SEC: Diebold fraudulently inflated pre-tax earnings to meet analyst expectations

Former Diebold Inc. executives fraudulently inflated the ATM manufacturer's pre-tax quarterly earnings to meet analysts' performance expectations, the United States Securities and Exchange Commission today charged in U.S. District Court in Washington, D.C.

Diebold, the world's third-largest ATM manufacturer based on annual shipments, agreed to pay a $25 million fine to settle the Securities and Exchange Commission charges, but U.S. District Court Judge Paul Friedman still must approve the settlement amount. Diebold, which is based in North Canton, Ohio, recorded a $25 million charge to its first-quarter 2009 earnings to settle the charges, Thomas W. Swidarski, Diebold president and CEO, said today in a statement.

"We are pleased that the settlement with the SEC is final," Swidarski said. "Moving forward, we will continue to direct our energy and focus toward the essential work of improving our competitive position and creating value for all of our stakeholders while maintaining effective financial controls within our processes."

According to Securities and Exchange Commission complaint former Chief Financial Officer Gregory Geswein, former Controller and later Chief Financial Officer Kevin Krakora and former Director of Corporate Accounting Sandra Miller engaged in the scheme that resulted in the company misstating pre-tax earnings by at least $127 million between 2002 and 2007, Scott W. Friestad, associate director of the SEC division of enforcement, tells ATMMarketplace. Diebold still employs Krakora but not as a financial executive, Friestad says.

The SEC charged Geswein, Krakora and Miller with fraud and violations of securities laws, and the trial is scheduled to be held in a United States District Court in Ohio. The SEC has not scheduled a date for the trial to begin.

Company officials boosted Diebold's quarterly pre-tax earnings by increasing the value of used inventory, improperly delaying and capitalizing expenses, manipulating reserves and accruals, recognizing revenue on a lease agreement that was subject to a side buy-back agreement and recording revenues for product sales before the company delivered the products to customers.

"Diebold's financial executives borrowed from many different chapters of the deceptive accounting playbook to fraudulently boost the company's bottom line," Robert Khuzami, director of the SEC division of enforcement, said in a statement. "When executives disregard their professional obligations to investors, both they and their companies face significant legal consequences."

The Securities and Exchange Commission also filed a separate enforcement action against former Diebold CEO Walden O'Dell. Although the SEC did not charge O'Dell with fraud, he agreed to repay Diebold $470,016 in cash bonuses, 30,000 shares of Diebold stock and stock options for 85,000 shares of Diebold stock, Friestad says.