The Securities and Exchange Commission today charged the former chief executive officer of a Chicago-area engine manufacturing company – Power Solutions – and two former senior sales executives for their roles in an accounting fraud that allegedly overstated the publicly-traded company’s revenues by almost $25 million.
According to the complaint, filed in federal court in Chicago, Gary Winemaster, Power Solutions International Inc.’s former CEO, and two former senior sales executives, Craig Davis and James Needham, caused Power Solutions to fraudulently record revenue for purported sales of products that were not complete, that the customer had not agreed to accept, for which the price was falsely inflated, and from improper “bill and hold” arrangements.
The SEC further alleges that the defendants misled and concealed key information from Power Solutions’ internal accounting personnel and external auditor.
In August 2016, the Power Solutions disclosed an “internal review of certain accounting matters.”
On May 16 2019 it said “Since that time, management and the Audit Committee of the Board, along with the assistance of outside advisors, have been working diligently to identify and undertake meaningful changes to remedy deficient operational and accounting controls and are working to become current with the Company’s financial reporting requirements. The filing of the 2017 Form 10-K is a significant step forward in that process.”
It also said in 2016 that “the Company plans to file its Quarterly Reports on Form 10-Q for the quarters ended March 31, June 30 and September 30, 2018, and its Form 10-K for the period ended December 31, 2018, by the end of the third quarter of 2019. In addition to these filings, the Company is working to become current with its 2019 filings. When the Company is current with all of its filings, it will seek to relist its common stock on a national exchange and expects to host an investor conference call to discuss its results and outlook.
“The Company’s sales for the full year 2018 are estimated to be approximately $500 million, an increase of approximately 20 percent compared to 2017. An associated improvement in gross profit and gross margin is also anticipated; however, the positive impact of the increased gross profit on operating income is anticipated to be more than offset by significant increases in operating expenses, largely the result of increased selling, general and administrative expenses principally due to higher restatement related costs, and higher research, development and engineering expenses for product development activities in support of the Company’s long-term growth objectives. The aforementioned financial data is preliminary and is subject to potential changes as a result of the finalization of the audit.
“At the end of 2018, the Company’s total debt was approximately $110 million, which compares to approximately $107 million as of September 30, 2018.”
This appears to be less than candid at its best.
“Investors depend on company executives to provide accurate, reliable information about their company’s financial condition,” said Kathryn Pyszka, Associate Regional Director of the SEC’s Chicago Regional Office. “As we allege, these executives deprived investors of truthful information about Power Solutions’ financial health by causing the company to fraudulently record revenue to meet revenue targets and projections.”
The SEC’s complaint charges the defendants with violating numerous antifraud, books and records, reporting, and internal controls provisions of the federal securities laws, as well as with aiding and abetting violations.
The complaint seeks permanent injunctions and penalties against all defendants, disgorgement and prejudgment interest against Needham, an officer-and-director bar against Winemaster, and a clawback of incentive-related compensation paid to Winemaster during the alleged fraud.
The U.S. Attorney’s Office for the Northern District of Illinois filed criminal charges against the defendants for related misconduct.
The SEC’s investigation, which is continuing, was conducted by Michael Mueller and Timothy Tatman of the Chicago Regional Office under the supervision of Steven Klawans. The litigation will be led by Daniel Hayes. The SEC noted that it “appreciates the assistance of the U.S. Attorney’s Office for the Northern District of Illinois and the Federal Bureau of Investigation.”