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-     SEC.gov | Capitol Distributing, LLC and Terry M. Phillips
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-              Capitol Distributing, LLC and Terry M. Phillips
-        Capitol Distributing, LLC and Terry M. Phillips
-                   U.S. SECURITIES AND EXCHANGE COMMISSION
- Litigation Release No. 20100 / May 2, 2007
- Accounting and Auditing Enforcement  Release No. 2604 / May 2, 2007
-  Securities and Exchange Commission v. Capitol Distributing, LLC and Terry M. Phillips , Civil Action
-No. 1:07-CV-00798 (RMC) (D.D.C. May 2, 2007)
- In the Matter of Terry M. Phillips, Securities Exchange Act of 1934 Release
-No. 34-55696 / May 2, 2007
- Video Game Distributor Capitol Distributing, L.L.C. Settles Charges for Aiding and Abetting Accounting Fraud by Take-Two Interactive Software, Inc.; Terry Phillips, an Owner of Capitol, Agrees to Pay a $50,000 Civil Penalty as Capitol's Controlling Person and Consents to an Antifraud Cease-and-Desist Order
- The Securities and Exchange Commission ("Commission") today announced that it filed a settled civil action in federal district court against video game distributor Capitol Distributing, L.L.C. ("Capitol") and one of its owners, Terry M. Phillips ("Phillips").  The Commission charged Capitol, a privately-owned, Virginia-based video game distributor, with aiding and abetting video game publisher Take-Two Interactive Software, Inc. ("Take-Two") in Take-Two's violations of the antifraud, reporting and recordkeeping provisions of the federal securities laws during fiscal years 2000 and 2001 through a fraudulent video game parking scheme.  The Commission also charged Phillips with liability as a controlling person for Capitol's violations and instituted a settled administrative cease-and-desist order against Phillips, which found that Phillips was a cause of Capitol's violations.
- In its complaint filed today, the Commission alleged that Capitol aided and abetted Take-Two's violations of the antifraud, financial reporting and recordkeeping provisions of the federal securities laws by knowingly providing substantial assistance to Take-Two's fraudulent scheme to inflate reported revenue during its fiscal years 2000 and 2001.  Specifically, the complaint alleges that Take-Two shipped to Capitol hundreds of thousands of video games, typically at the end of reporting periods, and fraudulently recorded those shipments as sales when, in actuality, Capitol only temporarily parked the games for Take-Two and did not intend to sell them.  The complaint alleges that in furtherance of the scheme Take-Two twice provided funds to Capitol or another Phillips-owned entity known as Phillips Land Company ("PLC"), for transmission to Take Two to create the false appearance that Capitol or PLC were paying for the games.  According to the complaint, Capitol in two instances returned the games to Take-Two under invoices falsely describing them as "purchases" of "assorted product."  The scheme enabled Take-Two to report approximately $15 million in phantom revenue from four separate parking transactions with Capitol.
- Capitol, without admitting or denying the allegations in the complaint, consented to the entry of a final judgment permanently enjoining it from violating Section 10(b) of the Exchange Act and Exchange Act Rule 10b-5, and from aiding and abetting violations of Sections 13(a) and 13(b)(2)(A) of the Exchange Act and Exchange Act Rules 12b-20, 13a-1, 13a-13 and 13b2-1.
- The complaint alleges that Phillips, as Capitol's founder, 20 percent owner, and principal operator is a control person of Capitol within the meaning of Section 20(a) of the Exchange Act.  Phillips, without admitting or denying the allegations in the complaint, consented to entry of a final judgment ordering him to pay a civil money penalty of $50,000 as a control person of Capitol for its aiding and abetting violations of Sections 10(b), 13(a) and 13(b)(2)(A) of the Exchange Act and Exchange Act Rules 10b-5, 12b 20, 13a-1, 13a-13 and 13b2-1.
- The settlements with Capitol and Phillips are subject to the approval of the United States District Court for the District of Columbia.
- In a related administrative proceeding, Phillips consented, without admitting or denying the Commission's findings, to the entry of a Commission order to cease and desist from committing or causing any violations and any future violations of Section 10(b) of the Exchange Act, and Exchange Act Rules 10b-5 and 13b2-1, and from causing any violations and any future violations of Sections 13(a) and 13(b)(2)(A) of the Exchange Act and Exchange Act Rules 12b-20, 13a-1 and 13a-13.  The Commission in its order found that Phillips and Take-Two began discussing Capitol's participation in the parking arrangement in July 2000.  In October 2000, Take-Two discussed the first parking transaction with Phillips, asking Phillips if he had another company that Take Two could issue a purchase order to for the games in lieu of Capitol sending the games back as a return.  Phillips mentioned PLC, then instructed a Capitol employee to work out the details with Take-Two.
- On June 9, 2005, the Commission filed and simultaneously settled civil charges against Take-Two and former and current members of senior management in connection with the parking scheme.  See SEC v. Take-Two Interactive Software, Inc., et al., Civil Action No. 05-CV-5443 (DLC) (S.D.N.Y. 2005) (filed June 9, 2005),  Litigation Release No. 19260 .
- The Commission's investigation in this matter is continuing.
-   SEC Complaint in this matter ,  Administrative Proceeding
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+UNITED STATES OF AMERICA
+BEFORE THE
+SECURITIES AND EXCHANGE COMMISSION
+SECURITIES EXCHANGE ACT OF 1934
+Release No. 55696 / May 2, 2007
+ACCOUNTING AND AUDITING ENFORCEMENT
+Release No. 2605 / May 2, 2007
+ADMINISTRATIVE PROCEEDING
+File No. 3-12627
+     :
+     : ORDER INSTITUTING CEASE-AND-
+In the Matter of   : DESI ST PROCEEDINGS, MAKING
+     : FINDINGS, AND IMPOSING A CEASE-
+     : AND-DESIST ORDER PURSUANT TO
+ Terry M. Phillips,  : SECTION 21C OF THE SECURITIES
+     : EXCHANGE ACT OF 1934
+     :
+Respondent.    :        :
+______________________________
+I.
+The Securities and Exchange Commission (“Commission”) deems it appropriate
+that cease-and-desist proceedings be, and hereby are, instituted pursuant to Section 21C
+of the Securities Exchange Act of 1934 (“Exchange Act”), against Terry M. Phillips
+(“Phillips” or “Respondent”).
+II.
+In anticipation of the institution of these proceedings, Respondent has submitted
+an Offer of Settlement (the “Offer”), which the Commission has determined to accept.
+Solely for the purpose of these proceedings and any other proceedings brought by or on
+behalf of the Commission, or to which the Commission is a party, and without admitting
+or denying the findings herein, except as to the Commission’s jurisdiction over him and
+the subject matter of these proceedings, which are admitted, Respondent consents to the
+entry of this Order Instituting Cease-and-Desist Proceedings, Making Findings, and
+Imposing a Cease-and-Desist Order Pursuant to Section 21C of the Securities Exchange
+Act of 1934 (“Order”), as set forth below.
+ 2
+III.
+On the basis of this Order and Respondent’s Offer, the Commission finds1 that:
+A. RESPONDENT
+Phillips, 48, of Midlothian, Virginia, is the founder, 20 percent owner and
+principal operator of Capitol Distributing, L.L.C. (“Capitol”) and the founder and 50
+percent owner of Phillips Land Company (“PLC”).
+B. RELEVANT ENTITIES
+ 1. Capitol is a privately-owned video game distributor organized as a limited
+liability company under the laws of the Commonwealth of Virginia.  It was founded by
+Phillips in 1999.  During the relevant period, Capitol had approximately ten employees.
+2. PLC is a Virginia company 50 percent owned and principally operated by
+Phillips, has no employees and, in the ordinary course of business, has no involvement in
+the purchase, sale, or distribution of video games.
+3. Take-Two Interactive Softw are, Inc. (“Take-Two”) is a Delaware
+corporation headquartered in New York, New York.  Take-Two develops, markets and
+publishes interactive entertainment software games for the personal computer as well as
+video game consoles.  Since July 31, 2006, Take-Two’s common stock has been
+registered with the Commission pursuant to Section 12(b) of the Exchange Act and
+currently trades on the NASDAQ NMS under the symbol “TTWO.”
