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UNITED STATES DISTRICT COURT |
SECURITIES AND EXCHANGE COMMISSION, Plaintiff, -against- RENT-WAY, INC., Defendants. |
: : : : : : : : : : : : : : |
Civil Action No. |
Plaintiff Securities and Exchange Commission ("Commission"), for its Complaint against defendants Rent-Way, Inc. ("Rent-Way" or the "Company"), Jeffrey Conway ("Conway"), Matthew Marini ("Marini") and Jeffrey Underwood ("Underwood") (collectively, the "Defendants"), alleges as follows:
1. Rent-Way is the second largest rent-to-own company in the United States. In order to meet earnings expectations during fiscal year 1999 and the first three quarters of fiscal year 2000, Rent-Way under-reported operating expenses by more than $60 million in its public filings with the Commission, which resulted in overstatements of pre-tax income or understatements of pre-tax loss ranging from 12% to 448%. Approximately $35 million in additional fraudulent entries were made to Rent-Way's books and records in the last quarter of fiscal 2000 that were discovered prior to public dissemination of that quarter's financial results.
2. The fraudulent scheme was carried out at the direction of Conway, who at various times during the relevant period held the positions of chief financial officer, president, chief operating officer and director, and Marini, the controller and chief accounting officer. Conway directed Marini to meet periodic earnings forecasts that Conway set. Among other things, Marini directed lower level accounting staff to make false and misleading accounting entries into Rent-Way's books and records. Conway also directed Underwood, Rent-Way's senior vice president in charge of operations, to defer the recording of operating losses at the end of fiscal years 1999 and 2000 for the sole purpose of inflating Rent-Way's fiscal 1999 and 2000 earnings. On the first full trading day after the Company issued a press release regarding possible accounting irregularities at the end of October 2000, the closing price of the stock declined 79% to $5.00 from its previous close of $23.44.
3. By engaging in the conduct described above, (i) Rent-Way, directly or indirectly, violated Sections 13(a) and 13(b)(2) of the of the Securities Exchange Act of 1934 ("Exchange Act"), 15 U.S.C. §§ 78m(a) and 78m(b)(2), and Rules 12b-20, 13a-1 and 13a-13 promulgated thereunder, 17 C.F.R. §§ 240.12b-20, 240.13a-1 and 240.13a-13; (ii) Conway and Marini, directly or indirectly, violated Sections 10(b) and 13(b)(5) of the Exchange Act, 15 U.S.C. §§ 78j(b) and 78m(b)(5), and Rules 10b-5, 13b2-1 and 13b2-2 thereunder, 17 C.F.R. §§ 240.10b-5, 240.13b2-1 and 240.13b2-2; Conway and Marini are liable pursuant to Section 20(a) of the Exchange Act, 15 U.S.C. § 78t(a), as controlling persons of Rent-Way, for Rent-Way's violations of Sections 13(a) and 13(b)(2) of the Exchange Act and Rules 12b-20, 13a-1 and 13a-13; (iii) and Underwood, directly or indirectly, violated Section 13(b)(5) of the Exchange Act and Rule 13b2-1.
4. The Commission brings this action pursuant to the authority conferred upon it by Section 21(d)(1) of the Exchange Act, 15 U.S.C. § 78u(d)(1), seeking to restrain and enjoin permanently the Defendants from engaging in the acts, practices and courses of business alleged herein. The Commission also seeks an order:
a. requiring Conway to disgorge all ill-gotten gains he received and losses he avoided as a result of the fraudulent conduct alleged herein plus prejudgment interest thereon;
b. requiring Conway, Marini and Underwood to pay civil money penalties pursuant to Section 21(d)(3) of the Exchange Act, 15 U.S.C. § 78u(d)(3); and requiring Conway to pay civil money penalties pursuant to Section 21A of the Exchange Act, 15 U.S.C. § 78u-1; and
c. barring each of Conway and Marini from serving as an officer or director of a publicly held company pursuant to Section 21(d)(2) of the Exchange Act, 15 U.S.C. § 78u(d)(2).
5. This Court has jurisdiction over this action pursuant to Sections 21(d) and 27 of the Exchange Act, 15 U.S.C. §§ 78u(d) and 78aa.
6. Defendants, directly or indirectly, used the means and instrumentalities of interstate commerce, or of the mails, or the facilities of a national securities exchange in connection with the transactions, acts, practices and courses of business alleged herein. The majority of these transactions, acts, practices and courses of business occurred in the Western District of Pennsylvania, where Rent-Way's headquarters, principal place of business, and books and records were located during the relevant time period.
