Home Solutions of America lied to inflate stock price before CEO sold, SEC alleges
07:38 AM CST on Tuesday, December 1, 2009
By SHERYL JEAN / The Dallas Morning News http://www.dallasnews.com/sharedcontent/dws/bus/smallbiz/stories/120109dnbushomesolutions.3f0a341.html
The U.S. Securities and Exchange Commission has accused a former Dallas-based hurricane restoration company and some of its former executives of reporting bogus multimillion-dollar business deals and fraudulently inflating its stock price before the former CEO sold millions of dollars in shares.
In a civil complaint filed Monday in U.S. District Court in Dallas, the SEC charged that Home Solutions of America Inc., now based in New Orleans, issued news releases and filing statements with the SEC about false contracts and financial results after Hurricane Katrina in 2005 and other disasters. The company's stock price then soared.
The SEC also accused then-CEO Frank J. Fradella, who resigned in March, of selling $6.8 million in company stock in an inflated market that he helped create. The stock price later plunged after large insider stock sales, shareholder lawsuits and the company's announcement that it would restate some financial reports.
Home Solutions' shares peaked at $14.14 in May 2006 but lost about 70 percent of their value by early September. Today, shares trade over the counter at 3 cents.
"The company's financial results were largely fabricated, and its public statements were intended to deceive," Rose Romero, director of the SEC's Fort Worth office, said in a prepared statement. "Instead of rebuilding New Orleans and other hurricane-stricken areas, they constructed a fantasyland of fraud."
Home Solutions and four of seven executives accused have reached settlements with the SEC.
The company has "executed a consent agreement to settle the case in its entirety," said Mark Mandel, a New York lawyer representing Home Solutions. "The company is pleased to put this behind them."
Jonathan Scott, a branch chief in the SEC's Fort Worth office, confirmed "a partial settlement in principal" and said Home Solutions has agreed to "let the court determine the appropriate penalty." The SEC is waiting for Home Solutions to provide all of the "necessary consent documentation," he said.
The SEC has initiated separate administrative proceedings to suspend or revoke the company's securities. Mandel said he couldn't comment on Home Solutions' operating status. Home Solutions could not be reached.
The SEC cited several "illicit maneuvers" from 2004 to 2007 by Fradella, Home Solutions' former chief financial officer Jeff Mattich and Brian Marshall, former president of the company's Fireline Restoration Inc., subsidiary to mislead the public about the company's true financial condition and defraud its main lender.
The agency accused Fradella of creating an expense-deferral scheme to inflate net income and accused all three men of conducting a series of revenue-inflation schemes.
Fradella, Mattich and Marshall and their lawyers could not be reached for comment.
The SEC alleged that Home Solutions misstated its net income for 2004, 2005 and 2006 and the first half of 2007 by 6.8 percent to 308 percent by improperly deferring expenses and recording false revenue and accounts receivable in advance of expected acquisitions or for construction projects that never materialized.
Home Solutions also improperly accounted for millions of dollars in executive bonuses in 2004, 2005 and 2006, which also inflated net income for those years, according to the SEC.
Since last fall, Home Solutions has been selling or closing divisions that don't directly serve the New Orleans market, according to documents filed with the SEC in April. Its remaining business, Picke Construction Corp. in New Orleans, lists Fradella as CEO on its Web site. A call to Picke found its phone disconnected.
Home Solutions moved its headquarters from Dallas to New Orleans in July 2008.
Four former Home Solutions and Fireline executives settled with the SEC, agreeing to permanent injunctions and a total of $180,000 in penalties and $32,850 in disgorgement and interest payments. http://www.dallasnews.com/sharedcontent/dws/bus/smallbiz/stories/120109dnbushomesolutions.3f0a341.html