+C. SUMMARY
+Take-Two and certain of its officers committed numerous violations of the
+anti-fraud, financial reporting and recordkeeping provisions of the federal securities laws
+to inflate reported revenue during fiscal years 2000 and 2001.2  Phillips was a cause of
+some of those violations which resulted from certain transactions between Take-Two,
+Capitol and PLC.  Specifically, in four separate transactions with Capitol during that
+period, Take-Two fraudulently recorded as sales approximately $15 million in revenue
+1  The findings herein are made pursuant to Respondent’s Offer of Settlement and are not
+binding on any other person or entity in this or any other proceeding.
+2  On June 1, 2005, the Commission authorized and simultaneously settled civil actions in
+federal court against Take-Two and several present and former members of senior
+management, obtaining injunctions, disgorgement, civil penalties, and officer and
+director bars.  The Commission also authorized, and simultaneously settled, an
+administrative cease-and-desist proceeding against one officer and a Rule 102(e)(3)
+administrative proceeding against the former Chief Financial Officer.
+ 3
+from shipments of games to Capitol that Capitol parked and subsequently returned
+without making any effort to sell.  In two of the transactions, Capitol created invoices
+falsely describing the returns as “purchases” of “assorted product” by Take-Two from
+PLC.  In those two transactions, Take-Two also provided the funds to Capitol or PLC that
+those entities then used to cover checks they wrote to Take-Two to purportedly “pay” for
+the games.
+Based on his participation in certain aspects of these transactions, Phillips was a
+cause of Take-Two’s violations of Sections 10(b), 13(a) and 13(b)(2)(A) of the Exchange
+Act and Exchange Act Rules 10b-5, 12b-20, 13a-1, 13a-13 and 13b2-1.
+3
+D. FACTS
+1. From October 31, 2000 through at least July 31, 2001, Capitol accepted
+several hundred thousand video games from Take-Two with the understanding that it
+would temporarily warehouse or “park” the games until a subsequent Take-Two
+reporting period, and then return the games to Take-Two.  Take-Two improperly
+recorded and reported approximately $15 million in revenue associated with these
+parking transactions.
+2. Phillips and Take-Two began discu ssing Capitol’s participation in the
+parking arrangement in July 2000.  In an e-mail dated July 25, 2000, Phillips explained to
+two Capitol employees that “we can take whatever [Take-Two] needs to ship . . . [I]f it is
+a huge amount we will need to find someplace to stick it . . . but it shouldn’t be a
+problem.”
+3. In October 2000, Take-Two discussed the first parking transaction with
+Phillips.  A Take-Two representative asked Phillips if he had another company that
+Take-Two could issue a purchase order to for the games in lieu of Capitol sending the
+games back as a return.  Phillips mentioned PLC.  Phillips instructed a Capitol employee
+to work out the details with the Take-Two representative.
+ 4. On October 31, 2000, the last day of  Take-Two’s fiscal year, Capitol
+accepted shipment of 230,000 video games from Take-Two with the understanding that
+Capitol would park them for a short time and then return the shipment to Take-Two.  The
+games shipped to Capitol were selected by Take-Two based on Take-Two’s warehouse
+inventory at the time.  Capitol had no input regarding the games it accepted.  Take-Two
+improperly recorded $5.4 million as revenue from the shipment – the most revenue from
+a single sale that Take-Two had recognized up to that time.
+3  Simultaneously with the issuance of this Order, Phillips, without admitting or denying
+the allegations of the complaint, has consented to a judgment in an action filed against
+Phillips and Capitol in the United States District Court for the District of Columbia
+ordering him to pay a civil penalty in the amount of $50,000.
+ 4
+ 5. Phillips knew that Capitol made no effort to sell the games.  Instead,
+Capitol returned all 230,000 games to Take-Two over the next two reporting periods.
+When the games were returned, Capitol provided Take-Two with invoices that falsely
+described the games as purchases of “assorted product” from Phillips’ company PLC.
+Take-Two used those invoices to conceal in its books and records the fact that the
+October 31, 2000 “sale” had been returned in its entirety.  PLC had no employees, no
+inventory, and did not distribute video games in the ordinary course of business.
+ 6. Take-Two provided Capitol or PLC with money to make purported
+“payments” for the games to bolster the appearance that the shipments to Capitol were
+legitimate sales.  For example, on December 20, 2000, Take-Two wired $2,557,239 to
+PLC.  Six days later, PLC sent Take-Two a check for $2,557,137, purportedly in partial
+payment for the games associated with the October 31, 2000 transaction.
+ 7. On February 28, 2001, Capitol accepted a second shipment of
+approximately 175,000 video games from Take-Two.  Take-Two improperly recorded the
+transaction as a $4.6 million sale – second in revenue only to the October 31, 2000
+transaction in Take-Two’s history up to that time.  All 175,000 games were subsequently
+returned to Take-Two with invoices that again falsely described the return as a purchase
+of “assorted product” from PLC.  Capitol again used funds provided by Take-Two to
+purportedly “pay” for the games.  Take-Two wired Capitol $4,594,100 on April 26, 2001
+and Capitol sent Take-Two a check for the same amount the next day.
+ 8. On April 27, 2001, three days before the end of Take-Two’s second fiscal
+quarter, Capitol accepted approximately 55,000 games from Take-Two.  Take-Two
+recorded $1.76 million as revenue from the purported sale.  After the end of the quarter,
+Capitol returned all these games to Take-Two.
+ 9. On July 31, 2001, the last day of Take-Two’s third fiscal quarter, Capitol
+accepted a shipment of more than 85,000 games from Take-Two.  Take-Two recorded
+more than $3 million as revenue from the purported sale.  After the end of the quarter,
+Capitol returned all these games to Take-Two.
+E. LEGAL ANALYSIS
+Section 21C(a) of the Exchange Act specifies that a respondent is a cause of
+another’s violation if the respondent knew or should have known that his act or omission
+would contribute to such violation.
+Section 10(b) of the Exchange Act and Rule 10b-5 thereunder proscribe a variety
+of fraudulent practices.  An issuer or individual may violate these provisions by either
+intentionally or recklessly making materially false or misleading statements in connection
+with the purchase or sale of securities.  Basic, Inc. v. Levinson, 485 U.S. 224, 231-32
+(1988).  To violate Section 10(b) of the Exchange Act and Rule 10b-5 thereunder, a
+defendant must act with scienter, Aaron v. SEC, 446 U.S. 680, 695, 701-02 (1980), which
+the Supreme Court has defined as “a mental state embracing intent to deceive,
+ 5
+manipulate, or defraud.”  Ernst & Ernst v. Hochfelder, 425 U.S. 185, 193 n. 12 (1976).
+Scienter of a company’s management is imputed to the company.  See, e.g., SEC v.
+Manor Nursing Centers, 458 F.2d 1082, 1089-96 (2d Cir. 1972).
+Take-Two violated Section 10(b) of the Exchange Act and Rule 10b-5 thereunder
+by using the transactions with Capitol to materially inflate its operating results, and by
+filing and releasing to the public periodic reports, registration statements and press
+releases that were materially false and misleading, and that misrepresented Take-Two’s
+financial condition.  Based on his conduct described above, Phillips was a cause of Take-
+Two’s violations of Section 10(b) of the Exchange Act and Rule 10b-5 thereunder.
+Section 13(a) of the Exchange Act and Exchange Act Rules 13a-1 and 13a-13
+thereunder require all issuers with securities registered under Section 12 of the Exchange
+Act to file annual and quarterly reports on Forms 10-K and 10-Q respectively.  Exchange
+Act Rule 12b-20 requires that, in addition to the information expressly required to be
+included in such reports, the issuer include such additional material information as may
+be necessary to make the required statements, in light of the circumstances under which
+they were made, not misleading.  The obligation to file these periodic reports includes the
+obligation to ensure that they are complete and accurate in all material respects.  See, e.g.,
+SEC v. Savoy Indus., Inc., 587 F.2d 1149, 1165 (D.C. Cir. 1978), cert. denied, 440 U.S.
+913 (1979).  No showing of scienter is required to establish violations of these provisions.
+Id. at 1167.  Information regarding the financial condition of a company is presumptively
+material.  SEC v. Blavin, 760 F.2d 706, 711 (6
+th Cir. 1985).
