Source: https://www.sec.gov/litigation/complaints/comp18136.htm
Timestamp: 2019-04-25 07:54:40+00:00

Document:
GARY L. MONROE, WILLIAM J.
1. During at least 1998 and 1999, Defendants Gary L. Monroe, William J. Rauwerdink, John R. Messinger, and Robert T. Bassman (collectively "defendants"), then officers of Lason, Inc. ("Lason"), at the time a publicly-owned document management company, directed that Lason fraudulently overstate Lason's net income to meet analysts' expectations and to prop up the price of its stock. As a result of the defendants' fraudulent conduct, the defendants received handsome salaries, generous bonuses, stock options and substantial loans. When initial reports of Lason's problems became public, Lason lost over $230 million in market capitalization over two days. Ultimately, the investors lost hundreds of millions of dollars when the company eventually declared bankruptcy and the shareholders lost their entire interest in the company.
2. Monroe has engaged in, and, unless enjoined, will continue to engage in, transactions, acts, practices and courses of business that constitute violations of Sections 17(a)(1), 17(a)(2), and 17(a)(3) of the Securities Act of 1933 ("Securities Act") [15 U.S.C. §§ 77q(a)(1)-(3)], Sections 10(b) and 13(b)(5) of the Securities Exchange Act of 1934 ("Exchange Act") [15 U.S.C. §§ 78j(b) and 78m(b)(5)], and Rules 10b-5, 13b2-1 and 13b2-2 promulgated thereunder [17 C.F.R. 240.10b-5, 13b2-1 and 13b2-2]. Monroe also has aided and abetted, and, unless enjoined, will continue to aid and abet, violations of Sections 13(a), 13(b)(2)(A) and 13(b)(2)(B) of the Exchange Act [15 U.S.C. §§ 78m(a), 78m(b)(2)(A) and 78m(b)(2)(B)], and Rules 12b-20, 13a-1 and 13a-13 promulgated thereunder [17 C.F.R. 240. 12b-20, 13a-1 and 13a-13].
3. Rauwerdink has engaged in, and, unless enjoined, will continue to engage in, transactions, acts, practices and courses of business that constitute violations of Sections 17(a)(1), 17(a)(2), and 17(a)(3) of the Securities Act [15 U.S.C. §§ 77q(a)(1)-(3)], 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 promulgated thereunder [17 C.F.R. 240.10b-5, 13b2-1 and 13b2-2]. Rauwerdink also has aided and abetted, and, unless enjoined, will continue to aid and abet, violations of Sections 13(a), 13(b)(2)(A) and 13(b)(2)(B) of the Exchange Act [15 U.S.C. §§ 78m(a), 78m(b)(2)(A) and 78m(b)(2)(B)], and Rules 12b-20, 13a-1 and 13a-13 promulgated thereunder [17 C.F.R. 240. 12b-20, 13a-1 and 13a-13].
4. Messinger has engaged in, and, unless enjoined, will continue to engage in, transactions, acts, practices and courses of business that constitute violations of 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 promulgated thereunder [17 C.F.R. 240.10b-5, 13b2-1 and 13b2-2]. Messinger also has aided and abetted, and, unless enjoined, will continue to aid and abet, violations of Sections 13(a) and 13(b)(2)(A) of the Exchange Act [15 U.S.C. §§ 78m(a) and 78m(b)(2)(A)], and Rules 12b-20, 13a-1 and 13a-13 promulgated thereunder [17 C.F.R. 240. 12b-20, 13a-1 and 13a-13].
5. Bassman has engaged in, and, unless enjoined, will continue to engage in, transactions, acts, practices and courses of business that constitute violations of Sections 17(a)(1), 17(a)(2), and 17(a)(3) of the Securities Act [15 U.S.C. §§ 77q(a)(1)-(3)], 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 promulgated thereunder [17 C.F.R. 240.10b-5, 13b2-1 and 13b2-2]. Bassman also has aided and abetted, and, unless enjoined, will continue to aid and abet, violations of Sections 13(a), 13(b)(2)(A) and 13(b)(2)(B) of the Exchange Act [15 U.S.C. §§ 78m(a), 78m(b)(2)(A) and 78m(b)(2)(B)], and Rules 12b-20, 13a-1 and 13a-13 promulgated thereunder [17 C.F.R. 240. 12b-20, 13a-1 and 13a-13].
