In the first case involving allegations of the fraudulent use of “finite insurance” to go to trial, a jury found a former director of risk management for Brightpoint liable for participating in the scheme.
The Securities and Exchange Commission had charged Timothy Harcharik, the former insurance-buying chief of the cell-phone distributor with participating in a scheme involving a round-trip insurance transaction between Brightpoint and American International Group. The scheme was allegedly designed to enable Brightpoint to conceal a big loss and to inflate its net income.
After a four-day trial, a jury in U.S. District Court in Manhattan found Harcharik liable for aiding and abetting Brightpoint’s fraud and other violations of the securities laws, according to the SEC. It acquitted him of one direct charge and one aiding and abetting charge.
The sanctions to be imposed on Harcharik will be determined by judge Harold Baer, Jr., at a later date. Bloomberg reported that Harcharik may appeal.
At issue is the alleged practice of using finite coverage to make loans look like insurance, thereby enabling a corporation to appear more profitable or less volatile than it really is. “Cracking down on the abuse of so-called finite insurance and reinsurance to cook the books of public companies has been a priority for us,” said Mark K. Schonfeld, director of the SEC’s New York Regional Office.
In September 2003, the SEC announced that AIG agreed to pay $10 million to settle charges related to its role in an alleged accounting fraud at Brightpoint. Neither the insurer nor the cell-phone company admitted or denied culpability. Further, the SEC brought charges against four individuals, including Harcharik and former Brightpoint CFO Philip Bounsall. Without admitting or denying guilt, Bounsall settled for a $45,000 civil fine. Harcharik, a non-employee of the company working in consulting capacity, was the only one of the executives who refused to settle.
The SEC accused AIG of developing and marketing a so-called “non-traditional” insurance product for the stated purpose of “income statement smoothing.” Brightpoint used that product to hide $11.9 million in losses and to overstate earnings by 61 percent in 1998, the commission alleged.
The regulator charged at the time that in October 1998, Brightpoint publicly announced that in the fourth quarter ending December 31, it would recognize a one-time charge ranging from $13 million to $18 million that arose from losses sustained by one of its divisions in the United Kingdom.
By December 1998, Brightpoint determined that the U.K. losses were actually about $29 million, and Brightpoint’s corporate controller, John Delaney, and Harcharik, devised a scheme to cover up these additional, unanticipated losses rather than disclose them, according to the SEC.