The Securities and Exchange Commission has filed a settled enforcement action in a Washington, D.C., federal court against Thor Industries, charging the Ohio-based producer of recreational vehicles with issuer reporting, record-keeping and internal control violations.
The SEC also charged the company with violating a 1999 cease-and-desist order and the former vice president of finance at a Thor subsidiary with securities fraud. Thor agreed to pay a $1 million civil penalty.
Mark C. Schwartzhoff, the former VP of finance at Thor’s Dutchmen Manufacturing subsidiary has agreed to be permanently barred from serving as an officer or director of a public company and from appearing or practicing before the SEC as an accountant. Schwartzhoff also agreed to pay disgorgement of $394,830, which the SEC deemed to be satisfied by the entry of a restitution order against Schwartzhoff in a parallel criminal case in which he agreed to pay restitution of approximately $1.9 million.
The SEC’s complaint alleges that from approximately December 2002 to January 2007, while serving as the senior financial officer of Dutchmen, Schwartzhoff engaged in a fraudulent accounting scheme to understate Dutchmen’s cost of goods sold in order to avoid recognizing inventory costs that were not reflected in Dutchmen’s financial accounting system. Instead of properly recording the increased cost of goods sold, Schwartzhoff concealed the costs in various balance sheet accounts by making manual journal entries to falsify the financial statements and other records he provided to Thor.
To cover up his false entries, the complaint alleges that Schwartzhoff created false supporting documentation and false account reconciliations. Schwartzhoff also submitted false documents and information to Thor’s external auditor.
As alleged in the complaint, Schwartzhoff’s fraud overstated Dutchmen’s pre-tax income by nearly $27 million from fiscal year 2003 to the second quarter of fiscal 2007, and allowed him to obtain nearly $300,000 in ill-gotten bonuses. In June 2007, Thor filed restated financial statements for fiscal years 2004 to 2006, each of the quarters of fiscal 2005 and 2006, and the first quarter of fiscal 2007, reducing its pre-tax income by approximately $26 million in the aggregate.
The SEC’s complaint further alleges that Thor failed to maintain accurate books and records and adequate internal accounting controls in violation of a 1999 Commission cease-and-desist order, and that the company’s failure to implement adequate internal controls after the 1999 order provided Schwartzhoff with the opportunity to commit his fraud without detection.
In particular, Thor failed to adequately implement and verify certain key segregation of duties within accounting and financial functions at Dutchmen, which allowed Schwartzhoff to have unfettered access rights to Dutchmen’s accounting system, the ability to create, enter and approve manual journal entries, and the ability to create and approve account reconciliations.
As a result, Schwartzhoff was able to make fraudulent journal entries in various accounts and to disguise these entries through account reconciliations and supporting documents that he falsified. In addition, as alleged in the complaint, Thor failed adequately to monitor and verify account reconciliations and account information that Schwartzhoff submitted in reporting Dutchmen’s financial results. Thor also failed to implement an effective internal audit function for Dutchmen.
As the SEC’s complaint alleges, after Schwartzhoff's fraud came to light, Thor concluded that the internal control failures at Dutchmen constituted a material weakness in Thor’s internal controls over financial reporting. Thor also determined that similar lack of segregation of duties existed in varying degrees at each of its subsidiaries. For example, senior accounting officers (controllers and vice presidents of finance) at numerous subsidiaries had the ability to create, enter, and approve journal entries and reconciliations in accounts such as accounts receivable, accounts payable, and cash.
At all but one subsidiary, various individuals had inappropriate access rights to accounting and information systems, including “super user” access by senior accounting officers at some subsidiaries. In addition, the complaint alleges Thor also determined that it lacked sufficient corporate level monitoring of account reconciliations for all of its subsidiaries.
Without admitting or denying the allegations in the complaint, Thor has consented to the entry of a final judgment requiring it to comply with the 1999 cease-and-desist order, permanently enjoining it from violating the securities laws, and ordering it to pay a $1 million penalty and hire an independent consultant to review and evaluate its internal controls and record-keeping policies and procedures.
Without admitting or denying the allegations in the complaint, Schwartzhoff consented to the entry of a final judgment permanently enjoining him from violating the securities laws and ordering him to pay disgorgement of $299,805 plus prejudgment interest of $95,025, for a total of $394,830. The payment of that amount is deemed to be satisfied by the entry of a restitution order against Schwartzhoff in a parallel criminal case that is equal to or greater than $394,830; and permanently barring him from serving as an officer or director. Schwartzhoff also consented to the issuance of an order pursuant to Rule 102(e) of the Commission’s Rules of Practice, permanently suspending him from appearing or practicing before the Commission as an accountant.
The settlements are subject to the approval of the United States District Court for the District of Columbia. The settlement with Thor takes into account the company’s self-reporting and significant cooperation in the SEC’s investigation.
Separately, on May 12, 2011, the United States Attorney’s Office for the Northern District of Indiana filed a related criminal action against Schwartzhoff, and Schwartzhoff agreed to plead guilty to one count of wire fraud and to pay restitution of approximately $1.9 million.