6. There is a reasonable likelihood that the defendants, if not enjoined, will continue to engage in transactions, acts, practices and courses of business, the same as, or similar to, those set forth in this Complaint.
7. The Commission brings this suit to enjoin such transactions, acts, practices and courses of business pursuant to Sections 20(b) and (c) of the Securities Act [15 U.S.C. § 77t(b) and (c)] and Sections 21(d) and (e) of the Exchange Act [15 U.S.C. §§ 78u(d) and (e)].
8. This Court has jurisdiction over this action pursuant to Section 22(a) of the Securities Act [15 U.S.C. § 77v(a)], Section 27 of the Exchange Act [15 U.S.C. § 78aa], and 28 U.S.C. § 1331.
9. Defendant Gary L. Monroe, a resident of Rochester Hills, Michigan, was Chief Executive Officer of Lason from 1996 to July 2000. He was Chairman of the Board of Directors from April 1998 to July 2000.
10. Defendant William J. Rauwerdink, a resident of Orchard Lake, Michigan, was Chief Financial Officer, Treasurer and Secretary of Lason from May 1996 to August 2000. He was a member of the Board of Directors from May 1999 to August 2000.
11. Defendant John R. Messinger, a resident of Oakland Township, Michigan, was President of Imaging Operations for Lason from July 1997 to January 1999. He became President and Chief Operating Officer of Lason, Inc. in January 1999 and was promoted to Chief Executive Officer in 2000. He resigned on March 24, 2001.
12. Defendant Robert T. Bassman, a resident of Lake Orion, Michigan, was Lason's Assistant Controller starting September 1996. He was promoted to Controller in early 1997 and served in that capacity until October 2000.
13. Lason was incorporated under Delaware law. At all times relevant to this Complaint, its principal offices were in Troy, Michigan.
14. Lason went public in 1996 and its common stock was registered with the Commission under Section 12(b) of the Exchange Act [15 U.S.C. § 78l(b)]. From at least October 1996 through October 2000. Lason was publicly traded on the NASDAQ Stock Exchange. Lason made secondary offerings of stock in August 1997 and August 1998. Its stock was delisted from the NASDAQ Stock Exchange in October 2000.
15. At all times relevant to this Complaint, pursuant to Section 13(a) of the Exchange Act [15 U.S.C. § 78m(a)] and the rules and regulations promulgated thereunder, Lason was required to file periodic and other informational reports, including Forms 10-K and 10-Q, with the Commission. Among other things, these periodic reports contained Lason's financial statements. In these periodic reports, Lason represented that it recognized revenue when services are provided.
16. At all times relevant to this Complaint, Lason was audited annually and reviewed quarterly by its auditor. In connection with the audits and reviews, the defendants signed representation letters to Lason's auditor representing, among other things, that Lason's financial statements were fairly presented in accordance with Generally Accepted Accounting Principles (GAAP).
17. Lason filed for Chapter 11 bankruptcy in December 2001. In June 2002, Lason emerged from bankruptcy and is now majority-owned by its creditors.
18. From at least 1996 through 1999, Lason was primarily in the business of copying, data management, document imaging and mail sorting. During that period, Lason grew rapidly through a series of acquisitions of smaller companies. Lason consistently met or exceeded the earnings estimates of securities analysts and its stock price rose.
19. Beginning in 1998, and increasing through 1999, Lason materially overstated its earnings. Lason's 1998 net income was overstated by at least $1.6 million or 9%. Lason's first quarter 1999 net income was overstated by at least $2.4 million or 35%. Lason's third quarter 1999 net income was overstated by at least $7 million or 65%.
20. On December 17, 1999, Lason issued a press release announcing that its 1999 net income would be significantly below Wall Street estimates. Lason did not disclose that its earnings for 1998 and earlier quarters of 1999 were overstated. Within two days, Lason's stock fell 53% and Lason lost $234 million in market capitalization.
21. Lason acquired numerous smaller companies during 1998. Lason generally paid for the acquired company with a combination of cash, Lason stock, and promised earn-out payments. The owners of companies acquired by Lason were entitled to earn-out payments if the acquired company exceeded certain earnings targets after the acquisition.
22. On several occasions during 1998, Monroe and Rauwerdink instructed the owners of companies being acquired by Lason to manipulate their books and records in order to boost Lason's earnings. Monroe and Rauwerdink referred to these manipulations as "tailwind."
