Category Archives: Business Services

Largest Houston company to restate financials

Crown Castle, now the largest Houston-area public company by market capitalization ($68 billion) following the recent energy meltdown, has announced that it will restate its financial statements for 2016 through 2018. It may have to file an extension for its 2019 results.



The company is based in the Galleria area and owns, operates and leases more than 40,000 cell towers and more than 75,000 route miles of fiber supporting small cells. It has revenues of $5.8 billion and 5,000 employees.

The restatement is the result of an error in its revenue recognition of tower installation services. In short, the company had been recognizing the entirety of the transaction price when it had completed installation services. However some of the transaction price was consideration for  permanent improvements in the installation. The improvements were recorded as fixed assets, therefore the consideration received for that element should have been recognized over the lease term.

The effect is to reduce adjusted EBITDA for 2019 by $100 million. Profits for previous years have also been reduced. The cumulative effect is increase liabilities and reduce equity by $457 million. It sounds like a big number but it is less than 4% of equity.

The Securities and Exchange Commission (SEC) issued a subpoena in September 2019 requesting certain documents from 2015 through to the present. However, the company states it had previously provided information to the SEC related to the matter. The company also said that the SEC investigation is still ongoing. That sounds like there could be more bad news coming.

The auditors for Crown Castle are PricewaterhouseCoopers. This episode doesn’t reflect well on them.

Unsurprisingly, the company that the restatement indicates the existence of one or more material weaknesses in its internal control over financial reporting.

SEC Filing – Crown Castle restatement

Houston accounting firm barred from performing public company audits

LBB Associates and its managing partner and majority partner, Carlos Lopez, have been barred by the Securities and Exchange Commission from performing public company audits. Or in the language of the SEC ‘LBB and Lopez are denied the privilege of appearing or practicing before the Commission as accountants’.



LBB, based in NW Houston, has two partners and approximately eight accountants on staff. It has about 28 public company clients. The stock of these clients is generally not publicly-traded but the clients follow SEC rules and filing requirements.

The case arose out of the collapse of an audit client, Behavioral Recognition Systems in 2015. At the time, that company was owned by Ray Davis. The SEC later filed a complaint against BRS and Davis. It alleged that they engaged in a fraudulent scheme to raise $28 million from BRS investor funds and divert $7.8 million for Davis’s personal use. The SEC alleged that Davis used the funds to purchase ancient jewelry, gold and other artifacts. Davis allegedly tried to cover his tracks by submitting fake consulting invoices to BRS from two related companies that he controlled.

The alleged fraud was discovered shortly after Davis sold the company in July 2015. However, Davis died in July 2018 before the case could be concluded.

The SEC started disciplinary proceedings against LBB in January 2019, alleging professional misconduct. The primary allegation was that Lopez relied on BRS management representations concerning the related party transactions and failed to perform any audit work around them.

Without admitting or denying the findings of the SEC, LBB and Mr Lopez agreed to the sanctions imposed. After two years, Lopez and LBB may apply to the Commission to be reinstated. However such future work would have to be reviewed by an independent audit committee of the public company.

https://www.sec.gov/litigation/admin/2020/34-88140.pdf

Workforce accommodation specialist appoints new CFO

Carolyn Stone has been appointed CFO of Civeo Corporation. She replaces Frank Steininger. He is staying on at the company as Executive VP of Strategic Initiatives until he retires in March 2020.



Civeo has its head office in downtown Houston. The company provides workforce accommodation services to the oil and gas and mining industries. It has operations in the US, Canada and Australia. The company has a market capitalization of $151 million, though its current share price is only 81 cents.

Ms Stone joined the company in May 2014 as its Controller and Corporate Secretary. Prior to joining Civeo, she was the CFO at Synagro. At that time Synagro was a Houston-based biosolids company that went in Chapter 11 in April 2013. Before that, Ms Stone spent many years working for Dynergy. She started her career at PricewaterhouseCoopers.

Compensation for Ms Stone was not disclosed.

Ms Stone’s appointment means that 10% of all Houston-area public companies have female CFOs. You can see the list of all the companies here.

https://www.businesswire.com/news/home/20191118005882/en/Civeo-Appoints-Carolyn-Stone-Chief-Financial-Officer

 

Harris County judge charged with fraud

Judge Alexandra Smoots-Thomas has been indicted on allegations of wire fraud. Since 2009, she has served as the presiding judge for the 164th District Court for the State of Texas. She has jurisdiction of Texas civil cases located within Harris County.



Beginning in early 2013, the indictment alleges that Smoots-Thomas used funds donated to her campaign for personal expenses unrelated to the campaign. She then hid her misuse of these funds by filing false campaign finance reports with the Texas Ethics Commission and concealing her activity from her campaign manager.

