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From Securities Regulation Daily, August 28, 2014

CEO and CFO sanctioned for mischaracterized revenue; Aguilar finds settlement too lenient

By Amanda Maine, J.D.

The SEC settled charges with the former CEO and CFO of a technology services company for mischaracterizing certain transactions leading to inflated revenue numbers. Commissioner Luis Aguilar dissented from the order approving the settlement with the former CFO, calling it “a wrist slap” (In the Matter of Lynn R. Blodgett and Kevin R. Kyser, August 28, 2014).

Allegations. Lynn R. Blodgett served as president and CEO of technology services company Affiliated Computer Services, Inc. (ACS) from November 2006 to February 2010. Kevin R. Kyser, a CPA, served as ACS’s executive vice president and CFO from September 2007 to February 2010. Xerox Corporation acquired ACS in February 2010 and Blodgett and Kyser were given other executive positions at Xerox.

In 2009, ACS became aware that if its revenue continued at current rates, it would fall short of company guidance and consensus analyst expectations. To increase revenue, ACS arranged for an equipment manufacturer to redirect through ACS pre-existing orders that the manufacturer had already received from another reseller, giving the appearance that ACS was involved in the transactions when it actually was not. During fiscal year 2009, ACS reported revenue of nearly $125 million from these “resale” transactions.

According to the SEC, ACS’s accounting of the transactions in its 2009 quarterly and annual reports did not comply with GAAP because it failed to reflect the lack of economic substance of the resale transactions. This accounting allowed ACS to meet its publicly disclosed internal revenue growth guidance for three of the four quarters in FY 2009. In the third quarter of 2009, ACS’s accounting for these transactions caused it to overstate its revenue by 1,600 percent. The SEC also alleged that ACS did not accurately disclose the true nature of these transactions in its quarterly reports.

Blodgett and Kyser certified each of ACS fiscal year 2009 Forms 10-Q and 10-K. Blodgett and Kyser received bonus compensation that were partly tied to ACS’s revenue growth. Due to the improperly reported revenue, Blodgett and Kyser received bonuses that were 43% higher than what they would have received if the revenue numbers had not been inflated by improper accounting, according to the SEC.

Sanctions. The SEC brought administrative proceedings against Blodgett and Kyser, alleging that they caused ACS’s violations of federal securities reporting provisions and books and records provisions and improperly certified ACS’s misleading reports. Both respondents agreed to settle with the Commission. As part of the settlement, both Blodgett and Kyser were ordered to cease and desist from committing or causing further violations. Blodgett agreed to pay $351,050 in disgorgement, $61,682 in pre-judgment interest, and a civil money penalty of $52,000. Kyser agreed to pay disgorgement of $133,192, pre-judgment interest of $23,403, and a civil money penalty of $52,000.

Aguilar dissent. SEC Commissioner Luis A. Aguilar dissented from the Commission’s order accepting Kyser’s settlement offer, calling the sanctions “a wrist slap at best.” Characterizing Kyser’s conduct as “egregious,” Aguilar criticized the Commission’s decision for only charging Kyser with books and records, reporting, and other non-fraud charges, despite the fact that the Commission has brought fraud charges in the past for similar conduct by respondents with the same state of mind. Accountants and CPAs in particular are the gatekeepers of the securities markets, Aguilar said. The Commission must be willing to bring fraud charges and to suspend accountants from appearing or practicing before the Commission in order to protect the public, he said.

Aguilar also lamented the “troubling trend” of the falling number of Rule 102(e) suspensions imposed over the past few years. He noted that Rule 102(e) suspensions were imposed in 54 percent of financial reporting and disclosure cases in 2010, while in 2013, that number had fallen to 41 percent. “A suspension order takes a fraudster out of the industry, and often has a far more lasting impact on the fraudster than the imposition of a monetary fine,” Aguilar stated.

In addition, Aguilar expressed concern that commission orders are at times purposefully vague or incomplete and written in a way that gives the public the impression that no fraud occurred. Such “behind-the-curtain” decisions can make fraudulent behavior appear to be an honest mistake, he warned. Kyser should have been charged with the non-scienter based antifraud provisions of the Securities Act and given a Rule 102(e) suspension in order to send a message that the Commission takes its responsibility of requiring integrity in the financial markets seriously, Aguilar advised.

The Commission’s order is No. 34-72938.

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