Opinion ID: 714943
Heading Depth: 2
Heading Rank: 1

Heading: The Companies' Fraudulent Practices

Text: 7 In the fall of 1989, the Arochem Companies began to suffer financial difficulties that continued through the beginning of 1990. At a meeting of the Companies' officers in March or April of 1990, Seniff informed Harris, Dispenza, Sebastian, and Sheperd that the Arochem Companies had a year-to-date deficit of approximately $60 to $65 million. In addition, Seniff and Dispenza informed the other officers that they would be falsifying the Companies' financial statements by overvaluing the Companies' crude oil inventory. 8 Also discussed at this meeting was the upcoming Ernst & Young year-end audit of the Companies' books. It was understood by the Companies' officers that unless the Companies earned $40 or so million dollars by the end of the fiscal year, May 31, 1990, the Companies would not pass the audit. Dispenza claims that Harris then directed Sheperd and him to become more creative in assisting in the preparation of the financial statements. 9 In late April or early May of 1990, Harris, Dispenza, and Seniff devised a strategy for the approaching audit. It was determined that, in order to conceal the Companies' $60 to $65 million loss, Dispenza would falsify and exaggerate the value of the Companies' assets. As part of the scheme to disguise the Companies' losses, according to Dispenza, Harris provided Dispenza with an inventory contract for the purchase of two cargoes of crude oil from a company called Trieast Marketing (Trieast). Dispenza claims that Harris informed him that International would not take possession of the oil, but that the contract should be used for the year-end audit. Accordingly, Seniff and Dispenza created false documents, such as false warehouse receipts and warranty titles, in an effort to make it appear that the Trieast contract had been performed. This allowed the Companies to use the Trieast contract to exaggerate the value of their inventory and profits. 10 Even after this creative accounting, Seniff informed Dispenza and Harris that the Companies still showed a $25 million loss and that the only way to conceal the loss was through outright fraud. Not to be deterred, Seniff, with Dispenza and Harris' knowledge, removed from the Companies' accounts payable register several pages that revealed that the Companies owed $25 million in payables. During the course of its audit, Ernst & Young sought evidence of payment for oil inventory valued at $25 million, and Dispenza asked Harris what should be done. According to Dispenza, Harris replied, [D]o whatever you can. Dispenza and Seniff responded by altering documents to indicate that the $25 million in oil purchases had been paid before the end of the prior fiscal year. As a result, the Companies' year-end income was increased by $25 million. 11 In its 1990 year-end financials, the Arochem Companies showed retained earnings of $13 million and a profit of $3.3 million. These numbers overrepresented the Companies' financial health by approximately $60 million. In September of 1990, Ernst & Young concluded its audit and provided the Arochem Companies with an unqualified opinion of financial condition based on the incorrect information supplied by the Companies. The audit then was provided by the Companies to the banks. 12 From September of 1990 through November of 1990, the Companies' financial troubles continued. The Companies' officers continued to misrepresent the Arochem Companies' financial health to the banks by altering their borrowing base reports and financial statements. In November of 1990, Seniff informed the Companies' officers that the Arochem Companies had sustained losses of over $103 million during the June 1990 to November 1990 period. As a result, the altered financial statements overstated the Companies' earnings at that time by approximately $106 million. 13 By March of 1991, it again became apparent to the Companies' officers that the Companies were going to have difficulty passing the 1991 year-end audit because of the Companies' $60 to $65 million deficit. 1 During this time, Dispenza claims that he began to receive from Harris by e-mail fraudulent contract documents, including three sham contracts (the sham contracts). According to Dispenza, Harris told him that he should use the sham contracts for the 1991 audit. Dispenza included additional documents, such as copies of fictitious letters of credit, with the sham contracts, to make it appear as if the Companies had paid $48 million for oil cargoes, when, in fact, the Companies had not paid any money. The sham contracts added approximately $47 million to the assets of the Companies, and an additional $11 million was reflected as profits arising from the fictitious inventory. Relying on the false contracts, Ernst & Young again issued an unqualified opinion of financial condition to the Arochem Companies at the end of the 1991 audit. This opinion also was supplied to the banks.