Phony-Invoices Fine Published by 11th Circuit
(CN) - Securities regulators persuaded the 11th Circuit to publish its findings against telecom executives whose phony invoices generated more than $100 million in fraudulent revenue.
The dispute stems from a June 2004 joint venture agreement in which telecom company Carrier Services Inc. would generate $25 million in revenue for Centerline Communications in exchange for 5 million stock shares of its Florida-based parent, GlobeTel Communications Corp.
To meet the requested revenue, however, GlobeTel manager Joseph Monterosso and Centerline's vice president, Luis Vargas, changed the names on other companies' invoices and call-detail records to reflect sales to and from GlobeTel's subsidiaries.
The fraudulent revenue from "off-net" telecom traffic, run on a switch neither owned nor operated by GlobeTel, accounted for about 58 percent and 87.4 percent of the company's revenue in 2004 and 2005, respectively, and for nearly 92 percent in the first quarter of 2006.
GlobeTel's financial statements misstated its revenue by more than $100 million from October 2004 through June 2006.
The Securities and Exchange Commission sued Monterosso and Vargas in November 2007, alleging violations of the Securities Act of 1933 and the Securities Exchange Act of 1934.
A year later, the case was consolidated with another that the SEC filed against GlobeTel and three other former executives, Lawrence Lynch, Timothy Huff and Thomas Jimenez.
The Southern District of Florida granted summary judgment against Monterosso and Vargas in March 2011, holding them liable for fraud and aiding and abetting under the Acts.
Monterosso and Vargas faced orders to disgorge $675,000, plus prejudgment interest, and pay civil penalties of $300,000 and $150,000, respectively. The judge also enjoined the pair from future violations and imposed officer-and-director bars against them.
Lynch settled with the SEC on liability, but was ordered to pay $780,000 in penalties.
Monterosso, Vargas, and Lynch appealed the District Court's orders, but a three-judge panel of the 11th Circuit affirmed in an unpublished March 3 opinion.
The Atlanta-based appellate court agreed Monday to publish its ruling, which rejects claims by Monterosso and Vargas that they thought GlobeTel management had approved the "off-net" program.
"Monterosso and Vargas cannot plausibly argue they believed GlobeTel could report revenue from switches neither owned nor leased by GlobeTel or its subsidiaries," the unsigned decision states. "As the district judge explained, 'the concept is akin to Verizon recording revenue from telecom traffic run by AT&T.' And after submitting fictitiously manufactured invoices and unrelated [call detail records] CDRs to GlobeTel's accounting department, Monterosso and Vargas cannot plead ignorance of the fact that such reported revenue was illegitimate."
The court found "overwhelming" evidence of Monterosso and Vargas's involvement.
"No reasonable jury could conclude Monterosso and Vargas were not conscious of the obvious risk that the fabricated invoices they were submitting misrepresented revenue and that by submitting those invoices and CDRs the accountants would rely on them to make entries in GlobeTel's general ledger," the judges wrote. "Monterosso and Vargas's actions in reverse-engineering revenue demonstrated, at the very least, proof of severe recklessness."
The 11th Circuit upheld the lower court's determination of fees, as well.
"While Monterosso and Vargas were not the ones who made the entries in GlobeTel's books and records, there was no genuine issue of material fact that they created the fake invoices and CDRs and transmitted those documents to GlobeTel," according to the ruling. "As a result of Monterosso and Vargas's actions, GlobeTel's books, records, and accounts were falsified and the district judge did not err in holding them liable for violating Rule 13b2-1."
In its March 27 motion to publish, the SEC noted that the opinion deserves precedential value because it "addresses two important issues of securities law that are of significant public interest."
"The opinion ... offers critical guidance as to how the antifraud provisions of the securities laws operate," according to motion signed by SEC senior counsel Lisa Helvin.
In addition the ruling "clarifies the standard for joint-and-several liability for disgorgement in the 11th Circuit and advances the development of a cohesive body of law on the subject," Helvin added.
The agency declined to otherwise speak about the case for an interview.