Ex-controller of W.R. Grace unit found to commit securities fraud

He manipulated earnings, an SEC judge rules

April 07, 2004|By BLOOMBERG NEWS

WASHINGTON - A former controller at National Medical Care Inc., a one-time subsidiary of W.R. Grace & Co., committed securities fraud in connection with earnings manipulation at the chemical producer during the 1990s, a Securities and Exchange Commission judge ruled yesterday.

Robert W. Armstrong III "cooperated, albeit with misgivings" in the earnings manipulation, ruled Carol Fox Foelak, an SEC administrative law judge. She issued a cease-and-desist order that leaves open the possibility of more severe punishment if Armstrong violates securities laws in the future.

"A company's management is responsible for the integrity of its financial statements," said Robert Levenson, a senior SEC trial counsel in Miami who handled the case. "We're pleased that the judge recognized that the conduct was fraudulent."

The ruling is among the final pieces of a case filed against seven former Grace executives in 1998. It was billed as the SEC's first enforcement effort against earnings manipulation, in which companies use accounting gimmicks to bolster quarterly and annual financial results. The six other executives settled with the SEC.

Foelak also ruled that Armstrong caused Grace to make misleading filings with the SEC and that he committed books and records violations.

Marc Dorfman, an attorney for Armstrong, declined to comment. Armstrong can appeal the ruling to the SEC's five commissioners.

At an agency trial last year, Armstrong argued that he reported the earnings manipulation to the company's management and to its internal and outside auditors, and that he was told the accounting was proper.

Grace and two partners of its auditing firm, then known as Price Waterhouse, settled separate cases with the SEC in 1999. Grace's former chief executive officer, J.P. Bolduc, settled SEC fraud allegations in February last year. None admitted or denied wrongdoing.

Grace, based in Columbia, Md., used as much as $60 million in reserves to smooth reported earnings of its health care group from 1991 to 1995, the SEC said.

The case was delayed in part because SEC commissioners took three years to review an appeal of the judge's dismissal of some charges against Armstrong. The commissioners issued a 582-word ruling in July 2002, sending the case back without making a decision.

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