7. Rent-Way is a Pennsylvania Corporation with its principal executive offices in Erie, Pennsylvania. The Company's common stock is registered with the Commission under Section 12(b) of the Exchange Act and is listed on the New York Stock Exchange. Rent-Way's fiscal year extends from October 1 to September 30.
8. Conway, age 45, was the chief financial officer of Rent-Way from February 1992 to September 1999 and president and chief operating officer of Rent-Way from September 1999 until he was asked to resign in December 2000. Conway also served as a director from February 2000 until he was asked to resign in December 2000. Conway is a certified public accountant.
9. Marini, age 38, was the controller of Rent-Way from October 1995 to December 1999 and chief accounting officer from December 1999 until he was terminated in October 2000.
10. Underwood, age 46, was the senior vice president in charge of operations overseeing all of Rent-Way's operations from September 1999 to July 2002. Underwood resigned from employment with Rent-Way on or about April 17, 2003.
11. Rent-Way is one of the largest rent-to-own companies in the United States. Prior to its announced sale of 295 stores in December 2002, Rent-Way operated over 1,000 stores in 42 states. Rent-Way was founded in 1981 and went public in 1993. In 1998, Rent-Way expanded significantly when it acquired Home Choice Holdings, Inc. ("Home Choice"), a 460-store chain of rent-to-own stores.
12. Conway became Rent-Way's CFO in May 1992 when Rent-Way owned only 17 stores. In mid-1995, when Rent-Way owned approximately 80 stores, Conway met Marini and arranged for Marini to become controller.
13. Between 1998 and October 2000, Conway was Rent-Way's key contact person with outside analysts concerning Rent-Way's prospects and also provided analysts with earnings guidance. Conway was consistently concerned with meeting or beating earnings expectations every quarter. In an April 28, 2000 press release, Conway stated that Rent-Way's financial "results extend our long string of in-line or better-than-expected results and sequential gains."
14. Eventually, Rent-Way's operations could no longer sustain Conway's unrealistic earnings estimates. In December 1998, after Rent-Way more than doubled in size through its acquisition of Home Choice and approximately two months after Rent-Way stock began trading on the New York Stock Exchange, Marini informed Conway that the Company's stores were under-performing for the quarter ending December 31, 1998. Conway told Marini that they could both lose their jobs if the Company did not meet earnings targets. Conway also told Marini that he needed time to make operational changes in order to improve Rent-Way's earnings.
15. Shortly thereafter, Conway told Marini to do whatever needed to be done to meet the Company's earnings targets, but not to disclose to Conway what steps he would take to accomplish that goal. Conway explained to Marini that since he (Conway) was an officer of the Company, he needed to maintain "plausible deniability" -- that is, the ability to deny direct knowledge of illegal conduct -- and therefore could not be told the details of Marini's actions. In giving those instructions to Marini, Conway knew, and Marini understood, that Marini would have to conceal expenses improperly in order to accomplish the goal of meeting earnings expectations.
16. Beginning in or around December 1998, Marini acted on Conway's instructions. To meet the earnings target Conway set, Marini deferred the recording of certain expenses including fixed assets and rental merchandise related expenses that should have been recorded in the current quarter.
17. In or about July 1999, during the fourth quarter of fiscal 1999, Marini advised Conway that the accounting department was pushing as hard as it could, but that the Company would not meet its earnings guidance. Conway again told Marini to do whatever was necessary to get the Company through the fiscal quarter and meet the Company's earnings target. Conway attempted to reassure Marini that he was implementing changes that would help turn around the Company's operations so that there would be no need in the future for Marini to manipulate Rent-Way's books and records.
18. Beginning in late 1999, Marini conducted meetings with subordinate accounting staff at the end of each month referred to by Marini and others as "greaseboard sessions." During those meetings Marini would direct his staff to scrutinize various accounts for expenses that could be reduced or capitalized. When necessary to meet Conway's earnings guidance, Marini also directed his staff to make false entries in accounts without any basis or support. Most of these entries had the effect of decreasing reported expenses, and increasing reported earnings by the same amount. Some of the entries had the effect of increasing an asset account and increasing the miscellaneous or other income accounts.
19. In or about September 1999 Conway was promoted from CFO to president and in or about December 1999 Marini was promoted from controller to chief accounting officer. In February 2000 the Company hired a new CFO. Even though Marini began to report officially to the new CFO, Conway directed Marini to continue to report to him informally. Marini met with Conway frequently both during and after regular office hours.
20. Shortly after his promotion to chief accounting officer, a Rent-Way director advised Marini of his fiduciary duties as an officer of the Company. Consequently, Marini decided to inform Conway of many of the details of the fraudulent entries Marini had made to the Company's books and records. For example, Marini told Conway about the manipulations being made at Marini's direction to the Company's rental merchandise accounts in an attempt to reduce artificially the Company's expenses.
