SEC settlement of fraud charges should not affect Diebold's future, analyst says

Diebold Inc.'s settlement of fraud charges yesterday with the United States Securities and Exchange Commission will not affect the ATM manufacturer going forward, Gil Luria, an analyst with Wedbush Securities in Los Angeles, tells ATMMarketplace.

"It's embarrassing to be accused of these practices, but Diebold restated its earnings a long time ago, and executives responsible for the fraud either have left the company or no longer have positions of authority handling company's finances," Luria says. "The settlement will not affect our opinion of the company."

The U.S. Securities and Exchange Commission Wednesday in a complaint filed with the U.S. District Court for the District of Columbia said three of Diebold's former top-financial executives fraudulently inflated the company's quarterly pretax earnings by as much as $127 million between 2002 and 2007 to meet Wall Street analysts' expectations.

Diebold, which is based in North Canton, Ohio, agreed to pay the SEC $25 million to settle the complaint without admitting or denying SEC charges. U.S. District Court Judge Paul Friedman must approve the settlement amount and issue an order before Diebold writes a check, Scott W. Friestad, associate director of the SEC division of enforcement, tells ATMMarketplace. The SEC will not pursue criminal charges against the company, Diebold said in a statement. Diebold is the world's third-largest ATM manufacturer based on annual shipments, according to Retail Banking Research, a London-based strategic-marketing firm.

The SEC accused former Chief Financial Officer Gregory Geswein, 55, former Controller and later Chief Financial Officer Kevin Krakora,54, and former Director of Corporate Accounting Sandra Miller,42, of orchestrating the fraudulent scheme, Friestad says. Geswein and Miller have left Diebold, but Krakora is still an employee. He no longer is a financial executive, Friestad says.

The SEC charged all three with fraud and a variety of other charges, according to a complaint filed in the U.S. District Court of the Northern District of Ohio in Cleveland. A trial date has not been scheduled, Friestad says. The SEC charged the three with manipulating Diebold's stock price to meet analysts' forecasts through the improper use of "bill and hold" accounting, recognition of revenue on a lease agreement subject to a side buy-back agreement, manipulating reserves and accruals, improperly delaying and capitalizing expenses and writing up the value of used inventory.

The "bill and hold" charge is old, Luria says. Under "bill and hold," Diebold recognized revenue from a product sale, although the product had not been shipped. In October 2007, Diebold announced it replaced " bill and hold."

The company now recognizes revenue in its North American and international business operations once the customer accepts the product.

Diebold restated its quarterly and yearly earnings for the fiscal years that ended Dec. 31,2006, Dec. 31, 2005, Dec. 31, 2004, and Dec. 31, 2003, to reflect the company's revised accounting method. Diebold also restated data for every quarter in 2006, 2005 as well as for the first quarter ended March 31, 2007. A year earlier, the SEC launched a formal investigation into "bill and hold," which led to an investigation into Diebold's other financial practices.

The Securities and Exchange Commission also filed a separate enforcement action against former Diebold CEO Walden O'Dell, 64. The fraudulent misstatements occurred under O'Dell, who ran the company from 1999 to 2005.

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.