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Univ. of Toledo College of Law

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Friday, March 13, 2009

SEC Charges MedQuist and Former Officers with Accounting Fraud

The SEC filed a settled civil injunctive action against MedQuist Inc., a medical transcription company based in New Jersey, charging it with securities fraud and other violations of the federal securities laws. The Commission's complaint alleges that, from 1999 to 2004, MedQuist claimed in SEC filings, press releases and earnings calls that the Company's strong financial performance was due to its disciplined and conservative business practices, while at the same time it was systematically and secretly inflating customer bills to increase revenues and profit margins. Without admitting or denying the allegations, MedQuist agreed to be permanently enjoined from violating the antifraud, reporting, books and records, and internal controls provisions of the federal securities laws.

The Commission also filed a settled civil action against former MedQuist Director, President, and Chief Operating Officer John A. Donohoe. Without admitting or denying the Commission's allegations, Donohoe agreed to a permanent injunction, a $75,000 civil penalty and a five-year officer and director bar. In its complaint, the Commission alleges that Donohoe, among other things, knew that the Company was increasing its bills to meet revenue and margin targets. The complaint further alleges that Donohoe and others at MedQuist told shareholders and other public investors that the Company's strong financial performance was due to disciplined and conservative business practices, while at the same time it was engaged in overbilling customers. Donohoe agreed to be permanently enjoined from violating federal securities laws.

In a separate complaint, the Commission charged former MedQuist Chief Financial Officer Brian J. Kearns and former Controller Bruce J. Van Fossen with participating in the fraudulent scheme. According to the complaint, Kearns and Van Fossen knew that company offices were not calculating bills in accordance with customer contracts, but rather were secretly manipulating the number of transcribed lines charged to customers in order to increase revenues and profit margins. Neither Kearns nor Van Fossen took steps to stop the scheme. Both knew that customers and employees complained of billing fraud, but neither investigated the accuracy of the Company's line counts. The Commission's complaint further alleges that both Kearns and Van Fossen made false statements to auditors designed to conceal the billing complaints and the scheme itself. Both Kearns and Van Fossen prepared, participated in, or signed misleading public filings and statements that attributed the Company's improved financial performance to disciplined and conservative business practices and attributed its revenues to contracted rates and increased sales.

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