Risk & Compliance

Security Company, Execs Settle with SEC

According to the commission, PowerLinx performed "virtually no due diligence" to determine whether a defense contractor was legitimate and could me...
Stephen TaubJune 29, 2006

The Securities and Exchange Commission has settled civil charges with PowerLinx, a small maker of security products and underwater cameras formerly known as SeaView Video Technology, and two former executives.

The SEC had charged that the company, former chief executive officer George Bernardich III, and former secretary and treasurer James Cox issued false and misleading press releases and made false and misleading filings between 2000 and 2004.

One such occasion, in September 2004, concerned a $23 million sales contract between PowerLinx and defense contractor Universal General, which according to the SEC had no revenues, no assets, and no means to satisfy any portion of the $23 million. PowerLinx, wrote the commission, performed “virtually no due diligence to determine whether UGC was legitimate and could meet its contractual obligations.” The commission added that Bernardich was responsible for the due-diligence failures and for drafting the misleading press releases and SEC filings.

The commission also alleged that during the first three quarters of fiscal 2000, PowerLinx “fraudulently recognized nearly 90 percent of its reported revenues” based on fictitious camera sales. According to the SEC, PowerLinx initiated consignment arrangements with a number of dealers and then recorded the orders as revenue before any cameras were manufactured, shipped to dealers, or sold to customers.

The SEC also accused PowerLinx of issuing numerous deceptive press releases that “materially misrepresented” the company’s operations and “offered glowing, but unsubstantiated” revenue and earnings forecasts.

Further, the regulator stated that following a management change in April 2001, the company’s annual report for 2000 contained a misleading restatement of revenues and “other materially misleading disclosures and accounting errors.” The SEC singled out former chief executive officer Richard McBride, now deceased, as “the principal architect” of PowerLinx’s fraudulent activities during 2000. The commission also pointed out, however, that Cox was responsible for certain fraud and reporting violations and that Bernardich, who succeeded McBride as CEO in February 2001, “aided and abetted PowerLinx’s reporting violations.”

Without admitting or denying the SEC’s findings, PowerLinx agreed not to violate general antifraud provisions of the federal securities laws; Bernardich and Cox agreed to be barred from serving as an officer or director of a public company for 10 years. Current chief financial officer Douglas Bauer also agreed to a cease-and-desist order for his role in causing PowerLinx’s reporting violation in connection with its April 2002 restatement of a deferred tax asset. Bauer, too, neither admitted nor denied the findings.

In related proceedings, PowerLinx’s former independent auditors, Accounting Consultants, and accountant Carol McAtee consented to the issuance of cease-and-desist orders for “causing certain of the company’s reporting violations.” According to the commission, the firm and McAtee repeatedly failed to comply with generally accepted auditing standards when performing their quarterly reviews and year-end audit of PowerLinx’s 2000 financial statements. Accounting Consultants and McAtee will be barred from appearing or practicing as accountants before the commission for two years.