21. Between December 1999 and October 2000 when the fraud was uncovered, Marini spoke to Conway frequently about the nature of the false entries being made to Rent-Way's books and records. Conway condoned Marini's actions and never told Marini to stop making false entries to Rent-Way's books and records. The only concern Conway expressed to Marini was how Marini would make sure that the Company could prevent the auditors from discovering the fraudulent entries.
22. Marini directed subordinates to make false entries across a variety of corporate level accounts. Following are the major accounts affected by the fraud and a description of how the manipulations affected Rent-Way's earnings.
23. Failure To Recognize Rental Merchandise And Other Expenses And Inflation Of Other Income. Rental merchandise is one of Rent-Way's largest asset accounts, and depreciation of rental merchandise and related losses are among the largest recurring expense items of Rent-Way's income statement. Generally, in each accounting period, Rent-Way recognized expenses for depreciation in rental merchandise and losses of rental merchandise and recorded a corresponding reduction in the rental merchandise asset account. Marini manipulated the rental merchandise accounts to limit artificially the recognition of rental merchandise expenses that should have been recognized in each quarter in which they were incurred. Typically, Marini would increase artificially the rental merchandise asset account in order to hide his reversals of current depreciation and other rental merchandise related expenses. Marini would also inflate artificially the rental merchandise asset account and make corresponding entries to inflate miscellaneous or other income.
24. In total, manipulation of the rental merchandise related accounts had the effect of understating expenses or overstating miscellaneous or other income by approximately $6.1 million in fiscal 1999 and $36.2 million in fiscal 2000.
25. Marini also used the construction inventory asset account for similar purposes. Marini would inflate artificially the construction inventory account and make corresponding entries to reduce miscellaneous expenses or to increase the miscellaneous or other income accounts. Manipulation of the construction inventory account had the effect of understating various operating and administrative expenses or overstating miscellaneous or other income by approximately $2.8 million in fiscal 2000.
26. Improper Capitalization Of Advertising Expenses. In the fourth quarter of fiscal 2000, Marini asked personnel in Rent-Way's advertising department to obtain fictitious advertising invoices for future unidentified work from the Company's outside advertising agency. Marini then used these false advertising invoices to capitalize $1.59 million in current advertising expenses that should have been recognized in the current quarter.
27. Failure To Recognize Accounts Payable Expenses. Marini directed that unprocessed invoices be held at year end to circumvent the accounting system for recording expenses during fiscal 1999 and 2000. Unrecorded expenses at the end of fiscal 1999 that were deferred into fiscal 2000 totaled approximately $4.9 million. Unrecorded expenses at the end of fiscal 2000 totaled approximately $9.2 million.
28. Failure To Amortize Vendor Rebates. In fiscal 1999 and 2000 Marini caused advertising rebate arrangements and volume rebates with the Company's rental merchandise vendors to be reflected improperly as rebate receivables or operating income instead of amortizing those rebates over time. Typically, vendors gave Rent-Way rebates to cover part of the advertising costs Rent-Way incurred to promote the merchandise, and also gave volume rebates. The value of the rebates should have been amortized over time in accordance with the terms of the rebate arrangements. Instead, Marini caused Rent-Way to book them as income prematurely. Marini also caused actual advertising rebate receivables to be overstated. This resulted in an overstatement of operating income by approximately $5.6 million in fiscal 1999 and $3 million in fiscal 2000.
29. Failure To Recognize Property And Equipment And Lease Obligations Expenses Associated With Closed Stores. Rent-Way closed the Home Choice headquarters and twenty-seven stores during fiscal 1999, but failed to write off the value of property and equipment related to those premises in fiscal 1999 for which the Company had not previously taken a reserve. The value of property and equipment that should have been written off totaled approximately $1.6 million. In addition, Marini caused approximately $944,000 in current legal fees and miscellaneous operating expenses and store fire damage costs to be applied to a previously established Home Choice merger liability accrual account, thus overstating operating income by approximately $944,000 in 1999.
30. Failure To Recognize Shrinkage In Parts Inventory. As of September 30, 1999, a physical inventory of merchandise parts by Company personnel showed actual parts inventory on hand of $366,000, rather than the $1.408 million then reflected in the Company's general ledger. Marini failed to record the shrinkage in inventory and instead caused the general ledger balance to reflect parts inventory of approximately $1.408 million, resulting in an understatement of expenses in fiscal 1999 of approximately $1 million.
31. Improper Capitalization Of Insurance Expenses. During fiscal 2000 Marini caused current insurance premium payments to be capitalized improperly by recording them as prepaid insurance even though the premium payments were a current period expense. This understated insurance expense by approximately $1.53 million in fiscal 2000.
