Risk & Compliance

Computer Sciences, Ex-CFO Settle SEC Fraud Charges

Five executives allegedly hid the financial impact of the company's failure to meet contract deadlines.
Katie Kuehner-HebertJune 8, 2015

The Securities and Exchange Commission on Friday charged Computer Sciences Corp. and former company executives with accounting and disclosure fraud. It hid that the company was losing money because of failure to meet contract deadlines for its largest client, U.K.-based National Health Service, the SEC alleged.

Former finance executive Robert Sutcliffe allegedly added items to CSC’s accounting models that artificially increased its profits, to avoid the large hit to its earnings for missing NHS contract deadlines, the SEC charged. CSC, with the approval of former chief executive Michael Laphen, continued to avoid the financial impact of its delays by basing its models on contract amendments it was proposing to the NHS rather than the actual contract, according to the SEC.

However, NHS officials repeatedly rejected CSC’s requests that the NHS pay the company higher prices for less work, the SEC alleged. By basing its models on those proposals, CSC artificially avoided recording significant reductions in its earnings in 2010 and 2011, according to the SEC’s complaint.

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Moreover, Laphen and former CFO Michael Mancuso repeatedly failed to comply with multiple rules requiring them to disclose these issues to investors, and they made public statements about the NHS contract that misled investors about CSC’s performance, the SEC charged.

Mancuso also allegedly concealed from investors a prepayment arrangement that allowed CSC to meet its cash flow targets by effectively borrowing large sums of money from the NHS at a high interest rate. Mancuso merely told investors that CSC was hitting its targets “the old-fashioned hard way,” the SEC said.

CSC agreed to pay a $190 million penalty to settle the charges, and Laphen agreed to return to CSC more than $3.7 million in compensation under the clawback provision of the Sarbanes-Oxley Act and pay a $750,000 penalty. Mancuso agreed to return $369,100 in compensation and pay a $175,000 penalty. CSC must also retain an independent consultant to review the company’s ethics and compliance programs.

Sutcliffe and two other former CSC finance executives, Edward Parker and Chris Edwards, are contesting the charges against them, spurring the SEC to file complaints in federal court in Manhattan. The SEC charged Parker, a former controller in Australia, and Edwards, formerly a finance manager in Denmark, for fraudulently manipulating the financial results of the company’s businesses in those countries.

“When companies face significant difficulties impacting their businesses, they and their top executives must truthfully disclose this information to investors,” Andrew Ceresney, director of the SEC’s Division of Enforcement, said in a press release.

CSC and the settling executives neither admitted nor denied the SEC’s allegations, the commission said.