Corporate Fraud : A Case Study of PowerLinx Inc

Contextual Recapitulate of Corporate Fraud by Powerlinx Inc: Case Briefing

Case Title

Securities and Exchange Commission (Plaintiff) v. Powerlinx Inc., George Bernardich III, and James R. Cox (Defendants)

Civil Action No.: Case Number 1: 06CV01172

United States District Court for the District of Columbia

June 27, 2006

Case Introduction

The plaintiff, Security and Exchange Commission (SEC), alleged a pattern of fraudulent as well as other improper corporate conduct by the Defendant PowerLinx, Inc. over a period of four years. The allegation follows thus that the Defendant fraudulently recognized about ninety percent of its reported revenue during the initial three quarters of 2000 fiscal year through the initiation of consignment arrangement with numerous third-party dealers and proceeded to report the consignment order amounts under revenue in its financial statements prior to the manufacture, shipment, and sales of any cameras to customers. PowerLinx made public announcements of these of these artificially inflated revenues besides filing them in three consecutive reports with SEC. PowerLinx also issued numerous deceptive press releases that materially misrepresented the company’s operations and offered glowing, but unsubstantiated, revenue and earnings forecasts (U.S. District Court for District of Columbia, 2006).

PowerLinx Fraud Issues

The complaint levels the claims that PowerLinx did contravene the antifraud regulations of the Federal Securities Laws in September 2004 through the issuance of significantly deceptive  press releases as well as filing misleading financial reports with SEC with regards to a alleged contract sales amounting to $ 23 million with a defense contractor, Universal General Corporation (UGC ), disregarding the fact that UGC had no assets, no revenue, as well as any means to grant any segment of the $ 23 million contractual obligations to PowerLinx. SEC highlights the fact that the PowerLinx failed in adhering to due diligence in establishing whether UGC was a legitimate entity and if it had the capacity to meet is contractual responsibilities. SEC identifies George Bernardich as being responsible for the failures in due diligence of PowerLinx besides drafting the materially misleading SEC filings and press releases. Ensuing from change in management in April 2001, PowerLinx filed an annual report, dotted with misleading restatement of revenues as well as accounting errors, for 2000 financial year with the SEC. The plaintiff claims that the chief architect of PowerLinx’s fraudulent activities during 2000 was its now-deceased former chief executive officer, Richard L. McBride. However, as further alleged, Cox was responsible for certain of PowerLinx’s fraud and reporting violations and Bernardich, who had replaced McBride as chief executive officer in February 2001, aided and abetted PowerLinx’s reporting violations with respect to the company’s 2000 annual report (U.S. District Court for District of Columbia, 2006).

Individuals Involved in PowerLinx Fraudulent Acts

  1. George Bernadich – President and Chief Executive Officer of PowerLinx (February 2001- April 2005)

Being the second Defendant in the case, Bernardich, was the president and the C.E.O, as well as the chairman of board of directors and also remained to be a director until March 2006. Bernardich took part in the drafting as well as signing of PowerLinx’s Form 10-K that was inaccurate and additionally he failed in establishing the accuracy of the accounts presented in the financial reports especially pertaining to the rationale for the restatement as well as the purported backlog orders worth $ 9 million in 2001. In the year 2004, in retorting to the inquiries of shareholders regarding the claim of shipments made to UGC, Bernardich organized the alleged shipment of products to UGC even with the knowledge that UGC had no capability as well as facilities to handle the goods and there was no anticipated use for the product at that period of time. Bernardich made arrangements for the manufacturer to append signature to the PowerLinx invoice as an acknowledgment for the receipt of the alleged shipment, and this was followed by a press release maing announcement on the same prior to filing Form 10-Q (U.S. District Court for District of Columbia, 2006).

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