32. Failure To Recognize Non-Rental Property And Equipment Expenses. In May 2000, Marini directed the reversal of expenses for approximately $1.3 million in non-rental property and equipment write-offs (such as office equipment and furniture), which had been identified by Rent-Way's internal audit department as being non-existent, causing those assets to be added back to Rent-Way's books. Beginning in May 2000, Marini also directed employees to suspend Rent-Way's process of writing off non-rental property and equipment identified as non-existent by Rent-Way's internal audit department on a going forward basis, resulting in the improper deferral of expenses totaling approximately $1.75 million during the remainder of fiscal 2000.
33. Improper Capitalization Of Certain Other Operating Expenses. Marini caused employees to make manual journal entries to the general ledger that recharacterized vehicle repair expenses over $1,000 to a capital expense. During the summer of 2000, Marini also directed a subordinate to capitalize all future automotive repair and maintenance expenses above $400, without consideration of the nature of the repairs. Marini also caused employees to capitalize improperly other expenses including computer equipment, leasehold improvements, store signs, furniture and fixtures, office supplies, and salaries of information technology employees working on Peoplesoft software enhancements. In total, approximately $11.7 million in expenses were capitalized inappropriately in fiscal 2000.
34. In the ordinary course of business, Rent-Way would expense rental merchandise that was damaged beyond repair (a "discard") or that was missing. The Company's operations manual also required the write-off of the remaining value of rental merchandise when payments on the underlying rental agreement became 90 days past due (a "skip"). Company policy authorized store managers to determine when a discard, missing or skip should be entered into the Point of Sale System used to track revenues and expenses at the store level ("POS System").
35. In September 1999, Conway directed Underwood to order operations personnel to defer the write-off of skips for the remainder of the fiscal year. To avoid resistance from operators, Conway told Underwood to direct that no write-offs be taken without approval of a regional manager. Conway and Underwood knew that the directive would result in deferring improperly the write-off of the remaining skips to fiscal 2000. As a result, Rent-Way deferred approximately $550,000 of skips expense from fiscal 1999 to fiscal 2000.
36. Underwood then permitted the deferred skips expense to be recorded, resulting in a recognition of the expense in the first week of fiscal 2000. When Conway noticed the large write-offs at the beginning of fiscal 2000, he complained to Underwood that it looked suspicious to write-off all of the skips over such a short period, and told Underwood that he should have spread out the write-offs over a longer period of time.
37. In May 2000, Conway and Marini told Underwood that operations had to find ways to reduce expenses in the fourth quarter. Underwood held a meeting with divisional vice presidents in early June and discussed ways for reducing expenses including the artificial deferral of missings and discards expense. In late June Underwood again met with divisional vice presidents to devise a weekly tracking chart designed to, among other things, defer to fiscal 2001 missings and discards expenses that should have been recognized in fiscal 2000. Conway and Marini participated in the meeting and encouraged the efforts to defer improperly the recording of missings and discards.
38. In late July or early August, Underwood met with Conway and discussed with him the progress operations personnel had made in deferring missings and discards. Conway approved of Underwood's actions.
39. In that meeting, Underwood also told Conway that Marini was urging Underwood to defer the recording of skips. At that point, Conway told Underwood that he did not have to defer skips. A few weeks later Conway changed his instruction and, knowing that Marini had asked Underwood to defer the recording of skips, told Underwood to do whatever Marini was asking him to do. Conway intended, and Underwood understood, that this was a directive to defer the recording of skips.
40. Acting on Conway's instruction, in mid-September 2000, Underwood directed operations personnel not to write-off any skips for the remainder of the fiscal year without obtaining regional manager approval. Underwood's purpose was to defer to fiscal 2001 the remaining skips expense that should have been recognized in fiscal 2000.
41. During the last quarter of 2000, operations personnel failed improperly to record approximately $1.1 million in skips and missing and discarded merchandise. Virtually all of the deferred skips, missings and discards were written-off at the beginning of October 2000. The deferral of write-offs at the end of fiscal 2000 was discovered prior to the issuance of the Company's year-end financial results.
42. During fiscal 2000, as a result of the improper accounting entries, a discrepancy developed between the Company's general ledger (on which Marini made the adjustments) and the POS System. This created a risk that Rent-Way's auditors would notice the discrepancy and thereby uncover the fraud. Marini discussed with Conway the discrepancy, the risk it created for Rent-Way's audit and a solution Marini had developed. Marini proposed making further improper adjustments to the POS System that would conceal the discrepancy and create the appearance of a balance between the general ledger and the POS System. Pursuant to the plan, Marini then directed an employee to restore approximately $16 million in rental merchandise deletions back to the POS System. When the employee refused to make the adjustment to the POS System at Marini's direction, Marini reported the problem to Conway. Conway intervened and ordered the employee to follow Marini's directions.
