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Editor: Eric C. Chaffee
Univ. of Toledo College of Law

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Wednesday, June 2, 2010

SEC Charges Diebold and Former Officers with Accounting Fraud

The SEC filed fraud and other charges against Diebold, Inc. ("Diebold"), Gregory Geswein, the company's former Chief Financial Officer, Kevin Krakora, the company's former Controller and later CFO, and Sandra Miller, the company's former Director of Corporate Accounting. Diebold is an Ohio corporation that manufactures and sells automated teller machines, bank security systems, and electronic voting machines.

The Commission alleges that Diebold, Geswein, Krakora, and Miller engaged in fraudulent accounting practices to inflate the company's earnings to meet forecasts. As alleged in the complaints, from at least 2002 through 2007, these fraudulent practices included (i) improper use of "bill-and-hold" accounting; (ii) improper recognition of revenue on a lease agreement subject to an undisclosed buy-back agreement; (iii) manipulating reserves and accruals; (iv) improperly delaying and capitalizing expenses; and (v) improperly writing up the value of used inventory.  According to the SEC, Diebold filed at least 40 annual, quarterly, and other reports with the Commission, and issued dozens of press releases, that contained material misstatements and omissions concerning the company's financial performance. According to the complaints, Diebold's improper accounting practices misstated the company's reported pre-tax earnings by at least $127 million.

Diebold agreed to settle the charges and pay a $25 million civil penalty.  In the contested action against Geswein, Krakora, and Miller, the SEC seeks permanent injunctive relief, disgorgement of ill-gotten gains with prejudgment interest, civil monetary penalties, and, with respect to Geswein and Krakora, officer-and-director bars and reimbursement of bonuses and other compensation.

In addition, the Commission filed an action against Walden O'Dell, the former Chief Executive Officer of Diebold, seeking reimbursement for bonuses and other incentive-based and equity-based compensation pursuant Section 304 of the Sarbanes-Oxley Act of 2002. The Commission's complaint alleges that Diebold was required to restate its annual financial statements for 2003, as well as other reporting periods, as a result of fraud and other misconduct. The complaint further alleges that O'Dell received from Diebold cash bonuses, shares of Diebold stock, and stock options during the 12-month period following the issuance of Diebold's 2003 financial statements, and that O'Dell failed to reimburse Diebold for that compensation. The complaint does not allege that O'Dell engaged in the fraud. Without admitting or denying the Commission's allegations, O'Dell has agreed to consent to a final judgment ordering him to reimburse $470,016 in cash bonuses, 30,000 shares of Diebold stock, and stock options for 85,000 shares of Diebold stock.

The SEC's complaints in all three actions are posted at its website.

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