Racking up its third courtroom loss in recent weeks, the U.S. Securities and Exchange Commission struck out across the board in an accounting fraud case against two former executives from a Southern California water treatment company.
In June 2011, the SEC charged former Basin Water Inc. chief executive officer Peter Jensen and former chief financial officer Thomas Tekulve Jr. with fraudulently inflating the company’s revenue by improperly including revenue from six sales transactions in reports filed with the commission. The commission alleged Basin overstated its 2006 revenues by 13 percent and its 2007 revenues by 74 percent. Jensen was also charged with insider trading.
The SEC sought an officer and director bar, disgorgement of ill-gotten gains and a financial penalty. But U.S. District Judge Manuel Real of the Central District of California didn’t buy it. After a nine-day bench trial, Real rejected every claim in the SEC’s 57-page complaint.
“No documentary evidence or witness testimony presented at the trial tended to show that any of the transactions were shams,” Real wrote in his Dec. 10 decision. “In fact, everybody involved in the various transactions testified that they were actual, legitimate deals.”
Tekulve was represented by O’Melveny & Myers partners Carolyn Kubota and Seth Aronson and associate Alec Johnson. Jensen tapped David Scheper, William Forman, and Jean Nelson of Scheper Kim & Harris.
“In this case, the SEC confused accounting disagreements for fraud,” Kubota, a white-collar defense partner in the firm’s Los Angeles office, said in a written statement. “The court saw the distinction.”
Real concluded that “revenue was properly recognized on all six transactions,” and that there were “valid economic justifications” for all of them.
The only evidence that supported the SEC’s position, the judge wrote, was testimony from an expert witness, Professor Carla Hayn. However, the judge did not find her testimony persuasive, and “gave very little weight” to it.
Nor did Real find the defendants were negligent, writing that Tekulve “worked diligently on ensuring he got the accounting right.” Real also found the insider trading allegations to be without merit.
Earlier this month, the SEC also came up short when a federal jury in Kansas rejected all 12 of the agency’s securities fraud claims against Stephen Kovzan, chief financial officer of NIC Inc. And in October, a jury in Dallas found against the SEC in an insider trading case against billionaire Mark Cuban.
Contact Jenna Greene at firstname.lastname@example.org.