43. In October 2000, as the fraud began to unravel, Conway took steps to conceal the fraudulent entries from other Rent-Way officers and from its directors and auditors. When Conway discovered that an employee in the accounting department was about to explain to the CFO why there was an imbalance between the general ledger rental merchandise account and the rental merchandise reflected in the POS System, Conway reprimanded the employee and directed the employee to misrepresent to the CFO the true nature of the discrepancy. When the employee refused, Conway himself misrepresented to the CFO the true nature of the discrepancy. A few days later, when the CEO of Rent-Way called Conway and Marini to a meeting to discuss the problem, Conway and Marini concocted a false explanation in order to conceal the true nature of the discrepancy from the CEO.
44. On the evening of Friday, October 27, the employee who was prevented by Conway from telling the CFO the true nature of the problem, and another employee, approached the CFO and told him that the discrepancy between the general ledger and the POS System was a result of fraudulent entries that had been made to the rental merchandise account. The next day, the CEO confronted Marini, who admitted to the scheme and disclosed Conway's involvement in the fraud.
45. The following chart summarizes the effect that the fraudulent entries had on the 1999 and 2000 forms 10-Q and the 1999 form 10-K filed by Rent-Way with the Commission:
| Period Ended/SEC Filing | Originally Reported Pretax Income | As Restated | % Overstated Income or Understated Loss |
| 12/31/98 1st Quarter Fiscal 1999 10-Q | (10,866,000) | (16,865,000) | 35.5% understatement |
| 3/31/99 2nd Quarter Fiscal 1999 10-Q | 12,155,000 | 10,854,000 | 12% |
| 6/30/99 3rd Quarter Fiscal 1999 10-Q | 12,155,000 | 10,854,000 | 12% |
| 9/30/99 Fiscal 1999 10-K | 30,336,000 | 9,384,000 | 223% |
| 12/31/99 1st Quarter Fiscal 2000 10-Q | 16,604,000 | 6,925,000 | 139% |
| 3/31/00 2nd Quarter Fiscal 2000 10-Q | 17,902,000 | 3,263,000 | 448% |
| 6/30/00 3rd Quarter Fiscal 2000 10-Q | 18,283,000 | 3,634,000 | 403% |
46. Conway signed Rent-Way's three fiscal 1999 10-Qs, its fiscal 1999 10-K and its first quarter fiscal 2000 10-Q. Marini signed Rent-Way's fiscal 1999 10-K and its three fiscal 2000 10-Qs.
47. In addition to the filings with the Commission, Rent-Way issued press releases on February 2, 1999, April 19, 1999, July 19, 1999, November 15, 1999, January 18, 2000, April 18, 2000 and July 20, 2000 (the "Press Releases"). Conway had a primary role in drafting each of the Press Releases. Each of the Press Releases materially overstated Rent-Way's pre-tax income or understated Rent-Way's pre-tax loss for the subject period and contained other material misstatements concerning Rent-Way's financial performance.
48. Conway and Marini were officers of Rent-Way, a public company, and each of them signed a December 22, 1999 management representation letter to PwC that, among other things, falsely represented that (i) Rent-Way's consolidated financial statements were fairly presented in conformity with GAAP; (ii) there were no material transactions, agreements or accounts that were not properly recorded; and (iii) there had been no fraud involving management or employees who have significant roles in the Company's internal control.
49. On or about May 15, 2000, after the filing of Rent-Way's materially misleading September 30, 1999 10-K, December 31, 1999 10-Q and March 31, 2000 10-Q, Conway sold 6,500 shares of Rent-Way stock for $24.90 per share. As a result of this sale, Conway avoided a loss of $129,350 when the price of the stock dropped to $5.00 after the fraud was disclosed to the public. According to a form 144 filed by Conway, he acquired the stock in 1992 as a gift. At the time of these sales of Rent-Way stock, Conway was the president and a director of Rent-Way and he therefore owed a fiduciary duty to Rent-Way and its shareholders. At the time of these sales, Conway possessed material non-public information that Rent-Way's true financial performance was not as Rent-Way had previously reported.
50. The Commission realleges and incorporates by reference herein the allegations contained in paragraphs 1 - 49.
51. Conway and Marini, directly or indirectly, singly or in concert, by the use of the means or instrumentalities of interstate commerce, or of the mails, or of any facility of any national securities exchange, in connection with the purchase or sale of Rent-Way securities, knowingly or recklessly, have: (a) employed devices, schemes and artifices to defraud; (b) made untrue statements of material fact, or omitted to state material facts necessary in order to make the statements made, in light of the circumstances under which they were made, not misleading; and/or (c) engaged in acts, practices and courses of business which operated or would have operated as a fraud or deceit upon purchasers of Rent-Way securities and upon other persons.
