The Securities and Exchange Commission said 38-year-old Paul Periolat of Rocklin manipulated inventory levels to increase margins so VeriFone wouldn’t miss expectations.
The Securities and Exchange Commission today charged Silicon Valley technology company VeriFone Holdings, Inc. and a former finance department employee for falsifying the company’s accounting records which boosted gross margins and income reported to shareholders. The SEC alleges that in three consecutive quarters in 2007, the company made unsupportable alterations to its records to compensate for an unexpected decline in gross margins, overstating VeriFone’s operating income by a total of 129 percent. When the misrepresentations came to light in December 2007, the company’s stock price fell 46 percent, resulting in a one-day drop in market capitalization of $1.8 billion.
“Through poor oversight and controls, VeriFone senior management allowed an employee to make millions of dollars of unsubstantiated accounting adjustments that enabled the company to meet its guidance to Wall Street,” said Marc J. Fagel, Director of the SEC’s San Francisco Regional Office. “Public companies need to ensure that their financial statements give an accurate assessment of their financial results, and are not improperly adjusted to meet analyst expectations.”
The SEC’s complaint, filed in federal court in San Jose, alleges that at the end of each of the first three quarters of 2007, internal company reports showed that gross margins would be markedly lower than previously released guidance to analysts. According to the SEC, senior management was convinced that the previous forecasts were correct and directed finance employees to figure out and fix the problem so the company could report results in line with forecasts and thereby avoid, in the words of a senior officer, an “unmitigated disaster.”
The SEC alleges that VeriFone’s former supply chain controller, Paul Periolat, then made large manual adjustments to inventory balances on VeriFone’s books each quarter, dramatically increasing both gross margins and operating income. In each of the first three quarters of 2007, the accounting adjustments allowed the company to meet its internal forecasts and guidance to investors. However, the complaint alleges that the adjustments were based on incorrect assumptions which Periolat did not take adequate steps to verify. In fact, the company’s unreported results had been correct, and Periolat’s adjustments led to VeriFone’s improper inflating of its income by over $37 million.
Without admitting or denying the SEC’s allegations, VeriFone agreed to a permanent injunction against future violations of Sections 13(a), 13(b)(2)(A), and 13(b)(2)(B) of the Securities Exchange Act of 1934, and Rules 12b-20, 13a-11, and 13a-13 thereunder. Without admitting or denying the SEC’s allegations, Periolat agreed to a permanent injunction against future violations of Sections 17(a)(2) and (3) of the Securities Act of 1933, and Section 13(b)(5) of the Exchange Act and Rule 13b2-1 thereunder, and aiding and abetting violations of Sections 13(a), 13(b)(2)(A), and 13(b)(2)(B) of the Exchange Act and Rules 12b-20, 13a-11, and 13a-13 thereunder, and to pay a $25,000 civil penalty [SEC v. VeriFone Holdings, Inc. and Paul Periolat, Case No. CV-09- 09 4046 RS (N.D. Cal.)] (LR-21194; AAE Rel. 3044)