Cash Flow

SEC: Size Doesn’t Matter

Pint-sized Meridian Holdings, and two former executives, are charged with fraud and backdating Sarbox certificates.
Stephen TaubOctober 4, 2007

The Securities and Exchange Commission has charged a tiny company and two of its former top executives, including the interim CFO, with fraudulently using a legal judgment to boost earnings. The SEC also charged the former executives with backdating Sarbanes-Oxley certifications. To be sure, the case sends a loud message to issuers that no company is too small to be in the regulator’s cross-hairs.

According to the SEC, during the second and third quarters of its 2004 fiscal year, Meridian Holdings Inc., which owns interests in Internet companies serving the medical industry, improperly recognized a $30.6 million default judgment and associated interest as assets and income, “when it had no reasonable basis to believe the judgment was collectible.”

As a result, the company turned quarterly losses of 7 cents per share into earnings of $2.12 per share. After the company filed the 2004 second quarter report, its stock price doubled.

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Meridian also wrongly recognized additional interest on the judgment during the third quarter of 2004, which again turned quarterly losses to quarterly gains, said the SEC. Following the 2004 third-quarter filing, Meridian’s stock price increased by 40 percent, according to the complaint, which noted that Meridian’s 2004 revenues were just $2.4 million when the judgment and interest payout were subtracted.

At press time, could not reach the company for comment.

In its suit, the SEC also asserted that Anthony C. Dike, Meridian’s chairman and chief executive officer at the time, and Michelle V. Nguyen, its former principal financial officer, prepared misleading financial statements by booking the judgment proceeds when they were unsure whether the amount was collectible. What’s more, despite advice from the company’s outside auditor, the SEC claims that Dike instructed both Nguyen and a Meridian internal accountant to include the proceeds as assets and income in the company’s general ledger.

Attorneys for Dike and Nguyen could not be immediately reached for comment.

In addition, the complaint charges that when Dike filed Meridian’s second and third quarter reports, he included Nguyen’s name on the Sarbanes-Oxley Act certifications filed with the reports, even though he knew Nguyen had not signed them. Further, Nguyen signed the Q2 certifications after the quarterly results had been filed, essentially backdating the documents. CEOs and CFOs of public companies are required under Section 302 of Sarbox to certify that financial statements are accurate when the reports are filed with the commission.

The SEC is seeking permanent injunctions from violating securities laws against the company and the two former executives. The regulator is also seeking court orders that would bar the duo from serving as an officer or director of a public company.

Nguyen, a certified public accountant, began working for Meridian in July 2004 as an independent consultant. She had previously been an independent contractor for Meridian’s outside auditor and had performed audit work for Meridian in the years before she was hired directly by the holding company.

Her responsibilities at Meridian included preparing consolidated financial information that was included in Meridian’s periodic reports, and acting as Meridian’s principal financial officer and interim chief financial officer. In 2005, Nguyen became licensed as a certified public accountant in California.

On January 21, 2004, the Los Angeles County Superior Court entered a default judgment in favor of Meridian against Sirius Technologies of America. The judgment awarded Meridian $10,684,926 in compensatory damages, $20 million in punitive damages, $3,000 for costs, and prejudgment interest at a 10 percent annual rate, for a total of $30,687,926, plus monthly interest.

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