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Diebold Executives Accused by SEC of Accounting Fraud

June 2 (Bloomberg) -- Three former senior executives of Diebold Inc. used fraudulent accounting practices to inflate earnings from at least 2002 to 2007, the U.S. Securities and Exchange Commission alleged in a lawsuit.

The SEC also named the company, a maker of bank teller-machines, in its complaint even as it reached a $25 million settlement with Diebold, according to an SEC statement. Diebold said in May 2009 that it had an “agreement in principle” to settle with the SEC, which was completed today.

Diebold’s financial management received reports comparing its actual earnings to analyst earnings forecasts and would then create lists of ways to close the gaps, the SEC said. The company would improperly recognize revenue or otherwise inflate Diebold’s financial performance, the SEC said.

Diebold “regularly manipulated earnings to meet forecasts,” the SEC said in the complaint filed today in federal court in Washington.

The SEC also filed suit in federal court in Ohio against Gregory Geswein, the company’s former chief financial officer; Sandra Miller, the former director of corporate accounting; and Kevin Krakora, the former controller and later CFO. Only Krakora is still with the company, said spokesman Michael Jacobsen. The case against the individuals is continuing, the SEC said.

‘Strongly Disputes’ Charges

“We are deeply disappointed that almost five years after Mr. Geswein voluntarily left Diebold on his own initiative, the SEC has made these stale allegations,” Stephen Scholes, his attorney, said in a statement. “Mr. Geswein strongly disputes the SEC’s charges.”

John Carney, Krakora’s attorney at Baker Hostetler LLP in New York, said Krakora is “an honest and well-respected financial professional with an unblemished record for integrity.” He disagrees with the SEC’s allegations, he said in an e-mail.

Virginia Davidson, Miller’s attorney, said her client “did nothing wrong.”

“The SEC never should have dragged her into this case,” said Davidson. “We’re confident the courts will agree.”

The company hasn’t admitted or denied any wrongdoing under its accord, the company said in a statement.

“We are pleased that the settlement with the SEC is final,” said Thomas W. Swidarski, Diebold’s president and chief executive officer.

Walden O’Dell, Diebold’s former CEO, agreed to reimburse the company more than $470,000 in cash bonuses, 30,000 shares of Diebold stock and 85,000 stock options even though he wasn’t accused of misconduct, the SEC said.

Sarbanes-Oxley

The Sarbanes-Oxley law of 2002 gave the SEC authority to seize payouts to CEOs and chief financial officers at companies that restate earnings “as a result of misconduct.” Until last year, the regulator had targeted executives it accused of orchestrating schemes.

The only other use of this provision by the SEC was its suit against Maynard Jenkins, the former CEO of CSK Auto Corp., in July 2009, seeking reimbursement of bonuses and stock-sale profits after other executives allegedly inflated earnings. Jenkins moved to dismiss the case, which he described as an attempt to “impose a Draconian penalty” on someone the government agreed didn’t participate in the wrongdoing.

The law “encourages senior management to proactively take steps to prevent fraudulent schemes from happening on their watch,” said Scott Friestad, an associate director in the SEC’s enforcement division who conducted the investigation. “We will continue to seek reimbursement of bonuses and other incentive compensation from CEOs and CFOs in appropriate cases.”

‘Certain Incentives’

“The SEC has not alleged that Mr. O’Dell engaged in any fraud,” said Joshua Hochberg, O’Dell’s attorney at McKenna Long & Aldridge LLP in Washington. “Mr. O’Dell is required to repay certain incentives as a result of the Sarbanes-Oxley law.”

Diebold rose 88 cents to $29.08 today in New York Stock Exchange composite trading. Earlier, shares dropped as low as $18.26.

The case is U.S. Securities and Exchange Commission v. Diebold Inc., 10cv908, U.S. District Court, District of Columbia (Washington).

To contact the reporters on this story: William McQuillen in Washington at bmcquillen@bloomberg.net; Joshua Gallu in Washington at jgallu@bloomberg.net.

To contact the editors responsible for this story: David E. Rovella at drovella@bloomberg.net; Lawrence Roberts at Lroberts13@bloomberg.net.

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