+Take-Two violated Section 13(a) of the Exchange Act and Exchange Act Rules
+12b-20, 13a-1 and 13a-13 thereunder when, as a result of the parking transactions with
+Capitol described above, it filed with the Commission materially false and misleading
+annual reports on Forms 10-K for the fiscal years ending October 31, 2000 and October
+31, 2001, and quarterly reports on Forms 10-Q for the quarters ending April 30, 2001 and
+July 31, 2001, which contained inflated operating results.  Based on his conduct
+described above, Phillips was a cause of Take-Two’s violations of Section 13(a) of the
+Exchange Act and Exchange Act Rules 12b-20, 13a-1 and 13a-13 thereunder.
+Section 13(b)(2)(A) of the Exchange Act requires issuers to “make and keep
+books, records, and accounts, which, in reasonable detail, accurately and fairly reflect the
+transactions and dispositions of the assets of the issuer.”  Exchange Act Rule 13b2-1
+prohibits direct or indirect falsification or causing falsification of books, records, or
+accounts subject to Section 13(b)(2)(A).  No showing of scienter is required to establish
+violations of Exchange Act Section 13(b)(2)(A) (see SEC v. World-Wide Coin
+Investments, Ltd., 567 F. Supp. 724, 749 (N.D. Georgia 1983)) or Exchange Act Rule
+13b2-1 (see SEC v. McNulty, 137 F.3d 732, 740-41 (2d Cir. 1998)).
+Take-Two failed to make and keep accurate books, records and accounts with
+respect to its transactions with Capitol.  It also used those transactions to falsify its books
+and records.  Based on his conduct described above, Phillips was a cause of Take-Two’s
+violations of Section 13(b)(2)(A) of the Exchange Act and Exchange Act Rule 13b2-1.
+ 6
+IV.
+ In view of the foregoing, the Commission deems it appropriate to impose the
+sanctions agreed to in Respondent Phillips’ Offer.
+Accordingly, it is hereby ORDERED that:
+Pursuant to Section 21C of the Exchange Act, Respondent Phillips shall
+cease and desist from committing or causing any violations and any future
+violations of Section 10(b) of the Exchange Act and Exchange Act Rules 10b-5
+and 13b2-1; and from causing any violations and any future violations of Sections
+13(a) and 13(b)(2)(A) of the Exchange Act and Exchange Act Rules 12b-20,
+13a-1 and 13a-13.
+By the Commission.
+        N a n c y  M .  M o r r i s
+        S e c r e t a r y

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@@ -1,1400 +1,503 @@
-     SEC.gov | James M. Materna, John R. Holtzhauser, and Paul R. Venesky
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-              James M. Materna, John R. Holtzhauser, and Paul R. Venesky
-        James M. Materna, John R. Holtzhauser, and Paul R. Venesky
-                   U.S. SECURITIES AND EXCHANGE COMMISSION
- Litigation Release No. 20199 / July 18, 2007
- Accounting and Auditing Enforcement Release No. 2642 / July 18, 2007
-  SEC v. James M. Materna, John R. Holtzhauser, and Paul R. Venesky , 1:07-CV-01274 (D.D.C.)(HHK)
- SEC Files Settled Accounting Fraud Charges Against the Former CFO and Former Controller of OM Group, Inc. and Former Controller of OMG Americas and Also Files Settled Cease-and-Desist Proceedings Against OM Group, Inc.
- On July 18, 2007, the Securities and Exchange Commission filed civil fraud charges in the U.S. District Court for the District of Columbia against James Materna, the former chief financial officer of OM Group, John Holtzhauser, the former controller of OM Group, and Paul Venesky, the former controller of OMG Americas, a subsidiary. According to the Complaint, Materna and Holtzhauser engaged in accounting fraud by recording and directing numerous adjustments to the consolidated financials ("top-side adjustments"), which were wholly unsupported and often duplicative of entries already recorded at the operating unit level. The Complaint alleges that Venesky made improper accounting entries at OMG Americas. According to the Complaint, the improper accounting practices were done with the intent to manage earnings. The scheme resulted in the filing of materially false and misleading financial statements in the company's annual report on Form 10-K for the fiscal years ended December 31, 2001 and December 31, 2002, and in the company's quarterly reports on Form 10-Q for the first three quarters of 2002, and the fourth quarter results on Form 10-K, and the first three quarters of 2003 filed on Form 10-Q. In March 2005, after conducting an internal investigation, OM Group issued a restatement reducing its retained earnings for the relevant period by $64 million as a result of the fraud. The Commission's Complaint charges Materna and Holtzhauser with violating, among others, the antifraud provisions of the federal securities laws. The Commission's Complaint charges Venesky with aiding and abetting violations of the antifraud provisions, among others. On July 18, 2007, the Commission issued a settled cease-and-desist order that finds that OM Group violated the antifraud, reporting, books and records, and internal controls provisions. OM Group produces value-added, metal based specialty chemicals and related materials.
- According to the Commission's Complaint:
- At the end of each quarter and fiscal year, OM Group consolidated the financial statements of its operating entities into one consolidated financial statement, which was reported on OM Group's Forms 10-K and 10-Q. During the close process, Holtzhauser and Materna made more than 700 top-side adjustments to OM Group's consolidated financial statement. The adjustments were across the divisions and the support for the adjustments was either inadequate or did not exist. Many of the improper accounting practices included, among other things, overcapitalizing overhead costs, inflated inventory recovery yields, improper supplier receivables and interest receivables, duplicating entries already made at the operating unit level, recording inaccurate inventory estimates, and recording expenses out of period. Venesky, the Controller of OMG Americas, was responsible for consolidating OMG Americas' financial results. Venesky used inaccurate estimates to record inventory. More often than not, Venesky's estimates increased following feedback from Holtzhauser and Materna.
- E-mails reflect the intent to adjust numbers to meet earnings targets or to enhance OM Group's performance. E-mails also show that there was a concerted effort by Materna, Holtzhauser, and Venesky to conceal material information from auditors. In one e-mail, Venesky wrote to Materna and Holtzhauser that "My concern about inventory is that going too heavy in WIP [work-in-process] or others will trigger even greater scrutiny. Truth is, we have a fresh set of auditors, and I have no idea how much conversational auditing this group will take." The documents also reflect a pattern of recording almost random round numbers to journal entries to try to manage earnings, and to look for "other candidates," i.e., other accounting categories in which to make more adjustments. In addition, certain journal entries were made at locations that auditors would not likely visit during audits. During the relevant period, OM Group did not have an adequate system of internal controls that would detect and prevent the improper accounting practices.
- Materna and Holtzhauser, without admitting or denying the allegations in the Commission's complaint, each consented to the entry of a final judgment permanently enjoining each from violating Section 17(a) of the Securities Act, and Sections 10(b) and 13(b)(5) of the Exchange Act and Rules 10b-5, 13b2-1, and 13b2-2 thereunder, and aiding and abetting violations of Sections 13(a), 13(b)(2)(A), and 13(b)(2)(B) of the Exchange Act and Rules 12b-20, 13a-1, 13a-11, and 13a-13 thereunder; imposes a $100,000 civil penalty; and a five-year officer-and-director bar; and consented to the issuance of an order imposing a five-year 102(e) suspension. Holtzhauser will also pay disgorgement of $76,707. Venesky, without admitting or denying the allegations in the Commission's complaint, consented to the entry of a final judgment permanently enjoining him from aiding and abetting violations of Section 10(b), 13(a), 13(b)(2)(A), 13(b)(2)(B), and 13(b)(5) of the Exchange Act and Rules 10b-5, 12b-20, 13a-1, 13a-11, and 13a-13 thereunder, and violating Rules 13b2-1 and 13b2-2 thereunder, and imposing a $25,000 civil penalty; and consented to the issuance of an order imposing a three-year 102(e) suspension. OM Group consented, without admitting or denying the findings by the Commission, to an order to cease-and-desist from committing any future violations of Section 17(a) of the Securities Act and Sections 10(b), 13(a), 13(b)(2)(A), and 13(b)(2)(B) of the Exchange Act, and Rules 10b-5, 12b-20, 13a-1, 13a-11, and 13a-13 thereunder.
- The Commission considered remedial acts promptly undertaken by OM Group and cooperation afforded the Commission staff.
-   SEC Complaint in this matter ;  Administrative Proceeding 33-8826
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+ UNITED STATES OF AMERICA
+ Before the
+ SECURITIES AND EXCHANGE COMMISSION
+SECURITIES ACT OF 1933
+Release No.  8826 / July 18, 2007
+SECURITIES EXCHANGE ACT OF 1934
+Release No. 56089 / July 18, 2007
+ACCOUNTING AND AUDITING ENFORCEMENT
+Release No.  2643 / July 18, 2007
+ADMINISTRATIVE PROCEEDING
+File No.  3-12699
+In the Matter of
+OM GROUP, INC.
