Wednesday, September 2, 2009
The SEC settled charges that Silicon Valley technology company VeriFone Holdings, Inc. and a former finance department employee falsified the company’s accounting records which boosted gross margins and income reported to shareholders. The SEC alleged that in three consecutive quarters in 2007, the company made unsupportable alterations to its records to compensate for an unexpected decline in gross margins, overstating VeriFone’s operating income by a total of 129 percent. When the misrepresentations came to light in December 2007, the company’s stock price fell 46 percent, resulting in a one-day drop in market capitalization of $1.8 billion.
The SEC’s complaint, filed in federal court in San Jose, alleges that at the end of each of the first three quarters of 2007, internal company reports showed that gross margins would be markedly lower than previously released guidance to analysts. According to the SEC, senior management was convinced that the previous forecasts were correct and directed finance employees to figure out and fix the problem so the company could report results in line with forecasts and thereby avoid, in the words of a senior officer, an “unmitigated disaster.”
The SEC alleges that VeriFone’s former supply chain controller, Paul Periolat, then made large manual adjustments to inventory balances on VeriFone’s books each quarter, dramatically increasing both gross margins and operating income. In each of the first three quarters of 2007, the accounting adjustments allowed the company to meet its internal forecasts and guidance to investors. However, the complaint alleges that the adjustments were based on incorrect assumptions which Periolat did not take adequate steps to verify. In fact, the company’s unreported results had been correct, and Periolat’s adjustments led to VeriFone’s improper inflating of its income by over $37 million.
Without admitting or denying the Commission’s allegations, VeriFone consented to a permanent injunction against violations of the reporting, internal controls, and other provisions of the federal securities laws. Further, without admitting or denying the Commission’s allegations, Periolat consented to a permanent injunction against further violations of certain antifraud, reporting, internal controls, and other provisions of the federal securities laws, and to pay a $25,000 civil penalty.