SEC Charges Hurricane Restoration Company and Execs in Alleged Fraud

A Dallas and New Orleans-based hurricane restoration company that has been subject to numerous lawsuits since Hurricane Katrina, and several of the company’s executives, have been charged by the Securities and Exchange Commission with accounting fraud. The SEC alleges Home Solutions of America Inc. lied about non-existent business deals in the wake of Hurricane Katrina, and fraudulently inflated the company’s stock price before the company’s CEO sold millions of dollars in company shares.

Home Solutions then-CEO Frank Fradella, who is among seven individuals charged by the SEC in the scheme, dumped approximately $6.8 million worth of stock into the inflated market, according to the SEC.

“The company’s financial results were largely fabricated and its public statements were intended to deceive,” said Rose Romero, director of the SEC’s Fort Worth Regional Office. “Simply put, instead of rebuilding New Orleans and other hurricane-stricken areas, they constructed a fantasyland of fraud.”

According to the SEC’s complaint, filed in U.S. District Court for the Northern District of Texas, several different illicit maneuvers were used by Home Solutions at various times between 2004 to 2007 at the direction of Fradella and other executives in order to mislead the public about the company’s true financial condition.

The SEC alleges that Fradella initiated an expense-deferral scheme to inflate earnings by expensing year-end bonuses when paid rather than when earned. Fradella, Home Solutions CFO Jeff Mattich, and Brian Marshall (who became a Home Solutions director and president of its largest subsidiary, Fireline Restoration Inc., after its acquisition by Home Solutions) together engaged in a series of revenue-inflation schemes, booking millions of dollars of bogus revenue by invoicing and recording receivables on work that never occurred. They also improperly caused millions of dollars of revenue from another public company to be booked as Home Solutions revenue.

The SEC further alleges that Marshall engaged in a separate revenue-inflation scheme at Fireline, booking more than $9 million of fake construction revenue from undisclosed, related-party contracts with entities that Marshall controlled.

The SEC’s complaint charges Home Solutions, Fradella, Marshall and Mattich with violations of the antifraud, reporting, books and records and internal control provisions of the federal securities laws and seeks permanent injunctive relief, financial penalties, and as to the individuals, full disgorgement with interest and officer and director bars.

Four others charged by the SEC simultaneously agreed to settle on the following terms, without admitting or denying the allegations in the complaint:

• Former Home Solutions CFO and COO Rick O’Brien consented to a permanent injunction and a $130,000 penalty.
• Former Fireline controller Stephen Gingrich consented to a permanent injunction, a $25,000 penalty, and an administrative order barring him from practicing before the Commission as an accountant for at least three years.
• Former Fireline COO Thomas Davis consented to a permanent injunction, a $25,000 penalty, and payment of disgorgement and interest of $32,850.
• Jeff Craft, a business partner of Marshall, consented to a permanent injunction.

The SEC said its investigation is continuing.

Source: Securities and Exchange Commission, http://www.sec.gov/news/press/2009/2009-256.htm