23. Monroe and Rauwerdink instructed the owners of several companies acquired by Lason to delay billing and recognition of revenue for certain work done before the acquisition, until after the acquisition closed and the revenue could be shown on Lason's books and records. Monroe and Rauwerdink also instructed these owners to pre-pay certain expenses before the acquisition so that those expenses would not appear on Lason's books and records.
24. For example, when Lason acquired American Presort, Inc. (API) in March 1998, the owners of API, on Monroe's and Rauwerdink's instructions, delayed recognition of approximately $500,000 in revenue and pre-paid approximately $240,000 in expenses. When Lason acquired Consolidated Reprographics (CR) in August 1998, the owners of CR, on Monroe's and Rauwerdink's instructions, delayed recognition of approximately $350,000 in revenue and pre-paid approximately $13,000 in expenses. When Lason acquired Digital Information Technologies (DIT) in November 1998, the owners of DIT, on Monroe's and Rauwerdink's instructions, delayed recognition of approximately $455,000 in revenue and pre-paid approximately $45,000 in expenses.
25. The effect of the tailwind scheme in 1998 was that Lason's earnings and earnings per share were materially overstated in Lason's first and third quarter Forms 10-Q and Lason's 1998 Form 10-K. But for the fraudulent earnings produced by tailwind, Lason would not have met analysts' earnings forecasts for the first, third and fourth quarters of 1998.
26. When Lason acquired DIT in November 1998, DIT had a loan, or note payable, on its books for $1.8 million. Prior to the acquisition by Lason, DIT's owner negotiated a settlement of the loan, allowing it to be paid off for $1 million in cash at the time of the acquisition. In effect, $800,000 of the note payable was forgiven.
27. Under GAAP, the proper method for Lason to account for the $800,000 forgiven portion of the note payable was for Lason to reduce the amount of goodwill being recorded in the acquisition by $800,000. Under the proper method of accounting, the $800,000 forgiven portion of the note payable would not directly affect Lason's income.
28. Instead, Bassman instructed DIT's bookkeeper to record $400,000 of the forgiven portion of the note payable as revenue in December 1998 and to save the rest to use as income in 1999. Bassman later recorded an additional $200,000 of the forgiven portion of the note payable as revenue in December 1998. Bassman's actions were taken with Monroe's and Rauwerdink's approval.
29. The effect of these actions was to overstate Lason's gross income by $600,000 in the fourth quarter of 1998 as reported in Lason's 1998 form 10-K.
30. In 1997, Lason began work on a contract for one of its largest clients. In December 1997, Lason invoiced its client for $400,000 in start up costs and recorded that amount as a receivable. The contract was eventually cancelled and the client refused to pay the start up costs. The defendants knew as early as January 1998 that Lason could not collect on the invoice and that the invoice should be written off.
31. Lason, however, did not write off the receivable. In December 1998, the receivable was still on Lason's books and Lason's auditor asked for substantiation that the amount recorded was a valid receivable.
32. Lason could not write off the receivable without missing its fourth quarter earnings estimates. As a result, Messinger and Bassman, with Monroe's knowledge, developed a scheme to have the invoice paid.
33. Messinger instructed a Lason sales executive to approach the client and ask the client to make payment on the invoice while promising the client an equal credit on a subsequent invoice. The sales executive told the client that payment was needed on the invoice because Lason had granted bonuses based on sales figures that included the invoice. The client eventually agreed to make payment on the invoice.
34. Bassman asked the sales executive to personally pick up the check from the client and bring the check to Bassman. When Bassman received the check, he showed the check to Lason's auditors, claiming the check was a payment on the outstanding invoice for the discontinued project.
35. The effect of these actions was to overstate Lason's gross income by $400,000 in the fourth quarter of 1998 as reported in Lason's 1998 Form 10-K.
36. In the first quarter of 1999, Lason was several million dollars short of its earnings target.
37. Starting in the first quarter of 1999, Lason boosted its earnings by recording on its books $1.5 million of revenue as an estimate of work in process (WIP). WIP is revenue that has been earned, but not yet billed to a customer. The $1.5 million estimate was booked in addition to all of the WIP reported by Lason's operating divisions. The defendants had no basis for knowing whether the work represented by the $1.5 million estimate was done. Booking the estimate was a violation of GAAP.
38. In the first quarter of 1999, Rauwerdink also asked Bassman to make fraudulent adjustments to several accounts that were unlikely to be questioned by Lason's auditor.
