The Securities and Exchange Commission this week filed fraud charges against Richmond, Va.-based paperboard and plastic packaging supplier Chesapeake Corp. and four of its former executives in connection with the company's 2000 restatements.
The Commission's complaint alleged, among other things, that the four executives -- William T. Tolley, Chesapeake's former chief financial officer; Carlos A. Gonzalez, Chesapeake's former corporate controller; William D. Wiseman, a former chief financial officer of Chesapeake Display & Packaging; and Douglas J. Rex, former controller of CD&P's largest business unit, U.S. Display -- were involved in a fraud that led the company to materially misstate its reported quarterly earnings for the first and second quarters of 2000 and its anticipated earnings for the third quarter of 2000.
The company agreed, without admitting or denying any wrongdoing, to an injunction against future violations of federal securities laws. No financial penalty was imposed.
"We cooperated fully with the SEC and are pleased that this matter has been concluded on this basis," Thomas H. Johnson, Chesapeake chairman and chief exectuive, said in a statement. "I believe that the company's board of directors and its audit committee responded promptly and appropriately when they were presented with the issues that led to the earnings restatements. As a result of this experience, we have implemented additional financial reporting procedures and controls."
The SEC alleged that, in an effort to bolster CD&P's flagging financial performance and forestall a possible sale, Wiseman and Rex improperly recorded revenue and delayed recording write-offs, resulting in an overstatement of net income for the first quarter of 2000, and smoothing improperly the earnings impact of the delayed write-offs over the second and third quarters of 2000.
Chesapeake was charged with securities fraud and with violating the reporting, books-and-records and internal controls provisions of the laws. Tolley, Gonzalez, Wiseman and Rex were each charged with securities fraud, knowingly falsifying Chesapeake's books, records, and accounts, and circumventing or failing to implement internal accounting controls, and aiding and abetting Chesapeake's violations of the securities laws. Tolley was charged with making false representations to Chesapeake's outside auditors in connection with the auditors' reviews of Chesapeake's first and second quarter 2000 financial statements.
Without admitting or denying the allegations, all of the defendants settled the charges by agreeing to judgments barring them from further securities laws violations. Wiseman and Rex also consented to be permanently barred from serving as officers or directors of any public company. Tolley and Wiseman agreed to pay civil penalties of $50,000 each, and Gonzalez agreed to pay $45,000. Rex agreed to a judgment under which the court will decide the penalty he'll pay. Wiseman also agreed to be suspended from appearing or practicing before the SEC as an accountant.
According to the complaint, Tolley and Gonzalez knew, or were reckless in not knowing, of some of the improper accounting practices prior to Chesapeake's filing of its first and second quarter financial statements, which Tolley signed, and the issuance of an October 2000 press release announcing its anticipated third-quarter earnings.
The SEC said Chesapeake failed to offset against first quarter 2000 revenues $1 million in credit memos issued by U.S. Display to its customers in the first quarter, and then improperly amortized the $1 million over the second and third quarters. The company also failed to correct a $4.8 million overstatement of inventory in the first quarter of 2000, and instead improperly amortized it incrementally over the second and third quarters, according to the SEC. In addition, the complaint said Chesapeake improperly recognized a purported $1.5 million contingent receivable in the first quarter of 2000 and failed to write off $1.1 million of the same receivable in the second quarter when it became apparent that U.S. Display was unlikely to collect that amount, and instead improperly amortized the uncollectible portion in through the close of the fiscal year.
The SEC said Rex posted two phony journal entries, which Wiseman approved, that artificially increased U.S. Display's third-quarter 2000 profits by $7.3 million in order to meet earnings forecasts.