+Respondent.
+ORDER INSTITUTING CEASE-AND-
+DESIST PROCEEDINGS, MAKING
+FINDINGS, AND IMPOSING A CEASE-
+AND-DESIST ORDER PURSUANT TO
+SECTION 8A OF THE SECURITIES ACT
+OF 1933 AND SECTION 21C OF THE
+SECURITIES EXCHANGE ACT OF 1934
+I.
+ The Securities and Exchange Commission (“Commission”) deems it appropriate that cease-
+and-desist proceedings be, and hereby are, instituted pursuant to Section 8A of the Securities Act
+of 1933 (“Securities Act”) and Section 21C of the Securities Exchange Act of 1934 (“Exchange
+Act”), against OM Group, Inc. (“OM Group” or “Respondent”).
+II.
+ In anticipation of the institution of these proceedings, Respondent has submitted an Offer
+of Settlement (the “Offer”) which the Commission has determined to accept.  Solely for the
+purpose of these proceedings and any other proceedings brought by or on behalf of the
+Commission, or to which the Commission is a party, and without admitting or denying the findings
+herein, except as to the Commission’s jurisdiction over it and the subject matter of these
+proceedings, which are admitted, Respondent consents to the entry of this Order Instituting Cease-
+and-Desist Proceedings, Making Findings, and Imposing a Cease-and-Desist Order Pursuant to
+Section 8A of the Securities Act of 1933 and Section 21C of the Securities Exchange Act of 1934
+(“Order”), as set forth below.
+ 2
+III.
+ On the basis of this Order and Res pondent’s Offer, the Commission finds1 that:
+A. RESPONDENT
+OM Group is a Delaware corporation headquartered in Cleveland, Ohio.  OM Group is
+engaged in the production and marketing of value-added, metal-based specialty chemicals and
+related materials, primarily from cobalt and nickel.  At all relevant times and continuing through
+today, OM Group’s common stock has been registered with the Commission pursuant to Section
+12(b) of the Exchange Act, and is listed on the New York Stock Exchange under the ticker symbol
+“OMG.”  Its fiscal year end is December 31 of each year and its independent auditor is Ernst &
+Young LLP.
+B. SUMMARY
+This matter involves a pattern of accounting fraud by OM Group and certain of its senior
+officers in 2001, 2002, and years prior.  OM Group is a metal-based specialty chemicals company
+that is based in Cleveland, Ohio and has operations globally.  At the end of each quarter and each
+fiscal year, OM Group consolidated the financial statements of its various operating entities and
+subsidiaries into one consolidated statement.  OM Group’s former Chief Financial Officer (“CFO”)
+and former Corporate Controller (“Controller”) were responsible for the entire consolidation
+process.  OMG Americas was one of OM Group’s wholly owned subsidiaries, and was comprised
+of manufacturing and other facilities at five North American locations.  The former Controller of
+OMG Americas oversaw the consolidation process for OMG Americas.  OM Group, through its
+CFO and Controller, engaged in accounting fraud by recording and directing numerous
+adjustments to the consolidated financials (“top-side adjustments”), which were wholly
+unsupported and often duplicative of entries already recorded at the operating unit level.  The
+Controller of OMG Americas recorded erroneous and unsupported accounting entries at the
+direction of the CFO and Controller to OMG Americas’ books and records.  Many of the improper
+accounting practices were done with the intent to manage earnings and to achieve financial results
+that were closer to OM Group’s annual plan.
+ These practices materially increased OM Gr oup’s annual and quarterly net income in a
+departure from generally accepted accounting principles (“GAAP”).  During the relevant period,
+OM Group did not have an adequate system of internal controls that would detect and prevent this
+type of conduct.  In addition, certain information was concealed from OM Group’s independent
+outside auditor, Ernst & Young LLP (“E & Y”).  As a result of the conduct, OM Group filed
+materially false and misleading financial statements in the company’s annual report on Form 10-K
+for the fiscal years ended December 31, 2001 and December 31, 2002, and in the company’s
+quarterly reports on Form 10-Q for the first three quarters of 2002, and the fourth quarter results
+1  The findings herein are made pursuant to Respondent’s Offer of Settlement and are not binding on
+any other person or entity in this or any other proceeding.
+ 3
+filed on Form 10-K, and the first three quarters of 2003 filed on Form 10-Q.  In March 2005, after
+conducting an internal investigation into the accounting improprieties, OM Group issued a
+restatement reducing its retained earnings for the relevant period by $64 million as a result of the
+fraudulent conduct.
+C. BACKGROUD
+1. OM Group History and Growth
+OM Group is a producer and marketer of metal-based specialty chemicals and related
+materials primarily from cobalt and nickel.  OM Group was formed in 1991 and was the parent
+company of three operating subsidiaries, Mooney Chemicals, Kokkola Chemicals in Finland, and
+Vasset S.A. in France.  It became a public company in September of 1993.  OM Group
+experienced tremendous growth from 1992 through 2001, acquiring a number of entities in the
+United States and internationally.  In 2000, OM Group acquired a nickel refinery in Harjavalta,
+Finland, which increased OM Group’s sales revenue from approximately $500 million to nearly $1
+billion.  The most significant acquisition occurred in August 2001, when OM Group completed the
+acquisition of Degussa Metals Catalysts Cerdec (“dmc2”), which consisted of multiple operating
+entities.  After the dmc2 acquisition, OM Group had over $2 billion in sales revenue.2  OM Group
+also experienced earnings growth during the 1999 through 2001 period and reported positive net
+income that increased each year during that period.3  Although OM Group grew through
+acquisitions, the accounting staff at corporate did not grow at the same rate and the accounting staff
+at the operating unit level was thin.
+At the end of each quarter and each fiscal year, OM Group consolidated the financial
+statements of its various operating entities and subsidiaries into one consolidated financial
+statement, which was reported on OM Group’s Forms 10-K and 10-Q.  During the relevant period,
+the CFO and Controller were responsible for the entire consolidation process, which took place at
+their Cleveland headquarters.  In practice, each operating unit submitted to the Controller
+electronically its monthly financial statement, which the Controller consolidated into one corporate
+financial statement.  During the close process, both the Controller and CFO made numerous top-
+side adjustments to OM Group’s consolidated financial statement.  In some instances, either the
+Controller or CFO directed the individual controllers of the operating units to make adjustments at
+the local level and resubmit the financials.  The Controller of OMG Americas made numerous
+entries at the direction of the Controller and CFO of OM Group.  OM Group did not have an
+2  The Harjavalta acquisition was financed with about $200 million in bank borrowing.  dmc2 was financed
+with debt (a bridge loan), equity, and the sale of assets.  In conjunction with the dmc2 acquisition, OM Group sold
+certain assets to repay a portion of the bridge loan.  Shortly thereafter, in December 2001, the company completed a
+$400 million bond offering and used the proceeds to repay the remainder of the bridge loan.  In January 2002, the
+company completed a $225.7 million equity offering and used the proceeds to repay other debts.  OM Group filed
+registration statements for both the equity and bond offerings, which contained financial statements covering the
+1999 through 2000, and 1999 through 2001 periods, respectively.
+3  OM Group’s net income for the 1999 through 2001 period was as follows:  1999--$55.8 million; 2000--
+$71.5 million; 2001--$75.6 million: Q1 2002--$23.3 million (up from $19.6 million in Q1 2001); Q2 2002--$25.5
+million (up from $20.1 million in Q2 2001).
+ 4
+internal audit group during the relevant period.  Thus, there was no review of the work being
+performed by the Controller or the CFO other than the audits performed by E & Y.
