Ex-Xerox execs face $22.5M in fines
Company to cover $19.4 million of the SEC penalties
By Richard Mullins
Democrat and Chronicle
FILE PHOTO
Xerox Corp. must pay $19.5 million of the $22.5 million in penalties levied by the Securities and Exchange Commission on six former executives charged with manipulating the company’s accounting. Former Chairman Paul Allaire will pay $1 million and be banned from serving as a director or officer of any public company for five years. [Day in Photos]
(June 6, 2003) — Company bylaws will result in Xerox Corp. paying nearly all of the $22.5 million in penalties levied by the Securities and Exchange Commission on six of its former executives charged with manipulating the company’s accounting.
Named in the 32-page SEC lawsuit released Thursday were former Xerox Chairman Paul Allaire, former Chief Executive G. Richard Thoman and former Chief Financial Officer Barry D. Romeril.
Also named were Philip D. Fishbach, who retired as controller in April 2000; Daniel S. Marchibroda, assistant controller until January 2000; and Gregory B. Tayler, who served first as director of accounting policy, then as assistant treasurer and controller before leaving Xerox in November 2001.
The suit says that between 1997 and 2000, the six men ‘’misled investors about Xerox’s earnings to polish its reputation on Wall Street and boost the company’s stock price.’’
For this, the SEC charged them with “securities fraud and aiding and abetting Xerox’s violations of the reporting, books and records and internal control provisions of the federal securities laws.”
To settle the charges, the six agreed to pay fines, reimburse ill-gotten stock-transaction gains during that period and relinquish officer and director positions at any public company for a period of years. Romeril was permanently banned from serving at a public corporation. In exchange, none was required to admit any wrongdoing.
A Washington, D.C., law firm representing Allaire and Romeril issued a statement Thursday, saying the men are now “retired,” and “have decided to put this issue behind them and get on with their lives rather than undertake lengthy and expensive litigation of the issues.”
The SEC will recoup the money from the men, and disburse the funds to “victims of the alleged fraud.” Xerox will compensate the executives for most of that money, including legal fees, because of company bylaws requiring it to indemnify its executives.
In a letter to Xerox employees Thursday, Chairman Anne M. Mulcahy said she could not comment on the settlement. “The best thing all of us can do is exactly what we have been doing,” she wrote. “Make the customer our priority among priorities.”
SEC officials characterized the penalties as a significant win that carries a strong warning to other corporate executives.
“The executive suite should be reserved for those who will tell the investing public the truth about the company’s performance,” said Paul R. Berger, associate director of enforcement. “That didn’t happen here, and Xerox’s shareholders were deceived.”
The suit largely reflects the same charges for which Xerox paid a then-record $10 million fine to settle back in April 2002.
But the legal papers released Thursday by the SEC offer the most detailed evidence yet that the top executives were involved in the fraud.
’Unreal profits’
The papers state:
In September 1997, Romeril e-mailed the controller of Xerox Europe about progress in assessing a potential accounting device and stated: “This could be the crucial opportunity for making Quarter 3.”
In November 1998, Romeril informed Allaire, Thoman, Fishbach and others that over the past four years, Xerox’s major earnings-generating market in Brazil had “$700M of unreal profits.”
In January 2000, the president of Xerox Europe informed Thoman, Romeril and others that Europe’s pre-tax profits had been “declining since 1996,” but that “this declining trend has been fully contained in the reported profit” by accounting.
Those and other actions fraudulently allowed Xerox to move forward about $3 billion in sales and inflate pre-tax earnings by about $1.4 billion from 1997 to 2000, the SEC said.
Berger said Allaire was aware of the scheme and “fraudulently failed to disclose that information to shareholders and the investing public.”
To settle the suit, the executives must pay their own personal and civil fines. That includes $1 million each for Allaire and Romeril, $750,000 for Thoman, $100,000 for Fishbach, and $75,000 each for Marchibroda and Tayler.
However, Xerox will bear a larger cost.
Mulcahy said in her letter to employees that “all of the individuals who are settling with the SEC were officers of Xerox. Under the terms of our bylaws, the company is required to indemnify officers against any costs, expenses or liabilities that result from acting as an officer.”
That means Xerox will pay $19.4 million of the $22.5 million settlement, plus the $4.8 million in legal fees the company has already paid on the former executives’ behalf. As part of the settlement, Fishbach will relinquish $127,035 in rights to future bonuses, and Marchibroda will give up $50,228.
Xerox will file claims with its insurance carriers to try to recoup some of that money, said spokeswoman Christa Carone. Thoman will also continue to receive the $800,000 a year for life agreed to as part of his negotiated separation package from the company, Carone said.
Redress for victims
Berger said that under the new Sarbanes-Oxley Act of 2002, the government is allowed to distribute the recouped money to victims of the fraud. Exact details of how this will happen, and who would be entitled, are yet to be worked out, he said.
A federal judge must approve the settlement, and collect the money. Then Berger said the court would devise a plan to identify specific victims of what could have been unfair stock trades based on the fraudulent accounting that those six executives made during the time period in question.
“You have to put together a plan, a practical one, so people do not get just 2 cents on the dollar,” Berger said.
Leaders of the union representing some Xerox workers here expressed relief over the settlement.
“I’m glad this is over and done with,” said Gary Bonadonna, the director of the Joint Regional Board of the Union of Needletrades, Industrial and Textile Employees, which represents about 2,000 Xerox workers in the Rochester area. “I would never think they were capable of doing the acts they are accused of.”
One retired worker called the settlement overdue.
“This should have happened quite a while ago,” said Gerald Zimmer of Webster, a former operations manager who is retired from Xerox after 35 years with the company. “I don’t know if the fines are heavy enough. They took a great company and almost drove it out of business with mismanagement. These people have to be taken to task for what they did.”
Others expressed doubt that restitution will be sufficient.
“This raises the question: Who suffered from their behavior and to what extent will there be restitution?” said Lois Niland of Pittsford, who was laid off in November after 13 years at Xerox. “Both shareholders and employees have suffered from their bad behavior. Somehow, I don’t think the checks will be in the mail.”
Includes reporting by staff writer Michael Wentzel.
E-mail address: rmullins@DemocratandChronicle.com
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