Risk & Compliance

Lights Out for Ex-CFO in Revenue Scheme

The former finance chief of an Israeli lighting firm will pay $55,000 for revenue-recognition fraud.
Stephen TaubFebruary 2, 2009

A federal court has entered a final judgment against a former finance executive whom the Securities and Exchange Commission had charged in a fraudulent scheme to inflate revenue.

Kevin Morano, the one-time CFO of Lumenis Ltd., an Israeli company that had executive offices in New York and whose stock was publicly traded in the United States, was ordered to pay a $55,000 civil penalty. The U.S. District Court for the Southern District of New York had determined on January 15 not to enter an order barring Morano from serving as an officer or director of a public company.

In its initial complaint filed in April 2006, the SEC alleged that Morano participated in a series of fraudulent transactions that caused Lumenis, which designed and made laser and light-based systems, to file materially false financial statements in 2002 and 2003.

The SEC alleged that from at least late 2001 through early 2003, Morano and others improperly recognizing a series of sales transactions, fraudulently inflated revenue, and misrepresented other financial metrics. Six consecutive financial reporting periods, starting with those for the year ended December 31, 2001, were later deemed materially false.

Morano’s two co-defendants — Lumenis and its former chief operating officer, Sagi Genger — previously agreed to settle SEC charges against them.

The SEC alleged that Genger induced distributors and other customers to make excessive end-of-quarter product purchases that should not have been included in Lumenis’ reported financial results. Genger also was accused of knowingly or recklessly disregarding the fact that these transactions did not qualify for recognition as proper sales.

The commission previously issued an order against an audit partner at Lumenis’ former auditor, Israel’s Deloitte & Touche Brightman Almagor, for engaging in improper and incompetent professional conduct. The audit partner, Chaim Schwartzbard, was suspended from practicing before the SEC for three years.

The SEC revoked the registration of Lumenis’ securities  in April 2006.

In another action in the same court late last week, the SEC announced that after a six-day bench trial, the court held James Stanard, CEO of reinsurer RenaissanceRe Holdings, liable for securities fraud.

The court also opined that Stanard was responsible for making false or misleading statements to auditors, providing false officer certifications, and violating and aiding and abetting violations of reporting, books-and-records, and internal controls provisions of the securities laws.

The SEC charged Stanard and others with fraud in connection with a sham transaction whose purpose and effect was to fraudulently defer more than $26 million of RenRe’s earnings from 2001 to later periods. With Stanard’s knowledge, RenRe fraudulently accounted for the sham transaction as “reinsurance,” when in fact, Stanard knew the transaction transferred no risk and should not have been accounted for as reinsurance, according to the SEC.

As a result, RenRe materially understated income in 2001 and materially overstated income in 2002, the SEC claimed.

The judge found that Stanard “wanted to engage in a transaction that would have a particular balance sheet effect, without economic reality,” that “he knew the transaction was being structured in a way … that would obscure its significance from the auditors,” that he “knew the facts … did not square with the [applicable accounting] rule,” and that “he acted with knowledge that RenRe’s earnings would be falsely stated.” The court further noted that Stanard damaged his credibility by claiming repeatedly at trial that the transaction in question was a reinsurance transaction.

The court imposed on Stanard a civil penalty of $100,000 but denied the SEC’s request for an officer and director bar.

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