SECURITIES AND EXCHANGE COMMISSION
Litigation Release No. 16534 \ May 2, 2000
Accounting and Auditing Enforcement Release No. 1254 \ May 2, 2000
SECURITIES AND EXCHANGE COMMISSION v. DAVID W. MCCONNELL AND CHARLES P. MORRISON (United States District Court for the Eastern District of Pennsylvania, Civil Action No. 00 CV 2261)
The Securities and Exchange Commission announced today that it filed a complaint in the United States District Court for the Eastern District of Pennsylvania against David W. McConnell, the former chief financial officer of Allegheny Health Education and Research Foundation ("AHERF"), and Charles P. Morrison, the former chief financial officer of AHERF's Delaware Valley region and an AHERF senior vice president, charging them with securities fraud. The Commission's Complaint alleges that McConnell and Morrison violated Section 10(b) of the Securities Exchange Act of 1934 ("Exchange Act") and Rule 10b-5 by, among other things, creating, reviewing and approving false financial statements of AHERF and a group of its subsidiaries collectively known as the Delaware Valley Obligated Group ("Delaware Valley"), thereby masking, from at least December 1996 through July 1998, AHERF's severely deteriorating financial condition. Specifically, the Commission's Complaint alleges that the financial statements overstated: (a) the 1996 income of Delaware Valley by, approximately, $40 million; (b) the 1997 income of AHERF by approximately $114.3 million; and (c) the 1997 income of Delaware Valley by approximately $59.6 million, in documents issued to the public in December 1996 and February 1998.
Simultaneously with the filing of the Complaint, McConnell consented, without admitting or denying the allegations of the Complaint, to a permanent injunction enjoining him from violating Section 10(b) of the Exchange Act and Rule 10b-5 thereunder and ordering him to pay a civil monetary penalty of $40,000.
AHERF is a Pennsylvania nonprofit healthcare organization. On July 21, 1998, AHERF filed for bankruptcy protection under Chapter 11 of the United States Bankruptcy Code on behalf of itself and four of its subsidiaries in the U.S. District Court for the Western District of Pennsylvania. By the time of its bankruptcy filing in 1998, groups of one or more of AHERF's subsidiaries ("obligated groups") were responsible for repaying at least thirteen bond issues issued by or for the benefit of these obligated groups, totaling more than $900 million (the "AHERF Bonds").
On behalf of the obligated groups, AHERF provided to nationally recognized municipal securities information repositories annual Secondary Market Disclosure Reports which contained a section explaining the financial health of the reporting entity(ies), debt service coverage ratios, and which attached audited financial statements. The Disclosure Reports were made available to the public through these repositories and were the most easily accessible source of information for investors and potential investors in AHERF bonds.
According to the complaint, between December 12, 1996 and January 7, 1997, AHERF sent Delaware Valley's 1996 Disclosure Report and audited financial statements to the repositories and numerous other third parties. The Complaint alleges that Delaware Valley's audited financial statements for the year ended June 30, 1996 were materially false and misleading, and failed to comply with Generally Accepted Accounting Principles ("GAAP"), because they materially overstated Delaware Valley's 1996 income by, approximately, $40 million and misrepresented the condition of Delaware Valley accounts receivable. The complaint further alleges that Delaware Valley's 1996 Disclosure Report was materially false and misleading in that it mirrored the numerical misstatements in the 1996 financial statements and it materially misrepresented the condition of Delaware Valley accounts receivable.
The complaint further alleges that, in February 1998, AHERF distributed its 1997 audited consolidated financial statements with consolidating schedules and consolidated Disclosure Report to the repositories and numerous other third parties. According to the Complaint, AHERF's audited consolidated financial statements with consolidating schedules for the year ended June 30, 1997, which purported to be prepared in accordance with GAAP, were materially false and misleading and failed to comply with GAAP in that they materially overstated AHERF's 1997 consolidated net income by, approximately, $114.3 million and they materially overstated the 1997 net income of Delaware Valley by, approximately, $59.6 million. AHERF's 1997 consolidated Disclosure Report allegedly was materially false and misleading in that it: (1) mirrored the numerical misstatements in the AHERF 1997 audited consolidated financial statements and consolidating schedules; (2) misrepresented the condition of Delaware Valley accounts receivable; and (3) misrepresented the financial condition of another AHERF obligated group, namely the Centennial obligated group ("Centennial").
The Commission also entered two administrative orders related to this case. Without admitting or denying the Commission's findings, two other members of AHERF's senior management agreed to orders to cease and desist from committing or causing any violation and any future violation of Section 10(b) of the Exchange Act and Rule 10b-5 thereunder, and barring them pursuant to Rule 102(e) of the Commission's Rules of Practice from appearing or practicing before the Commission as an accountant, with the right to reapply after three years. See In the Matter of Albert Adamczak, CPA, Exchange Act Release No.42743, dated May 2, 2000; In the Matter of Stephen H. Spargo, CPA, Exchange Act Release No. 42742 , dated May 2, 2000.