David G. Zilli

U.S. SECURITIES AND EXCHANGE COMMISSION

Litigation Release No. 19455 \ November 2, 2005

Accounting and Auditing Enforcement
Release No. 2342 \ November 2, 2005

SECURITIES AND EXCHANGE COMMISSION v. DAVID G. ZILLI (Defendant), Civil Action No. CV 05-2134 (D.D.C.) (filed November 2, 2005).

SEC SUES DAVID G. ZILLI FOR ACCOUNTING FRAUD

ZILLI SETTLES AND CONSENTS TO PERMANENT FRAUD INJUNCTION, PERMANENT OFFICER AND DIRECTOR BAR, AND PAYMENT OF OVER $144,000

Today the Securities and Exchange Commission filed a settled enforcement action against David G. Zilli, the former Chief Financial Officer of Bon Secours Cottage Health Services ("Cottage Health"), for violating the antifraud provisions of the federal securities laws. Cottage Health is a subsidiary of a Maryland-based non-profit hospital and healthcare company called Bon Secours Health System, Inc. ("Bon Secours") which issues corporate bonds, in part through public offerings. The Commission alleged in its complaint that, during Bon Secours' fiscal years 1998 through 2003, Zilli engaged in an extensive scheme of fraudulent accounting practices that created the false appearance of steady earnings growth at Cottage Health. According to the complaint, Zilli's fraud was accomplished through bogus manual journal entries that overstated the value of numerous assets and the operating income of Cottage Health and understated its liabilities. As a result of Zilli's fraudulent scheme, Bon Secours' financial statements were cumulatively misstated by an aggregate amount of $117 million during the period between 1998 and 2003. In February 2004, Bon Secours restated its 2002 consolidated financial statements to correct the impact of Zilli's fraudulent accounting over the relevant periods.

As alleged in the complaint, Zilli was the Vice President-Finance and CFO of Cottage Health from September 1998 through June 2003. During that time, Zilli supervised Cottage Health's accounting department and was responsible for the creation of the financial statements of the subsidiary. On a periodic basis, Zilli generated Cottage Health's financial statements and forwarded them to the finance department of Bon Secours where they were consolidated with those of the other subsidiaries to create Bon Secours' annual consolidated financial statements. Bon Secours included the consolidated financial statements in various public bond offerings that it made to investors.

According to the complaint, from 1998 through 2003, the accounting department prepared preliminary financial statements for Cottage Health and forwarded them to Zilli for review. Zilli, on numerous occasions, independently devised complex adjusting manual journal entries to the preliminary statements, lacking any support or accounting basis. The accounting department then finalized the monthly reports for Cottage Health after making the adjustments that Zilli had instructed the accounting personnel to make. The Commission alleges that the adjustments made by Zilli artificially and fraudulently boosted Cottage Health's income in each period. As alleged, Zilli created the fraudulent journal entries to derive the specific income amount that he wanted to book for the particular period in order to ensure that Cottage Health's reported performance figures met its financial targets. The complaint further alleges that Zilli's fraudulent accounting resulted in the overstatement of three general categories of Bon Secours' assets: accounts receivable, fixed assets and inventory. According to the complaint, Zilli's misstatements materially inflated Bon Secours' "increase in unrestricted net assets," the equivalent of net income for a non-profit enterprise, by approximately the following amounts: (a) $20.1 million or 75% in fiscal year 2000; (b) $15.4 million or 31% in fiscal year 2001; and (c) $17.9 million or 270% in fiscal year 2002. The complaint further alleges that the misstatements overstated Bon Secours' income from operations by approximately the following amounts: (a) $22.9 million or 106% in fiscal year 2000; (b) $20.6 million or 51% in fiscal year 2001; and (c) $21.9 million or 42% in fiscal year 2002.

Zilli, without admitting or denying the allegations in the Commission's complaint, consented to the entry of the final judgment which permanently enjoins him from violations of Section 17(a) of the Securities Act of 1933 ("Securities Act"), Section 10(b) of the Securities Exchange Act of 1934 ("Exchange Act") and Rule 10b-5 thereunder. In addition to the injunctive relief, under the terms of the final judgment, Zilli will pay $144,513 in disgorgement. Based on Zilli's Sworn Statement of Financial Condition and other documentation, the Commission did not seek a penalty. The disgorgement amount shall be deemed satisfied upon his payment of that same amount in criminal restitution against Zilli in a parallel criminal action also filed today in the United States District Court for the District of Maryland. In the event that Zilli is ordered to pay an amount less than $144,513 in criminal restitution, the disgorgement amount that Zilli has agreed to pay in settling the Commission's complaint is equal to $144,513, less the amount of criminal restitution. Under the terms of the final judgment, Zilli also will be barred permanently from serving as an officer or director of a public company. Zilli's settlement with the Commission is subject to court approval.

The Commission acknowledges the assistance in its investigation by the United States Attorney's Office for the District of Maryland and the U.S. Postal Inspection Service.