SEC Accuses Former NextCard Executives of Accounting Fraud, Improper Stock Sales

Securities regulators are suing the management team behind the rapid rise and fall of online credit card lender NextCard Inc., alleging the company's top executives cooked the books and then scrambled to sell their stock before the ruse unraveled into financial ruin. The civil complaint filed Tuesday by the Securities and Exchange Commission continues the government's effort to clean up one of the dot-com bust's biggest debacles.

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Securities regulators are suing the management team behind the rapid rise and fall of online credit card lender NextCard Inc., alleging the company’s top executives cooked the books and then scrambled to sell their stock before the ruse unraveled into financial ruin. The civil complaint filed Tuesday by the Securities and Exchange Commission continues the government’s effort to clean up one of the dot-com bust’s biggest debacles. Banking regulators seized control of NextCard in early 2002, resulting in a failure that inconvenienced customers and saddled the taxpayer-backed Federal Deposit Insurance Corp. with an estimated loss of $253.5 million. NextCard’s collapse also burned investors who wound up with a virtually worthless stock that once traded above $50 per share. The SEC’s suit accused five executives, including former NextCard chairman Jeremy Lent and CEO John Hashman, of engaging in accounting shenanigans to conceal massive losses that began to pile up in late 2000 after the dot-com bubble burst. The scheme propped up NextCard’s stock, opening a window for both Lent and Hashman to sell their shares at artificially inflated prices, the SEC alleged. The complaint said Lent had implored other NextCard employees not to sell their company stock during late 2000 and 2001 so the shares wouldn’t decline precipitously. Hashman expects to be cleared of any wrongdoing, said his San Francisco attorney, John Potter. Lent’s attorney did not immediately return phone calls. Lent, who co-founded NextCard in 1996, made $7 million by selling company shares through a family trust between February 2001 and August 2001, the SEC said. Hashman, who joined NextCard as chief financial officer in 1997 and became CEO three years later, made $321,000 from stock sales completed from May 2001 and July 2001. The SEC says its investigation found that Hashman had left handwritten notes in November 2000 suggesting the company needed to resort to “accounting gimmickry” for two to three quarters. Banking regulators forced NextCard to reveal the severity of its loan trouble in October 2001, which led investors to sell, wiping out 84 percent of the company’s market value in a single day. NextCard went bankrupt 11 months later. Tuesday’s lawsuit also names three other former NextCard executives: Yanzi Cai, chief operating officer; Douglas Wachtel, controller; and Bruce Rigione, chief financial officer. The complaint estimates that Cai made $903,000 by selling NextCard stock while management concealed the company’s financial problems. The SEC estimates Wachtel made $105,405 from improper stock sales. Attorneys for Cai and Wachtel did not immediately return phone calls. Although he didn’t profit from stock sales, Rigione participated in the accounting cover-up, the SEC alleged. His attorney declined to comment. Regulators want the former NextCard executives to return the profits from the stock sales. The executives also face possible fines. Last year, authorities charged three former Ernst & Young employees responsible for auditing NextCard’s books of illegally tampering with the lender’s accounting records. Copyright 2004 Associated Press. All Rights Reserved. This material may not be published, broadcast, rewritten, or redistributed.

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