Capital Markets

Credit Line Out of Line, Alleges SEC

According to the commission, two former executives overstated revenue for a mortgage bank to keep it in compliance with a key financial covenant.
Stephen TaubApril 3, 2007

Two former executives who preserved a mortgage bank’s line of credit by overstating its revenue have settled civil charges with the Securities and Exchange Commission.

The individuals named in the SEC complaint are Jimmy Lynn Bradley, who served as chief financial officer of UCAP from March 2001 through May 2003 and from October 2003 through April 2004, and Don Cole, the engagement partner of UCAP’s outside auditor, Moore Stephens Frost, where Cole was employed from December 1989 until April 2003.

According to the commission, Bradley and Cole recorded only half of a revenue adjustment necessary to make the company’s financial statements comply with generally accepted accounting principles and overstated the value of its real estate. These actions enabled UCAP to falsely remain in compliance with a key financial covenant required to preserve the company’s sole line of credit, the regulator stated.

In addition, the SEC charged, Bradley and Cole caused UCAP to fraudulently record revenue from a real estate transaction with a related party and fail to record an expense for a settlement agreement between UCAP and a third party.

As a result, UCAP’s financial statements for the year ended September 30, 2002, allegedly understated the company’s pre-tax net loss by more than $1.8 million.

The commission also alleged that Bradley falsely certified that year’s annual report. Further, the SEC charged that Cole caused Moore Stephens Frost to issue an unqualified audit report, which falsely stated that the audit had been performed in accordance with generally accepted auditing standards, that the financial statements were free of material misstatements, and that they were presented in conformity with GAAP.

UCAP, which operated through its wholly owned subsidiary, UCMC, ceased operations in April 2004, according to the commission; UCMC filed for bankruptcy protection that November and also has cease operating.

Without admitting or denying the allegations, Bradley consented to a permanent officer-and-director bar and a five-year suspension from appearing or practicing as an accountant before the commission. The SEC stressed that it did not seek a civil penalty against Bradley, based on his demonstrated inability to pay.

Cole, who also neither admitted nor denied the allegations, agreed to pay a $25,000 civil penalty. He also agreed to a five-year suspension from appearing or practicing as an accountant before the commission.

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