52. As part and in furtherance of the violative conduct, Conway and Marini, directly or indirectly, singly or in concert, knowingly or recklessly, engaged in a fraudulent scheme to inflate Rent-Way's reported financial results by under-reporting expenses, concealing those expenses from the auditors and other improper practices. As described above, among other things: (i) Conway directed Marini to take whatever steps were necessary to meet his earnings estimates and told Marini not to tell him how he would achieve those earnings estimates so that he could maintain "plausible deniability"; (ii) beginning in or about December 1999 and continuing through October 2000, Marini told Conway the details of many of the false entries Marini was causing to be made to Rent-Way's books and records and Conway encouraged Marini to continue to do whatever was necessary to meet Conway's earnings guidance; (iii) Conway and Marini attempted to conceal the true nature of the false entries to Rent-Way's books and records from other officers and directors of Rent-Way and from Rent-Way's auditors; (iv) Conway directed Underwood to defer operating losses at the end of fiscal 1999 and 2000; and (v) Marini directed his subordinates to make false accounting entries to Rent-Way's books and records.
53. As part and in furtherance of the violative conduct, Rent-Way filed with the Commission the December 31, 1998 10-Q, the March 31, 1999 10-Q and the June 30, 1999 10-Q, all signed by Conway; the September 30, 1999 10-K and the December 31, 1999 10-Q, signed by Conway and Marini; and the March 31, 2000 10-Q and the June 30, 2000 10-Q, signed by Marini. Due to the substantial unreported expenses and other improper practices, each of these forms 10-Q and the form 10-K contained financial statements that materially overstated Rent-Way's pre-tax income or understated Rent-Way's pre-tax loss for the subject reporting period and contained other material misstatements concerning Rent-Way's financial performance. As a result, these forms 10-Q and the form 10-K were materially false and misleading.
54. As part and in furtherance of the violative conduct, Rent-Way management issued the Press Releases that Conway had helped to draft. Each of the Press Releases materially overstated Rent-Way's pre-tax income or understated Rent-Way's pre-tax loss for the subject period and contained other material misstatements concerning Rent-Way's financial performance. As a result, the Press Releases were materially false and misleading.
55. Conway and Marini each knew or was reckless in not knowing that, because of their fraudulent conduct, the fiscal 1999 and 2000 forms 10-Q and the fiscal 1999 form 10-K were materially false and misleading. Conway and Marini each knew or was reckless in not knowing that, because of their fraudulent conduct, the Press Releases were materially false and misleading.
56. By reason of the foregoing, Conway and Marini each, singly or in concert, directly or indirectly, violated, and unless enjoined will again violate, Section 10(b) of the Exchange Act, 15 U.S.C. § 78j(b), and Rule 10b-5, 17 C.F.R. § 240.10b-5.
57. The Commission realleges and incorporates by reference herein the allegations contained in Paragraphs 1 - 56.
58. Conway, directly or indirectly, singly or in concert, by the use of the means or instrumentalities of interstate commerce, or of the mails, or of any facility of any national securities exchange, in connection with the purchase or sale of Rent-Way securities, knowingly or recklessly: (a) employed devices, schemes, and artifices to defraud; (b) made untrue statements of material fact or omitted to state material facts necessary in order to make the statements made, in the light of the circumstances under which they were made, not misleading; and/or (c) engaged in acts, practices, and courses of business which operated or would have operated as a fraud or deceit upon purchasers of Rent-Way securities and upon other persons, as more fully described in the Complaint.
59. As part and in furtherance of this violative conduct, Conway, in breach of a fiduciary duty to Rent-Way's shareholders, while in possession of material non-public information concerning Rent-Way's true financial performance, sold 6,500 shares of Rent-Way common stock on or about May 15, 2000.
60. By reason of the activities described in this Complaint, Conway, singly or in concert, directly or indirectly, violated, and unless enjoined will again violate, Section 10(b) of the Exchange Act, 15 U.S.C. § 78j(b), and Rule 10b-5, 17 C.F.R. § 240.10b-5.
