The recent SEC enforcement action against Manitex International and three of its former senior executives is a compelling fraud case. Partly because of the unusual facts of the case, the settlement documents tell a good story.
According to the SEC, two separate and distinct financial frauds occurred at Manitex. The first began shortly after company employees found an inventory shortfall during the year end 2013 physical inventory, and the other, which occurred in 2016 and 2017, involved sales Manitex made to a entity Manitex helped set up and controlled, which weren’t actually sales at all, since the accounting rules prohibit recognizing sales made essentially to oneself. Manitex officers went to great lengths to hide the inventory shortfall, ultimately pretending to transfer the nonexistent inventory to a joint venture. Manitex senior officers also took a lot of convoluted actions in the second scheme. trying to make it appear as if Manitex were making sales to an independent company when, in fact, they knew were not. Along the way, the officers falsified documents, forged signatures, and lied to company auditors Buried in the fine print, there was also a terrific gem: Manitex’s former President suggesting that the name of an entity set up to further the second scheme should be called Vandalay Industries, a reference to a phony company George Costanza made up on the Seinfeld television show.
Manitex’s frauds went undetected for some time, but in October 2017, the company auditor started poking around, asking questions about the second scheme. Shortly afterward, an outside law firm began an investigation at the company, and soon the jig was up: Manitex fired two of the three executives involved in the conduct (the third had already left) and promptly announced that most of its financial statements for 2016 and 2017 should no longer be relied upon.
Given the false documents and other deceptive conduct, the SEC had quite a bit of leverage to get favorable settlements from the defendants/respondents. Among other things, the three former executives and the company were charged with 10b fraud and all of the former executives received officer and director bars or accounting suspensions or both. The SEC also doled out penalties to the company and two of the three former executives, the third did not have to pay a penalty based on his cooperation.
If I squint I can find a few problems with the SEC’s case. I couldn’t quite make out the chart in the settlement documents showing the effect of the second fraud on the company’s sales and net income. Also, it’s not clear why was the company was able to enter into a payment plan with the SEC, to pay its fine over time. The fines seemed to be too light and the length of the bar and suspension for the company’s former controller/CFO may be too short. Finally, the press release caused me to try to understand when the SEC names a company in press release headline. The action, released shortly before the SEC’s fiscal year end, is one of the few recent SEC maters in which the name of the corporation charged was stated in the press release headline. Does the SEC name companies in press release only when fraud is charged or in other cases also? It’s not clear from the SEC press releases issued in the last year or so what the standard is.
But these are all in all fairly minor points. Every case has a few loose ends and maybe a few deficiencies. All in all, it’s a solid case, fairly well written, persuasive and easy to follow, with what appear to be reasonable settlements for all concerned. It’s hard to get the whole hog. Nice work by the SEC’s Chicago office.
The SEC in Action 