+2. The Shareholder Litigation, Audit Committee Investigation, and $64 Million
+Restatement
+The CFO retired from OM Group in May 2002.  In the third quarter of 2002, under the
+direction of a new CFO, OM Group announced a lower of cost or market adjustment to inventory
+of $108 million, after changing its outlook for the price of cobalt and determining that it had to
+lower production levels of cobalt and sell off inventory to raise cash.  OM Group’s trend of
+obtaining positive net income ceased when OM Group’s third quarter of 2002 reflected a net loss
+of $71.2 million for the three month period, and $22.3 million for the nine month period.  In
+response to this announcement, OM Group’s stock price dropped 71% from $30.90 to $8.95, and
+shareholders filed a class action lawsuit on November 1, 2002 and a shareholder derivative suit on
+December 12, 2002.  During the discovery phase of the shareholder lawsuit in mid-2003, OM
+Group’s attorneys found e-mails that raised questions about whether there was adequate support
+for adjustments that were made to OM Group’s inventory balances.  In November 2003, OM
+Group’s audit committee hired outside counsel and forensic accountants to conduct an independent
+investigation.  At the conclusion of its internal investigation, OM Group reported its findings to the
+Commission staff in August 2004.  The company also underwent a restatement audit.4  The
+internal investigation and restatement audit by E & Y concluded that there were numerous
+unsupported top-side adjustments and other accounting entries to OM Group’s financial
+statements.  On March 31, 2005, as a result of the investigation, OM Group restated its financials
+for fiscal years ended December 31, 2002 and 2001, quarters ended September 30, 2003, June 30,
+2003, March 31, 2003, and all four quarters of 2002.  The restatement also affected periods prior to
+2001.
+The restatement adjustments reduced previously reported retained earnings as of September
+30, 2003 by $64.0 million.  A summary of the impact of the restatement follows (in millions):
+Increase in net income for the nine months
+    Ended September 30, 2003     $111.3
+Increase in 2002 net income        125.1
+Decrease in 2001 net income      (123.5)
+Decrease in net income for years prior to 2001   (176.9)
+Cumulative net decrease in previously reported
+    Retained earnings at September 30, 2003   $(64.0)
+4  OM Group also undertook steps to improve its internal controls and compliance program, including
+implementing a formal financial statement “close process” and creating an internal audit function.
+ 5
+The materiality of the adjustments is demonstrated below:
+(in millions) 9 months ended  Year ended Year ended Years prior to Total
+  9-30-03  12-31-02 12-31-01 1-1-01
+Net income 57.6   (327.9)  75.7
+(loss) as
+originally
+reported
+Adjustments 111.3   125.1  (123.5)  (176.9)  (64.0)
+Net income 168.9   (202.8)  (47.8)
+(loss) as
+restated*
+Percent  (66%)   (62%)  258%
+overstated
+(understated)
+*  Before OM Group’s change from the LIFO to FIFO method of valuing inventory.
+D.  IMPROPER ACCOUNTING PRACTICES AND FRAUDULENT CONDUCT
+1. Corporate Level Top-Side Adjustments
+OM Group, through its CFO and Controller, made more than 700 top-side adjustments to
+OM Group’s financials.  The adjustments were made across the divisions of OM Group and
+appeared to have no pattern.  The support for the adjustments was either inadequate or did not
+exist.  In addition, there were numerous e-mails and other documents that showed the adjustments
+were made with the intent to manage earnings and to achieve financial results that were closer to
+OM Group’s annual plan.  There are also e-mails and other documents that show a concerted effort
+to conceal the conduct from E & Y.  The improper top-side adjustments are discussed below.
+a.  Over Capitalizing Overhead Costs
+During the 1999 through 2002 period, the CFO and Controller made top-side adjustments
+to capitalize additional overhead costs related to certain of its operating units.  These adjustments
+were wrong because they were duplicative of amounts already recorded at the operating unit level.
+Thus, their top-side adjustments to OM Group’s consolidated financial statements contributed to an
+overstatement of OM Group’s income.
+ 6
+b.  Cobalt Inventory Recovery Yields
+OM Group had to extract their raw materials, like cobalt, from slag piles.  Although OM
+Group estimated the yields for the piles, extraction was a very inexact process and resulted in
+inconsistent yields from month to month.  When the yields were below what the CFO and
+Controller predicted -- for example, if they expected the operating unit to extract 10% cobalt but it
+only extracted 8% -- the CFO and/or Controller made a top-side adjustment for the remaining
+expected yield.  OM Group’s contention was that the remaining 2% was still in the pile or
+somewhere in the manufacturing process.  However, there was no process for extracting the
+remaining 2%, nor was there any analysis done to determine whether it was cost effective to
+attempt to recover any remaining content.  This accounting practice was not consistent with
+GAAP.5  Thus, these inappropriate top-side adjustments allowed OM Group to increase income.
+c.  Supplier Receivables
+Prior to 2001, OM Group was in a contractual dispute with three cobalt raw material
+suppliers concerning the metal content of raw materials that OM Group bought from the suppliers.
+In connection with this dispute, the CFO recorded three receivables totaling $26.9 million that
+were treated as prepaid inventory representing advance payments for future inventory shipments.
+It was determined that OM Group waived its claim to these recoverable amounts in its dispute
+negotiations with the suppliers, or otherwise did not adequately document its position to support
+recording these assets.  The top-side adjustments resulted in an overstatement of OM Group’s
+assets.
+d. Interest Receivables
+OM Group advanced $27.6 million to its joint venture partners during construction of a
+smelter in years prior to 2001.  OM Group recorded a receivable for such amount.  Although there
+was no agreement between OM Group and the joint venture partners providing for interest on the
+advance, OM Group recorded interest income on the advances in 2001 and years prior of $5.5
+million and $9.9 million, respectively.  In 2002, OM Group established a reserve of $12.0 million
+against the interest receivable of $15.4 million.  In 2003, OM Group finalized a written agreement
+with one of the partners, which provided for $6.8 million in interest income.  The original interest
+recorded represented a contingent asset that should not have been recorded until a written
+agreement was finalized.6  Thus, the interest receivable and the 2002 reserve should not have been
+recorded.
+5  The term inventory embraces goods awaiting sale, goods in the course of production (work-in-process), and
+goods to be consumed directly or indirectly in production (raw materials and supplies). ARB 43, chapter 4,
+paragraph 3.
+6  Without a written agreement, OM Group’s recordation of the interest receivable and corresponding interest
+income constituted a contingent gain.  SFAS No. 5, “Accounting for Contingencies.”  Paragraph 17 prohibits the
+reflection of gain contingencies in financial statements, since to do so might be to recognize revenue prior to its
+realization.
+ 7
+e.  Duplicating Entries Already Made at the Operating Unit Level
+OM Group purchased nickel raw material that was off-specification and incurred
+incremental costs to process this material to a usable form, which was recorded as a receivable
+from the supplier by the CFO and Controller.  However, the raw material contract included
+provisions for financial remedy for off-specification raw material, and the remedy properly was
+accounted for at the operating unit level.  The CFO and Controller made numerous other top-side
+adjustments to capitalize costs that were expensed at the operating unit level for certain fixed asset
+projects, software implementation projects, and miscellaneous other assets.  The adjustments were
+not appropriate because the operating units appropriately accounted for the expenses.
+f.  Other Erroneous and Un supported Accounting Entries
+There were numerous other top-side adjustments and errors that were restated, including
+inappropriate adjustments to fixed asset construction projects, certain accounts payable and cost of
+sales related to raw material contracts, inventory numbers, incorrect entries related to purchase
+accounting for the Harjavalta acquisition, errors in foreign currency remeasurement and
+intercompany profit elimination, improper derivative accounting, and expenses charged in a period
+that should have been taken in an earlier period.  All of these top-side adjustments were wholly
+inaccurate and unsupported.
+2. Inaccurate Estimates to OMG Americas’ Books and Records Made by the
+Controller of OMG Americas at the Direction of the CFO and Controller of
+OM Group
+The Controller of OMG Americas was responsible for consolidating OMG Americas’
+financial results and submitting them to OM Group’s Controller.  The OMG Americas Controller
+used inaccurate estimates to record inventory amounts at OMG Americas.  During the relevant
+period, OMG Americas did not have an inventory tracking system that could account for inventory
+that was “work-in-process” i.e., raw materials that had entered into the manufacturing process but
+not yet into finished goods.  As a result, work-in-process was estimated by the OMG Americas
+Controller at the direction and review of the Controller and CFO of OM Group.  Similarly,
+estimates were used to record amounts of finished goods inventory in-transit to company
+warehouses from the Franklin facility based on the theory that the system could not account for
+inventory that was in-transit to a distribution center.  Estimates were also used to record inventory
+balances for containers, packaging, and certain lab inventory at the Franklin facility.  Finally,
+entries were made to record the valuation of inventory full absorption costing.