61. The Commission realleges and incorporates by reference herein the allegations contained in paragraphs 1 - 60.
62. Rent-Way failed to file with the Commission, in accordance with the rules and regulations prescribed by the Commission, such quarterly and annual reports as the Commission has prescribed and Rent-Way failed to include, in addition to the information expressly required to be stated in such reports, such further material information as was necessary to make the statements made therein, in light of the circumstances under which they are made, not misleading, in violation of Section 13(a) of the Exchange Act, 15 U.S.C. § 78m(a), and Rules 12b-20, 13a-1 and 13a-13, 17 C.F.R. §§ 240.12b-20, 240.13a-1 and 240.13a-13. As described above, the December 31, 1998 10-Q, the March 31, 1999 10-Q, the June 30, 1999 10-Q, the September 30, 1999 10-K, the December 31, 1999 10-Q, the March 31, 2000 10-Q and the June 30, 2000 10-Q, were false and misleading because they included financial statements that were substantially inflated due to the under-reporting of approximately $60 million in expenses.
63. At all times relevant hereto, Conway and Marini each was a controlling person of Rent-Way for the purposes of Section 20(a) of the Exchange Act, 15 U.S.C. § 78t(a).
64. Conway and Marini each, knowingly or recklessly, directly or indirectly, singly or in concert, engaged in fraudulent practices resulting in: (i) material overstatements of Rent-Way's pre-tax income or material understatements of Rent-Way's pre-tax loss on its books and records and in financial statements included in the fiscal year 1999 and 2000 forms 10-Q and the fiscal year 1999 form 10-K; and (ii) other material misstatements in the fiscal year 1999 and 2000 forms 10-Q and the fiscal year 1999 form 10-K.
65. By reason of the foregoing, Rent-Way violated, and unless enjoined will again violate, Section 13(a) of the Exchange Act and Rules 12b-20, 13a-1 and 13a-13.
66. By reason of the foregoing, Conway and Marini are each liable as a controlling person, pursuant to Section 20(a) of the Exchange Act, for Rent-Way's violations of Section 13(a) of the Exchange Act and Rules 12b-20, 13a-1 and 13a-13; and unless enjoined, Conway and Marini will again engage in conduct that would render them liable, pursuant to Section 20(a) of the Exchange Act, for violations of Section 13(a) of the Exchange Act and Rules 12b-20, 13a-1 and 13a-13.
67. The Commission realleges and incorporates by reference herein the allegations contained in paragraphs 1 - 66.
68. Rent-Way failed to:
a. make and keep books, records, and accounts, which, in reasonable detail, accurately and fairly reflected the transactions and dispositions of its assets; and
b. devise and maintain a system of internal accounting controls sufficient to provide reasonable assurances that:
i. transactions were executed in accordance with management's general or specific authorization;
ii. transactions were recorded as necessary to permit preparation of financial statements in conformity with generally accepted accounting principles or any other criteria applicable to such statements, and to maintain accountability for assets;
iii. access to assets was permitted only in accordance with management's general or specific authorization; and
iv. the recorded accountability for assets was compared with the existing assets at reasonable intervals and appropriate action was taken with respect to any differences,
in violation of Section 13(b)(2) of the Exchange Act, 15 U.S.C § 78m(b)(2). As described above, during fiscal years 1999 and 2000, Rent-Way under-reported expenses by approximately $60 million, and its internal accounting controls were insufficient to cause Rent-Way to prepare its fiscal 1999 and 2000 quarterly financial statements and its fiscal 1999 annual report in accordance with generally accepted accounting principles.
69. At all relevant times hereto, Conway and Marini each was a controlling person of Rent-Way for the purposes of Section 20(a) of the Exchange Act, 15 U.S.C. § 78t(a). Conway and Marini, knowingly or recklessly, directly or indirectly, singly or in concert, engaged in fraudulent practices resulting in material overstatements of Rent-Way's pre-tax income or material understatements of Rent-Way's pre-tax loss on its books and records and in financial statements included in the fiscal year 1999 and 2000 forms 10-Q and the fiscal year 1999 form 10-K.
70. By reason of the foregoing, Rent-Way violated, and unless enjoined will again violate, Section 13(b)(2) of the Exchange Act, 15 U.S.C. § 78m(b)(2).
71. By reason of the foregoing, Conway and Marini are each liable as a controlling person, pursuant to Section 20(a) of the Exchange Act, for Rent-Way's violations of Section 13(b)(2) of the Exchange Act; and unless enjoined, Conway and Marini will again engage in conduct that would render them liable, pursuant to Section 20(a) of the Exchange Act, for violations of Section 13(b)(2) of the Exchange Act.
