Indictment in Enron-Like Accounting Fraud Case - The Industry Spread

Michael Volpe

After spending a decade in finance, Michael Volpe has been a freelance investigative journalist since 2009. His work has been published locally in the Chicago Reader, Chicago Crusader, Chicago Heights Patch, and New City. Nationally, Volpe's work has appeared in a wide variety of publications including the Washington Examiner, the Daily Caller, Crime Magazine, the Southern Christian Leadership Conference Newsletter, and Counter Punch. Volpe has been recognized by whistleblowers as leading the charge in getting their stories out. His first book Prosecutors Gone Wild was published in October 2012, his second book The Definitive Dossier of PTSD in Whistleblowers was published in February 2013 and his third book Bullied to Death was published in August 2015.

US Department of Justice

Indictment in Enron-Like Accounting Fraud Case

December 22, 2017

Another indictment was handed down in a burgeoning accounting fraud which harkens back to Enron.

Edward DiMaria is the former Chief Financial Officer at Bankrate Inc.

He is charged “in an indictment unsealed today for his alleged participation in a complex accounting and securities fraud scheme.” According to a statement from the US Attorney’s Office for the Southern District of Florida.

The Background:

Bankrate.com is “a marketing and financial publishing company. Bankrate aggregated and published information related to various consumer financial products, including mortgages, credit cards, insurance, and automobile loans.” According to the indictment.

Bankrate Inc. was founded in 1976; it first went public in 1999 before being acquired by Apax Partners in 2009, which spun it off into another initial public offering in June 2011, raising $300 million.

It currently trades on the New York Stock Exchange (NYSE) under the symbol RATE.

The current market cap is approximately $1.245 billion.

The Allegations Against DiMaria

According to the indictment, DiMaria is accused of “knowingly and willfully falsify, and cause to be falsified, books, records, and accounts required to, in reasonable detail, accurately and fairly reflect the transactions and dispositions of Bankrate, in violation of Title 15, United States Code, Sections 78m(b)(2), 78m(b)(5), and 78ff, and Title l7, Code of Federal Regulations, Sections 240. 13172-1.”

In layman’s terms, DiMaria cooked the books, in public accounting statements which then went out to traders, analysts and the media.

Accounting firm A being the outside auditor which was supposed to independently audit Bankrate’s books.

“From in or around at least 201 1, through in or around September 2014, DIMARIA, Lerner, and their co-conspirators agreed to (a) defraud Bankrate’s shareholders and the investing public, and (b) mislead Bankrate’s independent auditors and regulators by making and causing others to make false and misleading statements about Bankrate’s financial condition.” The indictment further noted. “As described below, DIMARIA, Lerner, and their co-conspirators utilized a combination of methods to fraudulently manipulate Bankrate’s publicly reported revenue and earnings. These methods included maintaining a ‘cushion’ of unsupported and unnecessary expense accruals, mischaracterizing certain of Bankrate’s routine expenses as ‘deal costs,’ making unsupported revenue and earnings adjustments, and lying to Bankrate’s auditors and the investing public about Bankrate’s true financial condition.”

The Conspiracy

Bankrate issued a statement to The Industry Spread, downplaying the crime.

Kayleen Yates, communications director for Bankrate, issued this statement: “We are aware of the DOJ action against one of our former employees. As we have previously disclosed, we continue to cooperate with the Department of Justice’s investigation. We have no further comment on these historical matters at this time.”

While DiMaria is the only one charged in this indictment, Hyunjin Lerner, who served as Bankrate Inc. Vice President of Finance from around September 2006 until September 2014, was charged as part of the same scheme in March 2017.

Yates said Lerner no longer works for the company.

Two other unindicted co-conspirators were not named but referred to as: “Bankrate Executive 1 was a high-ranking executive who worked at Bankrate’s offices in New York.” And “Bankrate Executive 2 was a Vice President in the finance department who reported directly to DIMARIA and worked at Bankrate’s offices in New York.”

The indictment explained the larger conspiracy.

