The Securities and Exchange Commission charged Home Solutions of America Inc.’s former executives Frank Fradella, Jeff Mattich and Tampa businessman Brian M. Marshall with fraudulently inflating the stock price to reap financial rewards.
“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, Texas regional office said in a Nov. 30 statement.
“Simply put, instead of rebuilding New Orleans and other hurricane-stricken areas, they constructed a fantasyland of fraud,” Romero said.
In 2006, Home Solutions, then based in Dallas-Fort Worth and listed on the Nasdaq, reportedly paid up to $50 million for Tampa’s Fireline Restoration Inc., a Florida general contractor that specialized in disaster restoration services. Marshall, founder of Fireline, became a director and president of Home Solutions, which has been based in New Orleans since July 2008.
SEC investigators allege that executives at Home Solutions, now listed as HSOA on the pink sheets, lied about business deals in the wake of Hurricane Katrina to pump up the stock price and then sold millions of dollars in shares.
The company recorded millions of dollars in bogus revenue and issues a series of materially false press releases boasting robust finances for the company following weather-related disasters, states the SEC.
The stock price hit a high of $13 before it plummeted following large insider stock sales, class-action shareholder lawsuits and the company’s public acknowledgement it would restate previous incorrect financial statements.
Fradella, HSOA’s chief executive officer from 2001 through 2008, dumped $6.8 million in stock between May 24-26, 2006, the SEC alleges.
Fradella, Mattich, who was chief financial officer, and Marshall “engaged in a series of revenue-inflation schemes, booking millions of dollars of bogus revenue by invoicing and recording receivables on work that never occurred,” states the SEC.
Marshall is accused of engaging in a separate revenue-inflation scheme at Fireline by booking more than $9 million of fake construction revenue from undisclosed, related-party contracts with entities he controlled, said the SEC.
Marshall’s business partner, Jeffrey T. Craft of Craftmar Construction Inc., has consented to a permanent injunction for his involvement with Fireline, the SEC said.
Even before Home Solutions acquired Fireline in July 2006, Marshall allegedly assisted Home Solutions in generating bogus revenues by awarding a contract to HSOA to perform work on Vista Royale, a Vero Beach condominium project on Florida’s east coast damaged by a hurricane, the SEC said.
Home Solutions never performed work on Vista Royale, yet it sent $8.4 million in invoices to Marshall, according to the SEC complaint. Based on those invoices, HSOA recorded $8.4 million in bogus revenue for the second quarter of 2006.
In turn, Home Solutions sent checks for about $2.7 million to Marshall for subcontractors that reportedly worked on Vista Royale, states the complaint. About $1.3 million was paid to entities controlled or managed by Marshall.
Beginning in December 2006, Marshall began a scheme to inflate Fireline’s revenue by causing private companies he controlled to enter into contracts for construction work. He then directed Fireline Vice President Thomas Davis and other employees to create documents and make accounting entries to make it appear Fireline was performing the work, states the complaint.
During 2006 and 2007, Marshall caused Fireline to enter into at least 10 related-party contracts, including a $4 million contract for the construction of Marshall’s home.
“When counsel to HSOA’s audit committee visited the Tampa construction sites in October 2007, most were bare lots or just in the initial stages of construction,” states the complaint.
For the year ended Dec. 31, 2006, Home Solutions’ revenue was overstated by $3.2 million while operating income was overstated by about $1 million.
For the six months ended June 30, 2007, Home Solutions’ revenue was overstated on these projects by $6.9 million, states the complaint.
To perpetuate the scheme, Marshall had Craft, his partner at Craftmar Construction, provide a false confirmation letter of the work to KMJ Corbin & Co., HSOA’s accounting firm, the complaint states.
Marshall, Fradella and Mattich are charged with violations of the antifraud, reporting, books and records and internal control provisions of the federal securities laws. The SEC is seeking permanent injunctive relief and financial penalties.
In addition to Craft, three others, including Davis, agreed to a settlement with the SEC without admitting or denying allegations in the complaint filed Monday in U.S. District Court, Northern District of Texas.
Former Chief Financial Officer and Chief Operations Officer Rick O’Brien consented to a permanent injunction and $130,000 penalty. And former controller Stephen Gingrich consented to a permanent injunction, a $25,000 penalty and an order barring him from practicing before the SEC as an accountant for at least three years.
