VeriFone Holdings Inc. on Tuesday agreed to settle regulators' charges that it falsified accounting records by pledging to never violate federal securities laws. A VeriFone employee implicated in the accounting debacle will pay a $25,000 fine.
The Securities and Exchange Commission charged VeriFone, a provider of electronic pay services, and a former supply chain controller, with overstating operating income by 129 percent by improperly accounting for its inventory.
In February 2007, VeriFone discovered that in the fiscal first quarter ended Jan. 31 its gross margin fell unexpectedly to 42.8 percent, or about 4 percentage points lower than the forecast provided to Wall Street analysts.
The SEC said senior management were convinced prior forecasts were correct. The agency claimed the company then directed employees to search for and fix the problem to avoid what an executive called an "unmitigated disaster."
The SEC said 38-year-old Paul Periolat of Rocklin, Calif., manipulated inventory levels to boost margins — and thereby income as well — so VeriFone wouldn't miss expectations. The company said Periolat acted without scrutiny or authorization from more senior management.
"Through poor oversight and controls, VeriFone senior management allowed an employee to make millions of dollars of unsubstantiated accounting adjustments that enabled the company to meet its guidance to Wall Street," Marc Fagel, San Francisco regional director for the SEC, said in a statement.
The manipulation of inventory levels continued into the next two quarters as well because gross margins again fell below analysts' expectations.
During an annual audit in November 2007, the accounting irregularities came to light. A month later, VeriFone announced it would restate earnings for the first three quarters of fiscal 2007. Its stock fell by 46 percent to $26.03 the day of the disclosure, erasing $1.8 billion from its market capitalization.
The SEC sued VeriFone on Tuesday and the case was settled on the same day. VeriFone and Periolat did not admit or deny any wrongdoing.
"Over the past 18 months, the company has substantially improved its governance and internal controls in order to prevent a recurrence of this type of event," said CEO Douglas Bergeron, in a statement.
Shares of VeriFone rose 81 cents, or 7.3 percent, to $11.94 in after-hours trading. The stock slipped 41 cents, or 3.6 percent, to close the regular session at $11.13.