Capital Markets

United Rentals Settles Sale-Leaseback Fraud Charges with SEC

The equipment-rental company allegedly structured the deals to inflate it profits and enable it to immediately recognize revenue.
David Katz and Stephen TaubSeptember 8, 2008

United Rentals, a large equipment-rental company, has reached an agreement with the Securities and Exchange Commission to pay $14 million to settle civil financial fraud charges stemming from the improper use of sale-leaseback transactions and a broad range of other improper accounting practices.

The alleged fraud involved the recognition of revenue tied to six sale-leaseback deals between 2000 and 2002 and related alleged fraudulent sales of used equipment in return for concessions to suppliers during the same period. URI’s then-CFO Michael Nolan and its then-vice chairman and chief acquisitions officer John Milne, also a former CFO of the company, put the fraud together mainly via a series of interlocking three-party, sale-leaseback transactions, according to the SEC, which previously charged them with individual wrongdoing.

With URI’s business deteriorating, the company sold used equipment to a financing company and then leased the equipment back for a short time, according to the commission. To induce the financing company to take part in the deals, Milne and Nolan allegedly paid a free to the finance company and arranged for an equipment manufacturer to guarantee the financing company against any losses. At the same time, URI guaranteed the equipment maker against any losses it might incur under its guarantee to the financing company, according to the SEC.

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URI fraudulently structured the deals to inflate it profits and enable it to immediately recognize the revenue spawned by the sales to the financing company, the SEC charged. Under generally accepted accounting principles, URI could only immediately recognize the profit generated by the sale of the equipment only if, among other criteria, the risks and rewards of ownership were transferred to the financing company.

Under the alleged arrangement, however, URI actually transferred no risk. “Milne and Nolan engaged in extensive efforts to hide from URI’s independent auditor both the fees paid to the Financing Company and the guarantees made to the third-party manufacturers,” according to the SEC’s complaint.

The SEC also alleged that in another effort to improve its earnings, URI engaged in a series of fraudulent “trade packages” with suppliers. The company sold blocks of used equipment for amounts in excess of fair value in exchange for certain undisclosed financial inducements offered to those suppliers, the regulator said.

URI also improperly applied purchase accounting principles relating to the acquisition of various businesses between 1998 and 2000, according to the SEC. As a result, URI materially misstated its financial condition and operating results in filings, the commission charged.

Without admitting or denying the charges, United Rentals agreed to the deal with the Securities and Exchange Commission. “We are very pleased to bring this matter to a conclusion for the Company,” said Michael Kneeland, URI’s president and chief executive officer. “The company has cooperated fully with the SEC throughout the commission’s review of our historical accounting practices. We have also made a number of important changes since the SEC inquiry began in 2004, including restructuring the Company’s finance, treasury, internal audit and compliance functions, among many other positive steps.” The SEC said in a press press release, however, that its investigation is continuing.

In April, Milne, a chief acquisitions officer of the company when the fraud allegedly occurred who later served as its CFO, was indicted for conspiracy, securities fraud, insider trading, and making false filings with the SEC. Nora Dannehy, Acting U.S. Attorney for the District of Connecticut, charged that Milne worked to artificially increase the company’s stock price, hide its true financial condition, and misrepresent its books, records, and accounts. Milne also allegedly sold 850,000 shares of United Rentals stock, generating proceeds of more than $22 million, while in possession of material non-public information about the company. He was charged with three counts of securities fraud, one count of insider trading, and three counts of making false statements to the SEC. Milne’s attorney could not be reached for comment.

Last December, Nolan admitted in criminal court to making false filings with the SEC and faces up to 10 years in prison and a $22 million fine. Nolan also settled fraud charges with the SEC. Nolan’s attorney could not be reached for comment.