+These estimates were inaccurate and unsupported.  At the end of each year, the Franklin
+plant slowed down production in anticipation of a holiday shutdown.  By December 31st, little or
+no work-in-process existed because the manufacturing process was completed by that time, and the
+materials were turned into finished goods and shipped out.  Thus, the OMG Americas Controller’s
+estimates for work-in-process were wholly inaccurate and unsupported.  It was determined that in-
+transit inventory was fully accounted for on OMG America’s books.  Thus, there was no need for
+ 8
+the Controller of OMG Americas to record additional amounts or estimates to record in-transit
+inventory.  OM Group sold materials to customers in totes, to which OM Group retained
+ownership.  The Controller of OMG Americas estimated the number of totes in inventory;
+however, he could not describe a mechanism that was in place to retrieve the totes from the
+customer, nor could he specifically describe how the totes were tracked when they were sent out to
+customers.  Thus, there was no reasonable basis for his inventory estimates.  In addition, there was
+no supporting documentation for his valuation of inventory full absorption at the Franklin facility.
+The Controller of OMG Americas submitted all of his estimates to the CFO and the Controller of
+OM Group for review.  More often than not, the OMG Americas Controller’s estimates increased
+following feedback from these two more senior officers.
+ The Controller of OMG Americ as also recorded inaccurate journal entries concerning
+certain litigation.  In 2000, the Controller of OMG Americas recorded $4.5 million for anticipated
+recovery of contributions previously made by the company to a settlement trust and related legal
+fees for product liability litigation.  The asset was reduced to $2.5 million in 2001 and was written
+off in December 2002.  Despite having an adverse judgment entered against the company’s
+position and other unfavorable facts and circumstances, OM Group kept the receivable on its
+books.  The Controller of OMG Americas established the receivable pursuant to discussions with
+the CFO and Controller of OM Group based upon their expectation that when the claimants had
+settled the matter, the funds in the trust would be redistributed to the contributors.  However, the
+Controller of OMG Americas did not recall learning from the CFO or Controller of OM Group that
+an adverse judgment had been rendered against the company.
+3. Evidence that the Accounting Improprieties Amounted to Fraud
+There are numerous e-mails and documents that clearly demonstrate that OM Group
+through its CFO and Controller engaged in fraudulent accounting practices, and that the Controller
+of OMG Americas was a participant.  The e-mails evidence the intent to adjust numbers to meet
+earnings targets or to enhance OM Group’s performance in a particular quarter or year end.  The e-
+mails also show that there was a concerted effort by the CFO, the Controller, and the Controller of
+OMG Americas to hide information from E & Y.  One e-mail from the Controller of OMG
+Americas to the CFO and Controller of OM Group states:  “My concern about inventory is that
+going too heavy in WIP [work-in-process] or others will trigger even greater scrutiny.  Truth is, we
+have a fresh set of auditors, and I have no idea how much conversational auditing this group will
+take.”  Another e-mail discusses making “small undetectable changes to inventory” in documents
+that would be submitted to E & Y, and then further states that “I can’t change them by much, it
+would not be a prudent move.”  The e-mails and other documents also show that the CFO and
+Controller of OM Group were aware that the accounting entries made to OM Group’s financial
+statements were not supportable and that OM Group’s financial statements were potentially
+materially misstated during the relevant period.  There are also e-mails that show the Controller of
+OMG Americas raised red flags to the CFO and Controller that certain of the journal entries made
+to OMG Americas’ financial statements were not supportable.  For example, the Controller of
+OMG Americas wrote to the Controller of OM Group that “I do believe that we were too
+aggressive in our estimation of an SGA [sales general administrative expenses] adjustment.  I
+believe that we can substantiate one-fourth that number, the rest is tight.”
+ 9
+The documents also reflect a pattern of recording almost random round numbers to journal
+entries to try to manage OM Group’s earnings, and to look for “other candidates,” i.e., other
+accounting categories in which to make more adjustments.  There is also evidence that certain
+journal entries were made at locations that E & Y would not likely visit during audits.
+E. LEGAL ANALYSIS
+1. Violations of the Antifraud Provisions:  Section 17(a) of the Securities Act and
+Section 10(b) of the Exchange Act and Rule 10b-5 thereunder
+Section 17(a) of the Securities Act prohibits fraud in the offer or sale of securities.  Section
+10(b) of the Exchange Act and Rule 10b-5 thereunder prohibit securities fraud in connection with
+the purchase or sale of securities.  To establish a violation of these antifraud provisions, the
+Commission must generally prove that the defendant made materially false or misleading
+representations or omissions in connection with the offer, purchase or sale of securities, with
+scienter.  Aaron v. SEC, 446 U.S. 680, 697 (1980); Ernst & Ernst v. Hochfelder, 425 U.S. 185, 195
+(1976); SEC v. Monarch Funding Corp., 192 F.3d 295, 308 (2d Cir. 1999); SEC v. First Jersey
+Secs., Inc., 101 F.3d 1450, 1466-67 (2d Cir. 1996).  “Recklessness” satisfies the scienter standard.
+Press v. Chemical Investment Svcs. Corp., 166 F. 3d 529, 527-38 (2d Cir. 1999).
+A statement or omission is material if “there is a substantial likelihood that a reasonable
+shareholder would consider it important” or, in other words, “there [is] a substantial likelihood that
+the disclosure of the omitted fact would have been viewed by the reasonable shareholder as having
+significantly altered the ‘total mix’ of information available.”  Basic, Inc. v. Levinson, 485 U.S.
+224, 232 (1988) (adopting standard of TSC Industries, Inc. v. Northway, Inc., 426 U.S. 438, 449
+(1976)).  Precipitous movement in stock price can be an indication of materiality.  United States v.
+Bilzerian, 926 F.2d 1285, 1298 (2d Cir. 1991).  The “in connection with” requirement is satisfied
+by showing that false financial information was disseminated into the market place in a manner
+reasonably calculated to influence the investing public.  Ames Department Stores, Inc. Stock Litig.,
+991 F.2d 953, 962, 966 (2d Cir. 1993) (“in connection with” requirement satisfied by allegations
+that corporation disseminated false financial information into marketplace through press releases,
+annual reports, Form 10-K and two Forms 10-Q).
+OM Group violated Section 17(a) of the Securities Act and Section 10(b) of the Exchange
+Act and Rule 10b-5 thereunder as a result of the conduct described above.  OM Group included in
+its offering documents, periodic filings, and press releases financial information that senior
+management knew, or was reckless in not knowing, was materially false and misleading.  The top-
+side adjustments and other improper accounting entries caused OM Group’s financial statements to
+be materially misstated.  OM Group’s $64 million retained earnings restatement is evidence of the
+materiality of the accounting improprieties.  The materially false financial statements were
+included in OM Group’s annual and quarterly reports during fiscal years 2001 and 2002 and in the
+ 10
+Form S-1, effective January 16, 2002,7 that was issued in OM Group’s $225.7 million equity
+offering.  The materially incorrect financial information was also disseminated to the public
+through earnings releases.  The level of scienter was high.  The CFO and Controller concealed
+from the company’s auditor the fact that many of their top-side adjustments lacked support and
+were done with the intent to manage earnings.  The CFO’s and the Controller’s scienter is imputed
+to OM Group.
+2. Violations of the Reporting Provisions:  Section 13(a) of the Exchange Act and
+Rules 12b-20, 13a-1, 13a-11 and 13a-13 thereunder
+Section 13(a) of the Exchange Act requires all issuers of securities registered under Section
+12 of the Exchange Act to file reports with the Commission containing such information as the
+Commission’s rules and regulations prescribe. 15 U.S.C. § 78m(a) (2006).  Rules 13a-1, 13a-11
+and 13a-13 thereunder require issuers to file annual, current, and quarterly reports, respectively.
+The reports must contain financial statements prepared in conformity with GAAP and not contain
+any materially false or misleading information.  See Ponce v. SEC, 345 F.3d 722, 734-37 (9th Cir.
+2003).  Additionally, Rule 12b-20 requires that in addition to the information required in a report,
+further material information should be added as necessary to make the required statements, in light
+of the circumstances under which they were made, not misleading.  Information regarding the
+financial condition of a company is presumptively material.  SEC v. Blavin, 760 F.2d 706, 711 (6th
+Cir. 1985).  No showing of scienter is required to establish a violation of Section 13 of the
+Exchange Act.  SEC v. McNulty, 137 F.3d 732, 740-41 (2d Cir. 1998).
