SEC Settles Financial Fraud Charges With Issuer, CFO

by Dorsey & Whitney LLP
Contact

The Commission filed settled financial fraud charges against an issuer which discovered and remediated a series of accounting issues and the CFO who caused the books and records to be falsified, eventually resulting in a restatement. SEC v. DGSE Companies Inc., Civil Action No. 14-1909 (N.D. Tx. Filed May 27, 2014).

DGSE buys and sells jewelry, diamonds, fine watches, rare coins and currency, precious metal bullion products, collectibles and other valuables. Its CFO during the period was I. John Benson, also named as a defendant.

In early 2012 the Board of Directors determined that there were certain accounting irregularities which might impact reported financial information. The company announced that its filed financial statements beginning with the second quarter of 2007 should not be relied on. The Board retained a forensic accounting firm and launched an internal investigation. The Board’s investigation identified a series of irregularities including:

o Many unsupported and/or improperly-described accounting entries;

o No standard, formalized process for reconciling intercompany accounts;

o The recording of unsupported entries directly into the general ledger;

o A lack of regular inventory counts matching the general ledger;

o The lack of an audit trail with which to identify the reason for accounting adjustments;

o The use of antiquated accounting systems that allowed manipulation;

o Improper data security; and

o No backup of the accounting data.

These deficiencies compromised the accounting systems of the firm. The inter-company accounts became out of balance by millions of dollars.

Mr. Benson made a number of fraudulent accounting entries to bring the general ledger back into apparent balance. Those included ordering the preparation of adjusting entries to the general ledger and overstating the inventory by millions of dollars. He also executed a false management letter to the auditors, representing that company management was not aware of any fraud, that the company had good title to the merchandise and that consignment items had been excluded from the inventory. In addition, Mr. Benson knowingly executed misleading public filings and management certifications.

These irregularities stem from deficiencies in DGSE’s accounting systems and internal records. Those include: a lack of sufficient controls to adequately maintain and reconcile accounts; an antiquated accounting system; an insufficiently staffed accounting department; and a lack of adequate written policies and procedures.

As a result of its internal investigation, and additional work performed by accountants retained by the firm, DGSE restated its financial statements in its Form 10K-A, filed December 19, 2012. The firm also undertook an extensive series of remedial actions including: removing and replacing all members of the prior management team; retaining new independent auditors to report to the audit committee; engaging a national consulting firm to identify errors in electronic accounting system functioning: reconciling prior inventory discrepancies and balancing the general ledger; augmenting electronic inventory tracking; instituting a regular blind inventory check that is independently reconciled by a newly formed Accounting and Control Department; and reinforcing the Code of Business Conduct and Ethics and Related Person Transaction Policy.

The Commission’s complaint charges the company with violations of: Securities Act Section 17(a)(2) and Exchange Act Sections 13(a), 13(b)(2)(A) and 13(b)(2)(B). Mr. Benson was charged with violations of Exchange Act Sections 10(b) and13(b)(5) and with aiding and abetting violations of Sections 13(a), 13(b)(2)(A), 13(b)(2)(B) and certain related rules along with each subsection Securities Act Section 17(a).

DGSE resolved the charges, consenting to the entry of a permanent injunction prohibiting future violations of each Section with which it was charged. The firm was also required to appoint an independent consultant to review its accounting controls and to take the necessary remedial steps to correct any deficiencies.

Mr. Benson also settled the charges, consenting to the entry of a permanent injunction prohibiting future violations of the Sections with which he was charged. In addition, he is permanently barred from serving as an officer or director of a public company and is denied the privilege of appearing or practicing before the Commission as an accountant. Mr. Benson is also required to pay a penalty of $75,000.

 

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.

© Dorsey & Whitney LLP | Attorney Advertising

Written by:

Dorsey & Whitney LLP
Contact
more
less

Dorsey & Whitney LLP on:

Readers' Choice 2017
Reporters on Deadline

"My best business intelligence, in one easy email…"

Your first step to building a free, personalized, morning email brief covering pertinent authors and topics on JD Supra:
Sign up using*

Already signed up? Log in here

*By using the service, you signify your acceptance of JD Supra's Privacy Policy.
Custom Email Digest
Privacy Policy (Updated: October 8, 2015):
hide

JD Supra provides users with access to its legal industry publishing services (the "Service") through its website (the "Website") as well as through other sources. Our policies with regard to data collection and use of personal information of users of the Service, regardless of the manner in which users access the Service, and visitors to the Website are set forth in this statement ("Policy"). By using the Service, you signify your acceptance of this Policy.

