Washington, D.C., July 22, 2008 — The Securities and Exchange Commission today charged an Ann Arbor, Mich.-based company and a former executive in an accounting fraud scheme that ultimately cost the company more than $437 million in market capitalization and caused its stock price to drop by more than half its value during a two-month period in early 2006.
The SEC alleges that Scott Hirth of Carleton, Mich., the former Vice President of Finance and CFO for ProQuest Company's Information and Learning Division, made fraudulent manual journal entries at the end of monthly and quarterly reporting periods in order to favorably alter ProQuest's financial results over a five-year period. ProQuest, which produces electronic databases of archived information, is now known as Voyager Learning Company. The company has agreed to settle the SEC's charges, and Hirth will pay more than $400,000 to settle the charges against him.
"This case demonstrates the Commission's willingness to take strong action against those who commit financial fraud and the public companies that fail to prevent fraud through effective internal controls," said Linda Chatman Thomsen, Director of the SEC's Division of Enforcement.
Merri Jo Gillette, Director of the SEC's Chicago Regional Office, said, "As alleged in our complaint, Hirth engaged in an egregious and extensive accounting fraud by single-handedly making hundreds of false manual journal entries on the company's books and then going to great lengths to conceal his deceptive techniques. Our tenacious investigative work and enforcement action in this case should serve as a stark lesson to those seeking to commit fraud and harm investors."
According to the SEC's complaint, filed in federal court in Detroit, Hirth made false accounting entries that materially inflated ProQuest's reported "Earnings Before Interest and Taxes" for 2001 through 2004 and the first three quarters of 2005. The SEC alleges that Hirth created false documentation to purportedly support the balances in the manipulated accounts and used "hidden rows" and "white font" functions in spreadsheets to conceal his false accounting entries. According to the SEC's complaint, after ProQuest disclosed the accounting scheme in its public filings, it lost more than $437 million in market capitalization and its stock price dropped from $29.41 to $12.31 per share between February and April 2006.
The SEC also alleged that ProQuest failed to devise and maintain a system of internal accounting controls that could have prevented Hirth's scheme and failed to properly apply other basic accounting principles.
ProQuest and Hirth settled the charges without admitting or denying the allegations of the SEC's complaint. Under the settlement, Hirth is permanently enjoined from committing future violations of the federal securities laws, and will pay $233,676 in disgorgement, $54,474.25 in prejudgment interest, and a penalty of $130,000. Hirth also consented to be permanently barred from serving as an officer and director of a public company and from practicing as an accountant before the Commission. ProQuest is permanently enjoined from future violations of the internal controls, books and records, and reporting provisions of the federal securities laws.