“DIMARIA, Lerner, and their co-conspirators used Bankrate’s expense accruals to fraudulently manipulate Bankrate’s reported earnings through a prohibited accounting practice sometimes known as cookie-jar accounting.” The indictment noted.

It further stated, “First, DIMARIA, Lerner, and their co-conspirators would create a cookie jar of unnecessary and unsupported expense accruals in quarters when they deemed Bankrate’s financial performance to be satisfactory. DIMARIA, Lerner, and their co-conspirators kept track of the cookie jar on a spreadsheet they referred to internally as the ‘cushion,’ or ‘Ed’s cushion.’ DIMARIA, Lerner, and their co-conspirators would create the cookie jar or ‘cushion’ either by (a) refusing to reverse existing expense accruals that had become unsupported, or (b) creating new or inflating existing expense accruals that w ere baseless. By creating such a cookie jar or ‘cushion’ of unnecessary expense accruals, DIMARIA, Lerner, and their co-conspirators lowered Bankrate’s earnings in that period by fraudulently booking or maintaining hundreds of thousands of dollars in expenses that did not exist. DIMARIA, Lerner, and their co-conspirators maintained the ‘cushion’ spreadsheet at Bankrate’s com orate headquarters in the Southern District of Florida.

“Second, in periods when they deemed Bankrate’s financial performance to be unsatisfactory, DIMARIA, Lerner, and their co-conspirators used the cookie jar or ‘cushion’’ they had created to fraudulently increase Bankrate’s reported earnings by selectively reversing hundreds of thousands of dollars in expense accruals off the ‘cushion’ spreadsheet.”

SOX

In the aftermath of the Enron scandal, Congress passed Sarbanes Oxley, which was supposed to prevent these kinds of accounting scandals.

SOX, among other things, transformed the auditing process of publicly traded companies increasing the disclosure, oversight, and independence of the auditor.

SOX was designed to minimize the risk of this sort of accounting fraud in publicly traded companies.

In this case, audits were done, but, according to the indictment, the auditor is considered, for now, another victim.

The auditing firm is not named though, based on the description, is almost certainly one of the big four: Price Waterhouse Coopers, Ernst & Young, KPMG, or Deloitte.

“From at least in or around 2011 and continuing through 2014, a known public accounting firm (‘Accounting Firm A’) acted as the independent auditor of Bankrate’s financial statements. Accounting Firm A ‘s offices were located in the Southern District of Florida, in Miami and Ft. Lauderdale, Florida, among other places. Accounting Firm A relied on DIM ARIA, Lerner, and other Bankrate employees to provide truthful and accurate information about Bankrate’s internal accounting practices and policies.

“Accounting Firm A obtained information about Bankrate from DIMARIA, Lerner, and others through phone calls, meetings, and via email. In addition, DIMARIA, Lerner, and other Bankrate employees provided written assurances and representations to Accounting Firm A (‘Management Representation Letters’) that, among other things: (1) they had ‘made available . . . all financial records and related data’ (2) they ‘were not aware of any information indicating that an illegal act, or violations or possible violations of any regulations, had or may have occurred, whether or not perceived to have a material effect on the interim financial statements’ and (3) they had ‘no knowledge of fraud or suspected fraud affecting the Company involving (a) Management, (b) Employees who have significant roles in internal control, or (c) Others where the fraud could have a material effect on the interim financial statements.” DIMARIA, Lerner, and others addressed these Management Representation Letters to Accounting Firm A’s offices located in the Southern District of Florida.

“Based in part on misrepresentations made by DIMARIA, Lerner, and their coconspirators in Management Representation Letters, and elsewhere, Accounting Firm A would offer an opinion as to whether Bankrate’s annual financial statements presented fairly in all material respects.”

According to the indictment, DiMaria is accused of taking “action to coerce, manipulate, mislead, and fraudulently influence Accounting Firm A knowing that such action, if successful, could result in rendering Bankrate’s financial statements materially misleading, in connection with Accounting Firm A ‘s review of Bankrate’s financial statements.”

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