CSC Agrees To $190M Settlement With SEC Over Accounting Fraud Charges

The Securities and Exchange Commission Friday charged CSC and eight former executives of the solution provider giant with multiple counts of accounting fraud. The Falls Church, Va.-based solution provider has agreed to a $190 million penalty to settle the case. CSC is No. 4 on CRN's 2014 Solution Provider 500 list.

Five of the eight executives charged in the case agreed to settlements, according to an SEC statement. CSC and some of its former executives were charged with manipulating financial results and concealing significant problems about the company's "largest and most high-profile contract," a multibillion-dollar deal with the U.K.'s National Health Service (NHS), the SEC said in the statement.

[Related: Report: HP Passed On CSC Buyout Deal]

The SEC released new details surrounding the allegations concerning the CSC executives, including former CEO Michael Laphen, who agreed to return more than $3.7 million in compensation to CSC under the ’clawback’ provision of the Sarbanes-Oxley Act of 2002, which necessitates that the SEC seek the repayment of incentive compensation from executives involved in fraud. Laphen also agreed to pay a $750,000 penalty.

The SEC alleged that when CSC learned it would lose money on the NHS contract as it would be unable to meet required deadlines, financial executives distorted the company's accounting models by adding items "that artificially increased its profits but had no basis in reality," in order to avoid the financial hit to its earnings, according to the SEC statement.

With Laphen's approval, CSC continued to base its models on "contract amendments it was proposing to the NHS rather than the actual contract," allowing it to avoid any financial hit the delays would bring, the SEC said in its statement.

"NHS officials repeatedly rejected CSC’s requests that the NHS pay the company higher prices for less work," said the SEC in the statement. "By basing its models on the failing proposals, CSC artificially avoided recording significant reductions in its earnings in 2010 and 2011."

The agency added that its investigation into the matter found that Laphen and former CFO Michael Mancuso did not disclose these details to investors and alleged they made misleading public statements about the solution provider's performance. The investigation also found that Mancuso allegedly covered up a prepayment arrangement that allowed CSC to meet its cash flow targets by borrowing large sums of money from the NHS at a high interest rate, the SEC said.

Mancuso agreed to return $369,100 to CSC and will be penalized an additional $175,000, according to the SEC.

"When companies face significant difficulties impacting their businesses, they and their top executives must truthfully disclose this information to investors," said Andrew J. Ceresney, director of the SEC’s Division of Enforcement in a statement. "CSC repeatedly based its financial results and disclosures on the NHS contract it was negotiating rather than the one it actually had, and misled investors about the true status of the contract. The significant sanctions in this case against the company, CEO and CFO reflect our focus on ensuring that such misconduct is vigorously pursued and punished."

"We are pleased to settle this long-standing civil investigation that focused largely on accounting issues from 2009 to 2012," said a CSC spokesperson in an email to CRN. "Putting this matter behind us is in the best interest of CSC, our stakeholders, and our ongoing business transformation. From the outset, CSC cooperated with the SEC’s Division of Enforcement. The company installed new leadership in 2012, made adjustments to prior period financial statements in our SEC filings, and since the beginning of 2011 has instituted comprehensive enhancements to our compliance, financial control and disclosure programs. As part of the settlement agreement, CSC neither admits nor denies the SEC’s allegations."

PUBLISHED JUNE 5, 2015