Information Collection and Use by JD Supra

JD Supra collects users' names, companies, titles, e-mail address and industry. JD Supra also tracks the pages that users visit, logs IP addresses and aggregates non-personally identifiable user data and browser type. This data is gathered using cookies and other technologies.

The information and data collected is used to authenticate users and to send notifications relating to the Service, including email alerts to which users have subscribed; to manage the Service and Website, to improve the Service and to customize the user's experience. This information is also provided to the authors of the content to give them insight into their readership and help them to improve their content, so that it is most useful for our users.

JD Supra does not sell, rent or otherwise provide your details to third parties, other than to the authors of the content on JD Supra.

If you prefer not to enable cookies, you may change your browser settings to disable cookies; however, please note that rejecting cookies while visiting the Website may result in certain parts of the Website not operating correctly or as efficiently as if cookies were allowed.

Email Choice/Opt-out

Users who opt in to receive emails may choose to no longer receive e-mail updates and newsletters by selecting the "opt-out of future email" option in the email they receive from JD Supra or in their JD Supra account management screen.

Security

JD Supra takes reasonable precautions to insure that user information is kept private. We restrict access to user information to those individuals who reasonably need access to perform their job functions, such as our third party email service, customer service personnel and technical staff. However, please note that no method of transmitting or storing data is completely secure and we cannot guarantee the security of user information. Unauthorized entry or use, hardware or software failure, and other factors may compromise the security of user information at any time.

If you have reason to believe that your interaction with us is no longer secure, you must immediately notify us of the problem by contacting us at info@jdsupra.com. In the unlikely event that we believe that the security of your user information in our possession or control may have been compromised, we may seek to notify you of that development and, if so, will endeavor to do so as promptly as practicable under the circumstances.

Sharing and Disclosure of Information JD Supra Collects

Except as otherwise described in this privacy statement, JD Supra will not disclose personal information to any third party unless we believe that disclosure is necessary to: (1) comply with applicable laws; (2) respond to governmental inquiries or requests; (3) comply with valid legal process; (4) protect the rights, privacy, safety or property of JD Supra, users of the Service, Website visitors or the public; (5) permit us to pursue available remedies or limit the damages that we may sustain; and (6) enforce our Terms & Conditions of Use.

In the event there is a change in the corporate structure of JD Supra such as, but not limited to, merger, consolidation, sale, liquidation or transfer of substantial assets, JD Supra may, in its sole discretion, transfer, sell or assign information collected on and through the Service to one or more affiliated or unaffiliated third parties.

Links to Other Websites

This Website and the Service may contain links to other websites. The operator of such other websites may collect information about you, including through cookies or other technologies. If you are using the Service through the Website and link to another site, you will leave the Website and this Policy will not apply to your use of and activity on those other sites. We encourage you to read the legal notices posted on those sites, including their privacy policies. We shall have no responsibility or liability for your visitation to, and the data collection and use practices of, such other sites. This Policy applies solely to the information collected in connection with your use of this Website and does not apply to any practices conducted offline or in connection with any other websites.

Changes in Our Privacy Policy

We reserve the right to change this Policy at any time. Please refer to the date at the top of this page to determine when this Policy was last revised. Any changes to our privacy policy will become effective upon posting of the revised policy on the Website. By continuing to use the Service or Website following such changes, you will be deemed to have agreed to such changes. If you do not agree with the terms of this Policy, as it may be amended from time to time, in whole or part, please do not continue using the Service or the Website.

Contacting JD Supra

If you have any questions about this privacy statement, the practices of this site, your dealings with this Web site, or if you would like to change any of the information you have provided to us, please contact us at: info@jdsupra.com.

- hide
*With LinkedIn, you don't need to create a separate login to manage your free JD Supra account, and we can make suggestions based on your needs and interests. We will not post anything on LinkedIn in your name. Or, sign up using your email address.