exchange Commission complaint accusing him of participating in sham transactions involving the sale of industrial mats.
According to the SECs complaint, Hardey and L. Cyrus DeBlanc, a former CFO of Newparks subsidiary Soloco LLC, conspired with Quality Mat president Joe E. Penland to engage in a fraudulent accounting scheme that allowed Newpark in fiscal year 2003 to avoid writing off approximately $4.2 million in aging debt. As a result, Newpark reported approximately $500,000 of net income instead of a significant loss for that fiscal year.
The complaint alleged that, in 2002 and 2003, Newpark recognized $4.2 million in revenue based on sales of its primary product industrial mats used to lay temporary roads at drilling sites to Quality Mat and another vendor, Easy Frac. The complaint alleged that neither vendor had made any payment on the sales through the end of 2003, and that Hardey, DeBlanc and Penland devised and executed a scheme to funnel money to Quality Mat and Easy Frac through sham transactions that would then allow the vendors to pay their debts to Newpark.
According to the SEC, one of the sham transactions took place in 2004 and involved Dura-Base Nevada, LLC and Dura-Base de Mexico, two Newpark subsidiaries created to begin mat rentals in Mexico. The complaint asserted that Newpark purchased the entire initial inventory of mats for the Dura-Base business from Quality Mat, and that the decision to purchase the approximately 6,175 mats from Quality Mat was a pretext meant to give the appearance of a legitimate business transaction to Newpark's repurchase, at the original sales price, of 1,500 mats sold to Quality Mat in 2002 and 600 mats sold to Easy Frac in 2003.
The SEC claimed that, in an attempt to perpetuate the pretext, Hardey also misled Newpark's auditors about the basis for buying the Dura-Base inventory from Quality Mat by falsely claiming that Quality Mat had contractual rights in Mexico that Newpark would have to buy in order for the Dura-Base venture to go forward. According to the complaint, this ruse was necessary to allow Newpark to buy back the mats at the original sales price without suffering any adverse accounting consequences.
Under this scheme, Newpark could account for the repurchases as if they had taken place at Newpark's manufacturing cost, but still pay Quality Mat the original purchase price for the mats by assigning the difference in value to the intangible asset allegedly created by the repurchase of Quality Mat's contract rights.
The SEC alleged that the other sham transaction, which took place during 2004 and 2005, involved Quality Mat sending fictitious invoices to Newpark purportedly for bulk lumber sales. According to the complaint, in early 2004, Penland agreed to convert Quality Mat's outstanding debt from the 2002 sales to notes receivable. One of the notes required monthly payments of $52,409, which Quality Mat began making in March 2004.
Between May 2004 and July 2005, the bulk lumber invoices, which were sent monthly, averaged $52,409, but there were no purchase orders or delivery tickets backing up the alleged sale. The complaint alleged that Hardey, DeBlanc and Penland devised this scheme to provide Quality Mat with funds to continue making payments on this note, thus allowing Newpark to keep the debt on its books.
Penland was permanently enjoined from further violations of the federal securities laws in a final judgment entered against him on Oct. 2, 2009. That judgment also required that Penland pay a $70,000 civil penalty. DeBlanc was permanently enjoined from further violations of the federal securities laws in a final judgment entered against him on May 14, 2010. As with the final judgment against Hardey, the final judgment against DeBlanc also imposed an officer and director bar against him and required DeBlanc to pay a $75,000 civil penalty.
