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Ex-Controller Settles Kickback Charges

The former controller of Sourcecorp allegedly boosted revenues to increase the bonus payout of a one-time CEO.
Stephen TaubJuly 2, 2007

The Securities and Exchange Commission settled civil fraud charges against a former finance executive of Sourcecorp Inc. for his role in a kickback scheme to overstate earnings as a way boost another individual’s bonus. Michael W. Sulfridge, the former controller of Image Entry Inc., a wholly owned subsidiary of Sourcecorp, Inc., which is now privately owned, agreed to be barred from serving as an officer or director from a public company for five years.

In addition, Sulfridge will disgorge $50,000 of his $585,000 in improper compensation. The commission said it waived the remainder of Sulfridge’s disgorgement and would not assess a financial penalty.

According to the SEC complaint, Sourcecorp acquired Image Entry in 2001 from Image Entry’s CEO, Bill Deaton, and members of Deaton’s family. As part of the acquisition, Sourcecorp entered into employment agreements with Deaton in which the company agreed to pay Deaton an annual bonus, over a three-year “earn out” period, tied to Image Entry’s performance against certain earnings criteria.

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The Commission alleges that Sulfridge and Deaton planned and executed a scheme to overstate Image Entry’s earnings to increase the amount of Deaton’s “earn out” bonus. The SEC noted in its complaint that Sulfridge received about $585,000 from Deaton for his involvement in the scheme. Deaton previously settled commission charges.

The SEC complaint describes an alleged scheme to inflate Image Entry’s earnings from 2001 through the first quarter of 2004 by recognizing unearned revenue from state and federal government data entry contracts, prematurely recognizing revenue from a federal government data entry contract that Image Entry had not yet been awarded, and diverting various Image Entry expenses to other companies Deaton owned to reduce Image Entry’s expenses and increase its earnings.

The SEC claims that this alleged misconduct artificially inflated Image Entry’s earnings and, by extension, Deaton’s “earn out” bonus. The commission’s complaint also asserts that Sourcecorp’s earnings were materially overstated.

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