Risk & Compliance

CFO, 3 Others Charged With Mobile-Fuel Fraud

The SEC alleges fraudulent billing practices at SMF Energy allowed the firm to post profits when it actually lost money.
Matthew HellerSeptember 25, 2015

The former CFO of a defunct mobile-fueling company and three other former officers were charged Friday with inflating SMF Energy’s revenues by billing customers including United Parcel Service for fuel that was not delivered.

The U.S. Securities and Exchange Commission said in a civil complaint filed Friday that the fraudulent billing began in 2004 as a minor contributor to SMF’s balance sheet but later made the difference between the company being profitable and posting net losses, generating between $200,000 and $250,00 a week in revenue.

UPS, which was SMF’s biggest customer, was overcharged $13.3 million between March 2011 and March 2012, the SEC said. Florida-based SMF filed bankruptcy in April 2012 after disclosing the overcharging.

The SEC’s complaint includes securities fraud charges against four former SMF officers — CEO Richard Gathright, 61, CFO Michael Shore, 47, Chief Accounting Officer Laura Messenbaugh, 51, and Senior Vice President Robert Beard, 61.

“Information in a company’s public filings provides the foundation on which investment decisions are made,” Eric I. Bustillo, director of the SEC’s Miami regional office, said in a news release. “We allege that SMF used fraudulent billing practices to increase its earnings and would have reported losses rather than net profits had it not relied on such practices.”

The defendants accomplished the overbilling in large part, the SEC said, through a practice known as the Incremental Allowance (IA) that involved charging certain customers for fuel that was delivered plus an additional surcharge for fuel not actually delivered.

Customers who were subject to an IA of 4%, for example, would be charged for an extra four gallons of fuel for every hundred gallons actually delivered. In later years, SMF charged an IA of as much as 33%.

“Because there was very little cost associated with the IA, the IA revenue was pure profit, which the defendants used to paint an inaccurate financial picture to SMF’s investors,” the SEC said.

The regulator noted that bonuses for SMF executives were tied to pre-tax profit. As a result of SMF’s financial performance in fiscal 2011, CFO Shore received a $20,447 bonus.