39. In the same journal entry recording the $1.5 million WIP estimate, Bassman added $650,000 to Miscellaneous Accounts Receivable, and reduced the Postage Deposits, Customer Deposits and Accrued Payroll accounts by $500,000, $950,000, and $300,000 respectively. There was no support for these journal entries and they were done to fraudulently boost Lason's income.
40. Because he knew there was no support for the adjusting journal entries, Bassman refused to sign the journal entry. Rauwerdink signed the entry, fraudulently boosting Lason's earnings before taxes by $3.9 million for the quarter as reported in Lason's Form 10-Q for the first quarter of 1999.
41. By the end of the third quarter of 1999, Lason's management had discovered that Lason was $13 million short of the earnings estimate for the quarter.
42. In order to make up the earnings shortfall, Messinger obtained a list of Lason's largest customers. Based on the list, Messinger created fraudulent WIP worksheets, falsely attributing certain amounts of WIP to the largest customers in each Lason region.
43. On October 25, 1999, Rauwerdink authorized journal entries based on Messinger's fraudulent worksheets. The journal entries were authorized with Monroe's, Messinger's and Bassman's knowledge. The fraudulent entries boosted Lason's net income by 65% for the quarter.
44. On October 28, 1999, Monroe and Rauwerdink announced the false third quarter results in a conference call with securities analysts. The false results were also reported in Lason's Form 10-Q for the third quarter of 1999.
45. When Lason's auditors questioned some of the WIP recorded by Lason in the third quarter of 1999, Bassman showed the auditors the fraudulent WIP worksheets as support for the WIP recorded by Lason.
46. The defendants profited from their illegal conduct at Lason in several ways. Monroe, Rauwerdink and Bassman exercised options and sold Lason stock for significant gains in 1998 and 1999. All of the defendants were paid salaries and bonuses by Lason. Bonuses were paid only when certain earnings targets were met. Finally, in 1998 and 1999, Monroe, Rauwerdink and Messinger received money pursuant to Lason's executive note program. The amount of money they received was tied to Lason's stock price at the time of the note. None of that money has ever been repaid to Lason.
47. Paragraphs 1 through 46 are realleged and incorporated by reference.
48. Monroe, Rauwerdink and Bassman, in the offer and sale of securities, by the use of the means and instruments of transportation and communication in interstate commerce and by the use of the mails, directly and indirectly, employed devices, schemes and artifices to defraud, as more fully described in paragraphs 18 through 46 above.
49. Monroe knew or was reckless in not knowing of the facts and circumstances described in paragraphs 21 through 35 and 41 through 46. Rauwerdink knew or was reckless in not knowing of the facts and circumstances described in paragraphs 21 through 29 and 36 through 46. Bassman knew or was reckless in not knowing of the facts and circumstances described in paragraphs 26 through 46.
50. By reason of the activities described in paragraphs 47 through 49, Monroe, Rauwerdink and Bassman violated Section 17(a)(1) of the Securities Act [15 U.S.C. § 77q(a)(1)].
51. Paragraphs 1 through 46 are realleged and incorporated by reference.
52. Monroe, Rauwerdink and Bassman, in the offer and sale of securities, by the use of the means and instruments of transportation and communication in interstate commerce and by the use of the mails, directly and indirectly, obtained money or property by means of an untrue statement of a material fact or an omission to state a material fact necessary in order to make statements made, in the light of the circumstances under which they were made, not misleading, as more fully described in paragraphs 18 through 46 above.
53. Monroe, Rauwerdink and Bassman, in the offer and sale of securities, by the use of the means and instruments of transportation and communication in interstate commerce and by the use of the mails, directly and indirectly, engaged in transactions, practices and courses of business which operated or would have operated as a fraud and deceit upon purchasers, as more fully described in paragraphs 18 through 46 above.
54. By reason of the activities described in paragraphs 51 through 53, Monroe, Rauwerdink and Bassman violated Sections 17(a)(2), and 17(a)(3) of the Securities Act [15 U.S.C. §§ 77q(a)(2) and (3)].
and Rule 10b-5 thereunder [17 C.F.R. 240.10b-5].
55. Paragraphs 1 through 46 are realleged and incorporated by reference.
56. Monroe, Rauwerdink, Messinger and Bassman, in connection with the purchase and sale of securities, by the use of the means and instrumentalities of interstate commerce and by the use of the mails, directly and indirectly: used and employed devices, schemes and artifices to defraud; made untrue statements of material fact and 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 engaged in acts, practices and courses of business which operated or would have operated as a fraud and deceit upon purchasers and sellers and prospective purchasers and sellers of securities, as more fully described in paragraphs 18 through 46 above.