SEC v. Home Solutions of America, Inc., Frank J. Fradella, Brian M. Marshall, Jeffrey M. Mattich, Rick J. O'Brien, Stephen C. Gingrich, Thomas L. Davis and Jeffrey T. Craft, Civil Action No. 3:09-cv-02269 (DCG) (N.D. Tx. Nov. 30, 2009)
Litigation Release No. 21314 / November 30, 2009
Accounting and Auditing Enforcement Release No. 3071 / November 30, 2009
SEC v. Home Solutions of America, Inc., Frank J. Fradella, Brian M. Marshall, Jeffrey M. Mattich, Rick J. O'Brien, Stephen C. Gingrich, Thomas L. Davis and Jeffrey T. Craft, Civil Action No. 3:09-cv-02269 (DCG) (N.D. Tx. Nov. 30, 2009)
SEC Charges Hurricane Restoration Company and Executives In Post-Katrina Accounting Fraud; Four Individuals Settle
On November 30, 2009, the Securities and Exchange Commission filed a civil injunctive action in the U.S. District Court for the Northern District of Texas charging a Dallas and New Orleans-based hurricane restoration company and several executives for lying about non-existent business deals in the wake of Hurricane Katrina, and fraudulently inflating the company's stock price before the company's CEO sold millions of dollars in company shares.
The SEC alleges that Home Solutions of America, Inc. recorded millions of dollars in bogus revenue and issued a series of materially false press releases boasting robust financial results following Katrina and other weather-related disasters, thus inflating the company's stock price. The stock price later plummeted after large insider stock sales, the filing of private securities lawsuits alleging fraud, and the company's public announcement that it would restate its financial statements. Home Solutions then-CEO Frank Fradella, who is among seven individuals charged by the SEC in the scheme, dumped approximately $6.8 million worth of stock into the inflated market.
According to the SEC's complaint, several different illicit maneuvers were used by Home Solutions at various times between 2004 to 2007 at the direction of Fradella and other executives in order to mislead the public about the company's true financial condition. The SEC alleges that Fradella initiated an expense-deferral scheme to inflate earnings by expensing year-end bonuses when paid rather than when earned. Fradella, Home Solutions CFO Jeff Mattich, and Brian Marshall (who became a Home Solutions director and president of its largest subsidiary, Fireline Restoration Inc., after its acquisition by Home Solutions) together engaged in a series of revenue-inflation schemes, booking millions of dollars of bogus revenue by invoicing and recording receivables on work that never occurred. They also improperly caused millions of dollars of revenue from another public company to be booked as Home Solutions revenue.
The SEC further alleges that Marshall engaged in a separate revenue-inflation scheme at Fireline, booking more than $9 million of fake construction revenue from undisclosed, related-party contracts with entities that Marshall controlled. In fact, at the time Fireline caused Home Solutions to record the revenue, very little work had been performed on the projects and most remained bare-dirt lots.
The SEC's complaint charges Home Solutions, Fradella, Marshall and Mattich with violating Section 17(a) of the Securities Act of 1933 (the "Securities Act") and Section 10(b) of the Securities Exchange Act of 1934 (the "Exchange Act") and Rule 10b-5 thereunder. The complaint also charges Home Solutions with violating, and Fradella, Marshall and Mattich with aiding and abetting Home Solutions' violations of, Sections 13(a), 13(b)(2)(A), and 13(b)(2)(B) of the Exchange Act and Rules 12b-20, 13a-1, and 13a-13. The complaint further charges Fradella and Mattich with violating Section 13(b)(5) of the Exchange Act, Rules 13a-14, 13b2-1, and 13b2-2 thereunder and Section 304 of the Sarbanes-Oxley Act of 2002; and Marshall with violating Section 13(b)(5) of the Exchange Act and, Rules 13b2-1, and 13b2-2 thereunder, and aiding and abetting Home Solutions' violations of Section 10(b) of the Exchange Act and Rule 10b-5 thereunder.
The complaint seeks permanent injunctive relief and financial penalties against Home Solutions, Fradella, Marshall and Mattich, as to all the individuals, full disgorgement with interest and officer and director bars, and as to Fradella and Mattich, reimbursement of bonuses and stock sale profits under Section 304 of the Sarbanes-Oxley Act. Based on the failure of Home Solutions to file periodic reports since August 2007, the Commission also instituted separate administrative proceedings against the company, seeking revocation or suspension of each class of its securities.
Four others charged today by the SEC simultaneously agreed to settle on the following terms, without admitting or denying the allegations in the complaint.
Former Home Solutions CFO and COO Rick O'Brien agreed to pay a $130,000 penalty.
Former Fireline controller Stephen Gingrich agreed to pay a $25,000 penalty and to an administrative order barring him from practicing before the Commission as an accountant for at least three years. Former Fireline COO Thomas Davis agreed to pay a $25,000 penalty and to pay disgorgement and interest of $32,850.
In addition, O'Brien, Gingrich and Davis each consented to final judgments permanently enjoining them from violating Sections 17(a)(2) and (3) of the Securities Act and from aiding and abetting violations of Sections 13(a) and 13(b)(2)(A) of the Exchange Act and Rules 12b-20, 13a-1, and 13a-13 thereunder.
Finally, Jeff Craft, a business partner of Marshall, consented to a final judgment permanently enjoining him from violating Rule 13b2-2 under the Exchange Act.
Market Data 
Markets 
AI
