SEC Says Oak Hid Problems, Inflated Profits
Oak Industries defrauded shareholders by lying in its public financial disclosures, and Oak’s former chairman improperly received corporate funds for personal uses such as condominiums, a car and a racehorse, according to a civil complaint filed in federal court here Tuesday by the Securities and Exchange Commission.
The filing caps a 17-month SEC investigation into improper financial reporting and conflicts of interest involving senior Oak management. A separate investigation of current and former Oak officials will continue, an SEC spokesman said Tuesday.
Without acknowledging any guilt, Oak entered into a consent decree Tuesday that prohibits the company from violating various anti-fraud, reporting and accounting provisions of federal securities laws.
The agreement also requires the audit committee of Oak’s board of directors to review and improve the company’s accounting procedures for five years. The financially ailing media concern must also cooperate in the SEC’s continuing investigation.
“The SEC gave consideration . . . that we’ve had some problems (and) they’re anxious to have us get back to running the company,” Oak Chairman and Chief Executive E. L. McNeely said in an interview. “They took a hard look at what happened.”
McNeely assumed Oak’s top management jobs last fall after the abrupt resignation of Everitt A. Carter. The company reported $300 million in losses from 1982 through 1984.
The SEC filing claimed that, between 1980 and 1983, Oak, in order to “maintain an upward earnings trend,” inflated earnings, understated potential losses, played down technical problems with its cable-television converter equipment, made false statements and omitted material facts in its financial disclosure reports.
Despite problems known to senior management, Oak continued “extolling its profitability, stability, technical acumen . . . without adequately disclosing the increasingly serious financial and operating problems (it) was experiencing,” according to the filing.
In January and February, 1983, senior management, “determined to report a profit” of 25 cents per share for 1982, computed write-offs and other adjustments so that earnings would result in that figure, the SEC charged.
Tapped Reserves
In the first quarter of 1982, Oak improperly increased earnings by about $3.2 million by tapping previously established but unneeded reserves, the filing claimed.
“Sensitive” information and documents were withheld from Oak’s independent accountants, and the company routinely prepared two different sets of “reserve and exposure analyses”--one for internal use and the other for the outside auditors, according to the SEC.
Without being mentioned by name, Carter figured prominently in the SEC complaint, referred to only as the “former chairman.”
Details of some benefits paid to Carter and information about improper personal expenses paid by Oak for him were not disclosed to shareholders or to the SEC, as required by law, the complaint charged.
Specifically, Oak’s purchase of a Porsche car for Carter and Carter’s subsequent purchase of the car from Oak at less than market value were not disclosed. Also not disclosed were Oak’s purchase of a Mercedes-Benz for former President Raymond Peirce; Carter’s personal use of Oak condominiums in Rancho Bernardo and Deer Valley, Utah, and the purchase of Carter’s minority interest in an Australian racehorse, which was paid for by an Oak subsidiary in Australia.
In addition, although Oak disclosed to shareholders that an interior design firm owned by Carter’s wife, Brenda Mason, had been awarded nearly $1.1 million in Oak decoration contracts during 1982, the company had not revealed that Carter and Oak Senior Vice President Thomas C. Runge were directors of the interior design firm.
Oak also didn’t disclose that Runge had received a fee from the firm or that several Oak employees “performed certain services for (the) firm without compensation.”
Runge would not comment on the SEC report, and Carter could not be reached for a response.
Oak is now trying to recover more than $1 million in loans and improperly reimbursed expenses from Carter, McNeely said. Last month, the company canceled an employment contract that would have paid Carter $250,000 in cash and more than $125,000 in benefits annually until 1989.
Although Oak previously disclosed that the SEC was also investigating the possibility that Oak stock had been traded on the basis of inside information, that issue was not addressed in Tuesday’s filing.
Oak also has been named in a class-action shareholders lawsuit charging fraud and conflicts of interest. A settlement of that lawsuit is expected soon, with Oak reportedly prepared to pay $13.25 million.
