GAAP and IFRS

Ex-CEO Fined $545,000 for Inflating Company’s Value

The former chief of TelWorx Communications falfsified earnings and revenue in the runup to an acquisition, the SEC says.
Matthew HellerApril 2, 2015

The former CEO of TelWorx Communications has agreed to pay $545,000 to settle U.S. Securities and Exchange Commission charges that he inflated the telecom company’s financial results before and after it was acquired by PCTel.

Tim Scronce, now the head of a Winston-Salem, N.C., private equity firm, was the majority owner of TelWorx, which he acquired in 2005 and sold to PCTel for $18 million in July 2012.

According to the SEC, Scronce, 49, defrauded PCTel by inflating TelWorx’s quarterly revenues and earnings in the months leading up to the deal in order to jack up the purchase price and continued his fraudulent activity even after the deal was completed.

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“Scronce used accounting gimmicks to make TelWorx appear more valuable to PCTEL than it actually was,” Robert Burson, associate regional director of the SEC’s Chicago office, said in a news release. “Scronce compounded his deception by recording fake transactions even after the acquisition was complete.”

To settle the charges, Scronce, without admitting or denying the SEC’s findings, agreed to pay disgorgement of $376,007, prejudgment interest of $29,212.47, and a civil penalty of $140,000. He is also barred for 10 years from serving as a public company director or officer.

In an order instituting an administrative proceeding, the SEC said that before the PCTel acquisition, Scronce directed TelWorx Controller Michael Hedrick to make false accounting entries that “caused material overstatements of TelWorx’s EBITDA and its first and second quarter 2012 revenue.”

After the deal went through, Scronce was employed by PCTel until he resigned in December 2012. PCTel had confronted him with a false purchase order, the SEC said, and he subsequently agreed to a $4.75 million settlement with PCTel, $3.2 million of which represented reimbursement for part of the TelWorx purchase price.

Hedrick agreed to pay disgorgement of $25,000 to settle separate charges that he “recklessly inflated the value of obsolete inventory before the acquisition and recorded revenue prematurely both before and after the acquisition.”