+OM Group violated Section 13(a) of the Exchange Act and Rules 12b-20, 13a-1, 13a-11
+and 13a-13 thereunder as a result of the conduct described above.  OM Group filed reports with the
+Commission that misrepresented OM Group’s financial results for fiscal years ended December
+31, 2001 and December 31, 2002 on Form 10-K, and in the company’s quarterly reports on Form
+10-Q for the first three quarters of 2002 and the fourth quarter results filed on Form 10-K, and the
+first three quarters of 2003 filed on Form 10-Q.  Some of the misrepresented financials were
+included in Forms 8-K.
+3. Violations of the Books and Records and Internal Controls Provisions:
+Sections 13(b)(2)(A) and 13(b)(2(B) of the Exchange Act
+a. Books and Records Violations
+Section 13(b)(2)(A) of the Exchange Act requires issuers to make and keep books and
+records which in reasonable detail fairly and accurately reflect the transactions and disposition of
+the assets of the issuer.  15 U.S.C. § 78m (b)(2)(A) (2006).  OM Group violated Section
+13(b)(2)(A) of the Exchange Act as a result of the conduct described above.  OM group failed to
+make and keep books and records in accordance with GAAP.
+7  OM Group filed an S-1 on December 5, 2001 that became effective on January 16, 2002 that contained
+financial statements for the fiscal year ended December 31, 2000 and the nine months ended September 30, 2001.
+ 11
+b. Internal Controls Violations
+Section 13(b)(2)(B) of the Exchange Act requires issuers to “devise and maintain a system
+of internal accounting controls sufficient to provide reasonable assurances that … transactions are
+recorded as necessary to (I) permit preparation of financial statements in conformity with generally
+accepted accounting principles or any other criteria applicable to such statements and (II) to
+maintain accountability for assets.” 15 U.S.C. § 78m(b)(2)(B) (2006).  OM Group violated Section
+13(b)(2)(B) of the Exchange Act by failing to implement a system of internal accounting controls
+that would detect and prevent the improper accounting practices engaged in by its CFO, Controller,
+and Controller of OMG Americas.
+F. REMEDIAL EFFORTS
+In determining to accept the Offer, the Commission considered remedial acts promptly
+undertaken by OM Group and cooperation afforded the Commission staff.
+IV.
+ In view of the foregoing, the Commission deems it appropriate to impose the sanctions
+agreed to in Respondent’s Offer.
+ Accordingly, it is hereby ORDERED that:
+ Respondent OM Group cease an d desist from committing or causing any violations and any
+future violations of Section 17(a) of the Securities Act and Sections 10(b), 13(a), 13(b)(2)(A), and
+13(b)(2)(B) of the Exchange Act and Rules 10b-5, 12b-20, 13a-1, 13a-11, and 13a-13 thereunder.
+ By the Commission.
+       N a n c y  M .  M o r r i s
+       S e c r e t a r y

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-              Federal Home Loan Mortgage Corporation, et al.
-        Federal Home Loan Mortgage Corporation, et al.
-                   U.S. SECURITIES AND EXCHANGE COMMISSION
- Litigation Release No. 20304 / September 27, 2007
- Accounting and Auditing Enforcement Release No. 2728 / September 27, 2007
-  SEC v. Federal Home Loan Mortgage Corporation, et al. , Case No. 07-CV-1728 (U.S.D.C., D.D.C) (filed September 27, 2007)
- Freddie Mac and Four Former Executives Settle SEC Enforcement Action in Connection With Multi-Billion Dollar Accounting Fraud
- On September 27, 2007, the Securities and Exchange Commission filed a settled enforcement action charging the Federal Home Loan Mortgage Corporation ("Freddie Mac"), a shareholder-owned government-sponsored enterprise, with securities fraud in connection with improper earnings management that occurred from at least the second quarter of 1998 through and including the third quarter of 2002. The SEC's settled action also charged the following former Freddie Mac executives: David W. Glenn ("Glenn"), its former President, Chief Operating Officer, and Vice-Chairman of the Board; Vaughn A. Clarke ("Clarke"), its former CFO; Robert C. Dean ("Dean"), a former Senior Vice President; and Nazir G. Dossani ("Dossani"), a former Senior Vice President.
- The SEC's Complaint alleges that Freddie Mac engaged in a fraudulent scheme that deceived investors about its true performance, profitability, and growth trends, and that in 2000, 2001 and 2002 the Company misreported its net income in each of those years by 30.5%, 23.9% and 42.9%, respectively. As outlined in the Commission's Complaint, Freddie Mac's senior management exerted consistent pressure to have the Company report smooth and dependable earnings growth and to present investors with the image of a company that would continue to generate predictable and growing earnings. The Company's violations were the direct result of this corporate culture that placed great emphasis on steady earnings, and a senior management that fostered a corporate image that was touted as "Steady Freddie" to the marketplace
- Among the violative conduct alleged in the Complaint was the use of certain transactions to nullify the transitional effects of the Company's implementation of accounting standard SFAS 133(which relates to accounting for derivative instruments and hedging activities); the improper change in valuing the Company's "swaptions" portfolio at year-end 2000; the improper use of derivatives to shift earnings between periods; the improper use of a reserve in connection with the Company's application of SFAS 91 (which relates to accounting for loan origination costs); the use of certain transactions to nullify the effects of an accounting pronouncement known as Emerging Issues Task Force Issue 99-20; and the maintenance and reporting of a reserves for losses on loans materially in excess of probable losses.
- In its settlement with the Commission, Freddie Mac agreed, without admitting or denying the allegations, to the entry of a final judgment that permanently enjoins the Company from violations of Section 10(b) of the Exchange Act and Exchange Act Rule 10b-5, and Section 17(a) of the Securities Act, which are anti-fraud provisions of the federal securities laws. Freddie Mac also agreed to pay a $50 million civil penalty, which is expected to be distributed to injured investors through a Fair Fund. Without admitting or denying the allegations in the Commission's Complaint, Glenn, Clarke, and Dossani agreed to the entry of a final judgment that permanently enjoins them from violating Sections 17(a)(2) and (3) of the Securities Act. In a separate proceeding, Dean consented to the entry of a Commission Order requiring the he cease and desist from committing or causing any violations and any future violations of Sections 17(a)(2) and (3) of the Securities Act. Additionally, Glenn, Clarke, Dossani and Dean agreed to respectively pay civil penalties of $250,000, $125,000, $75,000, and $65,000, as well as $150,000, $29,227, $61, 663, and $34,658 in disgorgement.
-   SEC Complaint in this matter ;  Administrative Proceeding 33-8850
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+ UNITED STATES OF AMERICA
+ Before the
+SECURITIES AND EXCHANGE COMMISSION
+SECURITIES ACT OF 1933
+Release No. 8850 / September 27, 2007
+ACCOUNTING AND AUDITING ENFORCEMENT
+Release No. 2729 / September 27, 2007
+ADMINISTRATIVE PROCEEDING
+File No. 3-12842
+In the Matter of
+ROBERT C. DEAN
+Respondent.
+ORDER INSTITUTING
+CEASE-AND-DESIST PROCEEDINGS,
+MAKING FINDINGS, AND IMPOSING
+REMEDIAL SANCTIONS AND A
+CEASE-AND-DESIST ORDER
+PURSUANT TO SECTION 8A OF THE
+SECURITIES ACT OF 1933
+I.
+The Securities and Exchange Commission (“Commission”) deems it appropriate that cease-
+and-desist proceedings be, and hereby are, institu ted pursuant to Section 8A of the Securities of
+1933 (“Securities Act”) against Robert C. Dean (“Dean” or “Respondent”).
+II.
+In anticipation of these proceedings, Respondent has submitted an Offer of Settlement to
+the Commission (herein “Offer”), which the Commission has determined to accept.  Solely for the
+purpose of these proceedings and any other proceedings brought by or on behalf of the
+Commission, or to which the Commission is a party, and without admitting or denying the findings
+herein, except as to the Commission’s jurisd iction over hi m and the subject matter of thes e
+proceedings, which are admitted, Respondent consents to the entry of this Order Instituting Cease-
+and-Desist Proceedings, Making Findings, and I mposing Remedial Sanctions and a Cease-and-
+Desist Order Pursuant to Section 8A of the Securities Act of 1933 (“Order”), as set forth below.
+III.