57. Monroe knew or was reckless in not knowing of the facts and circumstances described in paragraphs 21 through 35 and 41 through 46 above. Rauwerdink knew or was reckless in not knowing of the facts and circumstances described in paragraphs 21 through 29 and 36 through 46. Messinger knew or was reckless in not knowing of the facts and circumstances described in paragraphs 30 through 35 and 41 through 45. Bassman knew or was reckless in not knowing of the facts and circumstances described in paragraphs 26 through 46.
58. By reason of the activities described in paragraphs 55 through 57, Monroe, Rauwerdink, Messinger and Bassman violated Section 10(b) of the Exchange Act [15 U.S.C. §78j(b)] and Rule 10b-5 thereunder [17 C.F.R. 240.10b-5].
59. Paragraphs 1 through 46 are realleged and incorporated by reference.
60. Lason filed materially false forms 10-K and 10-Q that did not conform with GAAP and did not contain any additional material information that was necessary to make the reports, in light of the circumstances under which they were made, not misleading, as more fully described in paragraphs 21 through 46 above.
61. By reason of the activities described in paragraphs 59 and 60, Lason violated and Monroe, Rauwerdink, Messinger and Bassman aided and abetted violations of Section 13(a) of the Exchange Act [15 U.S.C. § 78m(b)(5)] and Rules 13a-1, 13a-13 and 12b-20 thereunder [17 C.F.R. 240.13a-1, 13a-13 and 12b-20].
62. Paragraphs 1 through 46 are realleged and incorporated by reference.
63. Lason failed to make and keep books, records, and accounts, which, in reasonable detail, accurately and fairly reflected the transactions and dispositions of its assets, as more fully described in paragraphs 21 through 46 above.
64. By reason of the activities described in paragraphs 62 and 63, Lason violated, and Monroe, Rauwerdink, Messinger and Bassman aided and abetted Lason's violations of, Section 13(b)(2)(A) of the Exchange Act [15 U.S.C. § 78m(b)(2)(A)].
65. Paragraphs 1 through 46 are realleged and incorporated by reference.
66. Lason failed to devise and maintain a system of internal accounting controls sufficient to provide reasonable assurances that transactions were recorded as necessary to permit preparation of financial statements in conformity with generally accepted accounting principles and to maintain accountability for assets, as more fully described in paragraphs 21 through 46 above.
67. By reason of the activities described in paragraphs 65 and 66, Lason violated, and Monroe, Rauwerdink and Bassman aided and abetted Lason's violations of, Section 13(b)(2)(B)(ii) of the Exchange Act [15 U.S.C. § 78m(b)(2)(B)(ii)].
68. Paragraphs 1 through 46 are realleged and incorporated by reference.
69. Monroe, Rauwerdink, Messinger and Bassman directly or indirectly falsified Lason's books, records and accounts, as more fully described in paragraphs 21 through 45 above.
70. Monroe, Rauwerdink, Messinger and Bassman 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 statements made, in light of the circumstances under which such statements were made, not misleading to accounts in connection with Lason's audits and quarterly reviews, as more fully described in paragraphs 21 through 45 above.
71. By reason of the activities described in paragraphs 68 through 70, Monroe, Rauwerdink, Messinger and Bassman violated Rules 13b2-1 and 13b2-2 under the Exchange Act [17 C.F.R. 240.13b-1 and 13b-2].
72. Paragraphs 1 through 46 are realleged and incorporated by reference.
73. Monroe, Rauwerdink, Messinger and Bassman knowingly circumvented a system of internal accounting controls at Lason and knowingly falsified Lason's books and records, as more fully described in paragraphs 21 through 45 above.
74. By reason of the activities described in paragraphs 72 and 73, Monroe, Rauwerdink, Messinger and Bassman violated Section 13(b)(5) of the Exchange Act [15 U.S.C. § 78m(b)(5)].
I. Grant such other and additional relief as this Court deems just and proper.
Pursuant to Rule 83.20(g), Local Rules of the United States District Court for the Eastern District of Michigan, plaintiff hereby designates Ellen Christensen, Esq. (Bar Number 29574), Assistant U.S. Attorney, 211 W. Fort Street, Suite 2300, Detroit, Michigan, 48226, 313-226-9112, to receive service of all notices and papers.

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