ABS Industries, Inc., et al.

SECURITIES AND EXCHANGE COMMISSION

Litigation Release No. 16344 / October 28, 1999

Accounting Auditing and Enforcement Release No. 1197 / October 28, 1999

S.E.C. v. ABS INDUSTRIES, INC., et al., (N.D. OH., CASE NO. 1:99CV2600, FILED OCTOBER 27, 1999)

On October 27, 1999, the Securities and Exchange Commission (SEC) filed an action charging that ABS Industries, Inc. (ABS), an Ohio company, and four former officers or employees of ABS defrauded investors in the company's stock by intentionally overstating the company's revenues by millions of dollars in 1994 and the first three quarters of the company's 1995 fiscal year. Specifically, the SEC filed a complaint in the United States District Court for the Northern District of Ohio, Eastern Division, against ABS, formerly headquartered in Willoughby, Ohio, William J. McCarthy (McCarthy) of Ashtabula, Ohio, Theodore Ursu III (Ursu) of Highland Heights, Ohio, John M. McHale (McHale) of Massillon, Ohio, and David R. Bush (Bush), of Malvern, Ohio. ABS was formerly the holding company for two wholly-owned subsidiaries, Colfor, Inc. (Colfor) and Colmach, Inc. (Colmach), which produced and machined cold and warm forgings for the automotive and light truck industries. McCarthy was the President and Chief Executive Officer of ABS. Ursu was ABS' Chief Accounting Officer and Corporate Controller. McHale was the Controller for Colfor and Colmach, and Bush was Colfor's general manager.

This case involves misstatements arising from an intentional scheme by ABS' management to manage earnings. The SEC's Complaint alleges that ABS, McCarthy, Ursu, McHale and Bush engaged in a scheme to prematurely recognize revenue by improperly recording purported "bill and hold" sales at ABS. The Complaint further alleges that the sales recorded as "bill and hold" sales were for goods that were neither billed nor shipped to the customers, and, in some cases, did not exist or were not completely manufactured. The Complaint further alleges that the reason the Defendants engaged in this scheme was to meet prior sales projections established by McCarthy. For example, the Complaint alleges that the Defendants improperly recorded nearly $4.5 million in "bill and hold" sales in 1994 to meet McCarthy's projection in ABS' 1993 annual report that the company's sales would increase to "approximately $93,000,000" in 1994. As a result of the inclusion of the improper "bill and hold" sales, ABS posted sales of more than $92.1 million in its 1994 Form 10-K, which overstated, among other things, its sales by at least 3.21%, income before taxes by at least 2.48%, and accounts receivable by at least 16.35%. The Complaint alleges that reasonable investors would have considered such differences - in the context of a scheme to manage earnings - to be material. In addition, ABS also failed to disclose a material change in accounting policy and misrepresented the reason for the material increase in its accounts receivable due to improper "bill and hold" sales. The Complaint also alleges the Defendants lied to ABS' auditors regarding the true nature of the purported "bill and hold" sales in order to conceal and continue the fraudulent scheme.

The Defendants' scheme escalated in 1995. The Complaint alleges that in the first three quarters of 1995, the Defendants improperly reported at least $8,589,338, $14,878,115 and $16,593,328 of purported "bill and hold" sales in ABS' Forms 10-Q, with the following results: 1) pre-tax income, net income and earnings per share were overstated by at least 43.90% to 129.61%; 2) sales were overstated by at least 6.46% to 21.16%; and 3) accounts receivable were overstated by at least 5.93% to 23.64%. These misstatements resulted in the company reporting gains when it otherwise would have posted losses in at least two of the quarters.

The Complaint further alleges that Defendants' fraudulent scheme resulted in a fraud on the market for ABS' common stock and violated Sections 10(b), 13(a), 13(b)(2)(A), 13(b)(2)(B), and 13(b)(5) of the Exchange Act and Rules 10b-5, 12b-20, 13a-1, 13a-13, 13b2-1 and 13b2-2 thereunder. The Complaint seeks the following relief: 1) an order of permanent injunction against ABS, McCarthy, Ursu, McHale and Bush enjoining them from future violations of the federal securities laws; 2) disgorgement of all ill gotten gains received by McCarthy, Ursu, McHale and Bush, including performance bonuses they received based on ABS' reported financial performance in 1994 and the first three quarters of 1995; 3) the imposition of civil penalties against McCarthy, Ursu, McHale and Bush for their fraudulent acts; and 4) an order prohibiting McCarthy and Ursu from acting as an officer or director of any public company.