Regulation

Gaming Firm Gets Off Lightly; No Dice for Ex-Execs

Bally Technologies faces no monetary consequences for an alleged revenue accounting fraud, but two former top finance executives are on the hot seat.
Stephen TaubSeptember 25, 2008

Bally Technologies said it has settled with the Securities and Exchange Commission over an investigation of its historical revenue accounting.

However, the SEC filed a civil injunctive action against two former accounting executives of the gaming-machine maker.

Under the settlement, no fines, civil penalties, or other monetary sanctions were imposed on Bally, formerly known as Alliance Gaming Corp. The company consented, without admitting or denying the SEC’s findings, to a cease and desist order requiring it to remain in current compliance with federal securities laws and regulations relating to its reporting, record keeping, and internal controls.

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Bally stressed that the SEC made no allegations of fraud against the company.

“We are pleased with this resolution of the SEC investigation, which allows us to put these matters behind us as we continue to execute our strategies for the long-term success of our business,” said Richard Haddrill, Bally’s president and CEO.

Not so fortunate were former CFO Steven Des Champs and former vice president of finance Martha Vlcek. The SEC accused them of fraudulently and artificially inflating the company’s reported revenue and giving misleading information to investors about the company’s earnings.

The SEC’s complaint alleges that from the fourth quarter of fiscal year 2003 through the second quarter of the following year, the pair fraudulently recognized revenue on bill-and-hold transactions, made misleading disclosures and omissions regarding revenue recognition, and made materially false statements to the company’s outside auditors when they represented the transactions were proper under generally accepted accounting principles.

The improper bill-and-hold sales led to a 25 percent overstatement of Bally’s reported earnings per share for the fourth quarter of fiscal 2003 and to 33 percent and 27 percent overstatements of Bally’s quarterly EPS numbers in the first and second quarters of 2004, respectively, the SEC added.

The complaint also alleges that in the second and third quarters of 2005, Des Champs fraudulently recognized revenue on transactions where he knew that the company could not reasonably expect that it would be paid and again made materially false statements to the auditors about his knowledge of the improper accounting, among other things.

As a result, the SEC alleges that Bally was later required to reverse $6.3 million of the $10.6 million of revenue originally recognized.

The SEC charged the two individuals, among other things, with aiding and abetting Bally’s violations of securities rules. In addition, Des Champs was charged with falsely certifying the accuracy of Bally’s financial statements. The Commission’s complaint seeks permanent injunctions, disgorgement of ill-gotten gains, third-tier civil penalties, prejudgment interest, and an officer and director bar against both defendants.

Neither Vlcek nor Des Champs could be reached for comment.