SEC Settles Financial Fraud Case

by Dorsey & Whitney LLP
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Two senior executives at Veolia Environmental Services Special Services, a U.S. subsidiary of Paris based multi-national Veolia Environment S.A., were named in and resolved a financial fraud case with the SEC. SEC v. Hohol, 2:14-CV-00041 (E.D. Wis. Filed January 14, 2014). See Lit. Rel. No. 22906 (January 14, 2014).

Christopher Hohol was the senior vice president of Special Services from January 2007 through May 2011. Brian Poshak was the controller of the company during the same period. Both men, named as defendants in the Commission’s action, resigned in May 2011. The ultimate parent of Special Services is Veolia Environmental, the world’s largest utility and environmental services company in terms of revenue. Its ADRs are registered with the Commission pursuant to Section 12(b) of the Exchange Act.

From 2008 through early 2011 Veolia filed annual reports with the Commission. During the period Mr. Hohol aggressively exerted his authority over all aspects of Special Services’ operations, including the finance department. Using what the complaint calls “threats and intimidation,” he compelled Mr. Poshak and others to implement his orders which directed that Special Services be made to appear profitable.

To effectuate those orders, Mr. Hohol insisted on personally reviewing the preliminary revenue results. If those results were inadequate, Mr. Hohol insisted that additional revenue be found to “fix the numbers” so that the numbers conformed to the financial projections. Mr. Poshak responded to the orders by routinely falsifying, and directing those under his control to falsify, accounting entries in the general ledger for Special Services. The falsified entries included fictitious revenue accruals, entries that improperly reclassified certain expenses as inventory and others that improperly reclassified select expenses as prepaid assets. Collectively, the entries falsely boosted revenue.

After the entries were falsified, Mr. Hohol again reviewed the financial results. In some instances the modified results differed from those initially made available to him by millions of dollars. Mr. Hohol ultimately approved the falsified results after which they were consolidated into Veolia’s financial statements filed with the Commission.

In order to conceal the false accounting entries Mr. Poshak altered, or caused to be altered, the firm’s supporting documents. Those materials were made available to the outside auditors. In addition, Messrs. Poshk and Hohol circumvented the internal controls of the firm by executing false monthly financial and internal control attestations.

Each defendant benefited from the fraud. Specifically, Mr. Hohol was paid a total of $136,000 in bonuses while Mr. Poshak received $28,000.

As a result of the fraud Special Services overstated its EBT by a total of about $64 million during the relevant period. This caused the overstatement of operating income in Veolia’s consolidated financial statements for the years 2008 through 2010 in the same amounts. After learning of the fraud Veolia corrected the overstatements for each of the years on a retrospective basis in its 2011 annual report that was filed with the Commission. The complaint alleges violations of Exchange Act Sections 13(b)(2)(A and 13(b)(5).

To resolve the matter, each defendant consented to the entry of a permanent injunction based on the Sections cited in the complaint. In addition, Mr. Hohol agreed to pay disgorgement of $106,000 along with prejudgment interest. Mr. Poshak agreed to pay disgorgement of $28,000 together with prejudgment interest. The settlements consider the current financial condition of each defendant and are subject to court approval.

 

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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