72. The Commission realleges and incorporates by reference herein the allegations contained in paragraphs 1 - 71.
73. Conway, Marini and Underwood each knowingly circumvented or knowingly failed to implement a system of internal accounting controls and knowingly falsified, directly or indirectly, or caused to be falsified books, records and accounts of Rent-Way that were subject to Section 13(b)(2) of the Exchange Act, 15 U.S.C. § 78m(b)(2). As described above, Conway and Marini supervised and directed a fraudulent scheme to inflate Rent-Way's earnings to meet Rent-Way's earnings targets during fiscal years 1999 and 2000 and to conceal expenses from the auditors by directing others to make false entries on the Company's books and records. Underwood directed Rent-Way operations personnel to defer the write-off of certain operating expenses at the end of fiscal years 1999 and 2000. By reason of the foregoing, Conway, Marini and Underwood each violated, and unless enjoined will again violate, Section 13(b)(5) of the Exchange Act, 15 U.S.C. § 78m(b)(5), and Rule 13b2-1, 17 C.F.R. § 240.13b2-1.
74. The Commission realleges and incorporates by reference herein the allegations contained in paragraphs 1 - 73.
75. Conway and Marini, directly or indirectly, made or caused to be made materially false or misleading statements, or omitted to state or caused another person to omit to state material facts necessary in order to make the statements made, in light of the circumstances under which such statements were made, not misleading to an accountant, in connection with an audit of the financial statements of Rent-Way for fiscal year 1999.
76. By reason of the foregoing, Conway and Marini each violated, and unless enjoined will again violate, Exchange Act Rule 13b2-2, 17 C.F.R. § 240.13b2-2.
WHEREFORE, the Commission respectfully requests a Final Judgment:
Permanently enjoining Conway and Marini, their agents, servants, employees, attorneys, assigns and all persons in active concert or participation with them who receive actual notice of the injunction by personal service or otherwise, and each of them, from future violations of Section 10(b) of the Exchange Act, 15 U.S.C. §§ 78j(b), and Rule 10b-5, 17 C.F.R. §§ 240.10b-5.
Permanently enjoining Conway, Marini and Underwood, their agents, servants, employees, attorneys, assigns and all persons in active concert or participation with them who receive actual notice of the injunction by personal service or otherwise, and each of them, from future violations of Section 13(b)(5) of the Exchange Act, 15 U.S.C. § 78m(b)(5), and Rule 13b2-1, 17 C.F.R. § 240.13b2-1.
Permanently enjoining Rent-Way, its agents, servants, employees, attorneys, assigns and all persons in active concert or participation with them who receive actual notice of the injunction by personal service or otherwise, and each of them, from future violations of Sections 13(a) and 13(b)(2) of the Exchange Act, 15 U.S.C. §§ 78m(a) and 78m(b)(2), and Rules 12b-20, 13a-1 and 13a-13, 17 C.F.R. §§ 240.12b-20, 240.13a-1 and 240.13a-13.
Permanently enjoining Conway and Marini, their agents, servants, employees, attorneys, assigns and all persons in active concert or participation with them who receive actual notice of the injunction by personal service or otherwise, and each of them, from engaging in conduct as controlling persons that would render them liable pursuant to Section 20(a) of the Exchange Act, 15 U.S.C. § 78t(a), for violations of Sections 13(a) and 13(b)(2) of the Exchange Act, 15 U.S.C. §§ 78m(a) and 78m(b)(2), and Rules 12b-20, 13a-1 and 13a-13, 17 C.F.R. §§ 240.12b-20, 240.13a-1, and 240.13a-13.
Permanently enjoining Conway and Marini, their agents, servants, employees, attorneys, assigns and all persons in active concert or participation with them who receive actual notice of the injunction by personal service or otherwise, and each of them, from future violations of Exchange Act Rule 13b2-2, 17 C.F.R. § 240.13b2-2.
Ordering Conway to disgorge the ill-gotten gains he received and losses he avoided as a result of his violations of the federal securities laws, and to pay prejudgment interest thereon.
Ordering Conway, Marini and Underwood to pay civil money penalties pursuant to Section 21(d)(3) of the Exchange Act, 15 U.S.C. § 78u(d)(3).
Ordering Conway to pay civil money penalties pursuant to Section 21A of the Exchange Act, 15 U.S.C. § 78u-1.
Permanently barring Conway and Marini from serving as an officer or director of a publicly held company pursuant to Section 21(d)(2) of the Exchange Act, 15 U.S.C. § 78u(d)(2).
Granting such other and further relief as the Court may deem just and proper.
Dated: New York, New York
July 15, 2003
Respectfully submitted,
______________________
By: WAYNE M. CARLIN
Regional Director
Attorney for Plaintiff
SECURITIES AND EXCHANGE COMMISSION
Northeast Regional Office
233 Broadway
New York, New York 10279
(646) 428-1510
Of Counsel:
Edwin H. Nordlinger
Mark K. Schonfeld
Neal Jacobson
http://www.sec.gov/litigation/complaints/comp18241.htm
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