+On the basis of this Order and Respondent’s Offer, the Commission finds that:
+Summary
+  This matter concerns Respondent’s role in altering the method by which the Federal
+Home Loan Mortgage Corpora tion (“Freddie Mac” or “Company” ) valued certai n derivatives
+known as swaptions at year-end for its fiscal year 2000.  As a result of the change in methodology,
+Freddie Mac issued materially false and misleading financial statements.
+Respondent
+1. Robert C. Dean, age 42, was a Vice President of Freddie Mac from February 1998
+through June 2000 and a Senior Vice President of the Company from June 2000 through October
+2003, when he resigned from the Company.  His duties included work in Freddie Ma c’s Market
+Risk Oversight department.
+Other Relevant Entities
+2. Freddie Mac, was ch artered by Congress in 1970 by the  Federal Hom e Loan
+Mortgage Corporation Act (“Act”) .  Its princi pal place of business is in McLean, Virginia.
+Congress created Freddie Mac to  provide stability in the seco ndary m arket f or residential
+mortgages by increasing the liquidit y of mortgage investments and i mproving the distribution of
+investment capital available for residential mortgage financing.
+Background
+3. In June 1998, t he Financial Accounti ng Standards Boar d (“FASB”)  released
+Statement of Financial Accounting Standards No. 133 (“SFAS 133”), which related to accounting
+for derivative instruments and hedging activities.  Derivatives are financial instruments, such as
+options or futures contracts, whose value depends on the value of another “underlying” security or
+asset. Financial companies such as Freddie Mac frequently use derivatives to manage interest rate
+and other risk. SFAS 133 provi ded generally that, commencing January 1, 2001, holders of
+derivatives must acc ount for s uch assets at fai r value.  SFAS 133 also set out detailed rules
+concerning when a company could use hedge accounting to account for the changes in the value of
+a derivative as hedging the change  in the fair valu e or fut ure cash flows of a he dged asset or
+liability. The requirements of  SFAS 133 represen ted a signif icant change f rom the accounting
+practices required by GAAP before SFAS 133 was issued.
+4. For Fr eddie Mac, a ma jor holder of de rivatives subject to SFAS 133, the ne w
+standard required the Company to revalue and “ mark to market” (i.e ., report at actual quoted
+market prices or esti mated m arket value) its portfolio of derivatives  every reporting period.
+Changes in the fair value of c ertain derivatives were required by SFAS 133 to be r ecorded as
+income or loss on the Company’s income statement.
+2
+5. Absent action by Freddi e Mac, the adop tion of SFAS 133 would have re sulted in
+the Company reporting a large one-time gain effective January 1, 2001, because the fair value of its
+derivatives portfolio greatly exceeded the book value and, thereafter, it would have been required
+to m ark to market certa in derivatives, ther eby introducing a ne w c omponent of volatility that
+complicated the Company’s ability to maintain steady and predictable reported earnings.
+Changes in the Methodology for Valuing Swaptions
+6. Consistent with the Company’s general policy of reporting steady a nd predictable
+earnings growth, the Company reacted to SFAS 133 by setting a goal to minimize the transitional
+effects of SFAS 133 – i.e., the transition gain that would be reported effective January 1, 2001.  On
+December 12, 2000, several days after brainstorming alternative ways to reduce the transition gain,
+Respondent suggested that the Company coul d r ecord a lower valuation – and thus reduce its
+transition gain – if it altered the method by which it valued its swap tions.  Beginning on or about
+December 22, 2000, in a series of me moranda written by or in consultation with Respondent, the
+Company undertook to revise its methodology for valuing its swaptions portfolio, incorporating the
+unproven premise that prevailing market prices were not indicative of where the Compa ny could
+conduct transactions in the swaptions market.
+7. On January 2, 2 001, the  Company for mally adopted a  revis ed methodology for
+valuing swaptions.  The new methodology – which the Company used to calculate the fair value
+that was reported in its year-end f inancial statements – used volatility values f rom November 20,
+2000, a date  six wee ks prior to January 1, 2001.  This contributed to t he Company’s swaptions
+portfolio being valued approximately $731 million less than it would have been had the Company
+used current market implied volatilities, i.e., values from December 29, 2000, the last business day
+of the ye ar.  The Company premised its use of November 20 pric ing data on (i) the m arket for
+swaptions purportedly being illiquid as of December 29, 2000 to a degree seen only during certain
+historic events, and (ii) the Company purportedly being unable to transact business in swaptions at
+prices derived through implied volatility reported in the then-current market.
+8. Respondent and others developed a test to support the illiquidity premise.  The test
+involved retroactively c omparing the daily percentage changes in i mplied volatility levels of
+swaptions to their five-year historical standard deviation, or differences from mean values.  The
+stated purpose of this te st was t o show that the frequency and magnitude of change s in i mplied
+volatilities during November and D ecember 2000 were unprecedented versus other prior m arket
+liquidity crises. When the critical standard deviation parameter of this t est failed to “prove” the
+requisite historic market illiquidity at three standard deviations, the test was altered until it showed
+the swaptions market was at historically illiquid levels.  The final test used two standard deviations.
+9. Respondent initiated the concept a nd significantly contributed to the development
+of the Company’s revised methodology for calculating the fair value of its swaptions portfolio.  It
+was formally approved by Responden t and ot hers, and it was adopted i n the preparation of the
+Company’s year-end financial statements.
+3
+10. Respondent negligently a pproved the use of the  methodology that resulted in the
+swaptions valuation bei ng materially under stated, despite his knowledge of c ertain facts tha t
+should have called into question the validity of the methodology and its suitability for determining
+the fair value of the Company’s swaptions.  Among other things, Respondent:
+a.	 knew the Company had not previously deviated from the use of current market
+implied volatilies, but rather, the Comp any generally used f or its swaptions
+valuation model current  end-of-da y market inputs from the Indepe ndent
+Swaptions Pricing Service.
+b.	 was not aware of a ny c ompany that had ever used historica l data to price a
+portfolio of swaptions.
+c.	 knew the methodol ogy was not use d in c onnection with the  Company’s risk
+management practices and activities throughout the period whereas the revised
+methodology was used for accounting purposes.
+d.	 should have known that  the methodology improperly reduced the Comp any’s
+reported tra nsition gain and there fore did not  result in the swaptions  being
+reported at a reasonable estimate of t heir fair value at year-end as required by
+GAAP, and that the circum stances surrounding the  development of th e
+valuation methodology created substantial risk that the swaptions would not be
+disclosed at their fair value on the balance sheet date as required by GAAP.
+Effect on Reported Results
+11. The c hanged valuation me thod enabled Freddie Mac to val ue its s waptions at a
+value approxim ately $731 m illion lower than w ould have been if  current m arket im plied
+volatilities (i.e., December 29, 2000 volatilities) had been used, thus offsetting approximately $731
+million of the SFAS 133 transition gain and causing the following reported financial metrics to be
+materially misstated in Freddie Mac’s Information Statement and Annual Report for 2000:
+a.	 “Futures and Options” in Table 10 were valued at  $2.008 billion; the value
+using year-end volatilities (the historically utilized method) was $2.739 billion –
+a 26.7% understatement.
+b.	 “Total—Net  Fair Value ” of deri vatives in t he s ame ta ble was negati ve $257
+million; this figure should have been $474 million.
+c.	 “Gross Positive Fair Value” of Futures and Options in Table 9-3 in the notes to
+the financia l state ments shows a va lue of $2.187 billion; using year-end
+volatilities, it would have been $2.918 billion – a 25.1% understatement.
+4
+d.	 The “Gross Positive Fair Value” of Freddie Mac’s derivatives portfolio in the
+same table was $6.312 billi on; using year-end volatilities, it would have been
+$7.033 billion – a 10.4% understatement.
+These misstated financial statements were included in offerings of de bt securities by Fre ddie
+Mac.
+12. As a result of the conduct de scribed above, Respondent violated Sections 17(a)(2)
+and (3) of the Securities Act.
+IV.
+In view of the foregoi ng, the Commission deems it appropriate to accept the Offer
+submitted by Respondent and to impose the sanctions agreed to in Respondent’s Offer.
+Accordingly, it is hereby ORDERED that:
+Pursuant to Section 8A of the Securities Act, Respondent Dean shall cease and desist from
+committing or causing any violations and any future violations of Sections 17(a)(2) and (3) of the
+Securities Act.
+ By the Commission.
+       N ancy M. Morris
+       S ecretary
+5