The indictment lists 7 transactions for a total of $24,890 where Smoots-Thomas allegedly used the campaign account for personal use. $11,809 was used to pay a home mortgage and $9,942 to The Regis School for tuition. An airfare, a Prada handbag and a ring from Zales comprise the other transactions.

Each of the seven counts of wire fraud carries a possible sentence of up to 20 years in federal prison as well as a maximum $250,000 fine.

Smoots-Thomas was the presiding judge over the initial phase of the TechnipFMC – McDermott lawsuit involving COO Sumit Mukherjee. Smoots-Thomas was replaced as the judge on the case just before the parties were set to go to trial as she was diagnosed with breast cancer. She is still receiving treatment for the cancer.

Smoots-Thomas indictment

https://www.justice.gov/usao-sdtx/pr/local-judge-charged-fraud

Freight forwarding company owner pleads guilty to price fixing

Francis Alvarez, owner of a freight forwarding company, has pleaded guilty to an antitrust charge for her role in a multi-year, nationwide conspiracy to fix prices for international freight forwarding services.



The original charges were filed in the Southern District of Florida in Miami. According to the charges Alvarez and her co-conspirators agreed to fix prices, primarily for shipments to Honduras between September 2010 and August 2014. They held meetings where they discussed prices to be charged for freight services, exchanged pricing information and raised prices in accordance with the agreement.

Alvarez has agreed to pay a criminal fine and cooperate with the ongoing investigation. She will be sentenced at a later date. Alvarez owns Servicios Hondurenos which is based just north-east of downtown Houston.

Roberto Dip (who owned Dip Shipping, a freight forwarding company in New Orleans) and Jason Handal (a company manager for Dip) pleaded guilty in November 2018. In June, they were sentenced to 18 months and 15 months prison terms, respectively. The individuals each paid a $20,000 fine while the company paid a $488,250 criminal fine.

The ongoing investigation into price fixing in the international freight forwarding industry is being conducted by the Antitrust Division’s Washington Criminal I Section and the FBI’s New Orleans Field Office.

https://www.justice.gov/opa/pr/third-freight-transportation-executive-pleads-guilty-antitrust-charge

Husband and wife charged with $3.5 million tax evasion

Asim Lodhi and wife Naila Lodhi have been charged with tax evasion of $3.5 million of diverted corporate income.

The Lodhis owned and operated US Loss Prevention Inc and Vanguard Detective & Security Agency. The companies provided contract security services for commercial clients in the Houston and Dallas/Fort Worth metropolitan areas. The principal office was in SW Houston.



The indictment alleges that, between 2008 and 2011, the couple diverted and cashed approximately $3.5 million in customer checks through two checking cashing services. One was located in a Chevron gas station in Spring, the other was in a Valero gas station in Cypress!

However, the couple only deposited $2 million into the company bank accounts during that time. Furthermore the couple told an unnamed Cypress CPA who prepared the books and tax returns that the deposits were for non-taxable shareholder loans rather than taxable sales.

When the couple found out that they were under IRS investigation, they hired another CPA firm to prepare amended tax returns that showed the $2 million as taxable sales. These amended returns were presented to the IRS in July 2013. They didn’t disclose the missing $1.5 million.

The couple have been charged with seven counts of tax evasion. If convicted, Asim and Naila Lodhi face a maximum of five years in federal prison on each count. They also face a possible $250,000 maximum fine.

https://www.justice.gov/usao-sdtx/pr/husband-and-wife-charged-tax-evasion

Lodhi indictment

 

Houston energy broker to pay $1.5 million penalty

Matt Webb, the owner of Classic Energy LLC, has agreed to pay a $1.5 million penalty following the settlement of charges brought by the US Commodity Futures Trading Commission (CFTC).  The company is based near downtown Houston and is a broker of trades in energy futures.



According to the order, on 63 occasions between April 2014 and September 2015, Webb misused material, nonpublic block trade order information provided to him by Classic’s customers. Instead of using this information to facilitate trades with other market participants, as customers expected, Webb took the other side of these block trades in his proprietary trading account.

According to the order, Webb further deceived Classic’s customers by creating the false impression that he was acting only as a broker, not as a trading counter-party. Webb charged brokerage commissions. Through this scheme, Webb realized profits over of $400,000.

The order also finds multiple failures of supervision and record keeping.

Penalties

Webb agreed to settle without admitting or denying any of the findings or conclusions of the order. In addition to the $1.5 million penalty, he agreed to pay disgorgement of $413,065. Mr Webb is also banned from trading until January 3, 2022.

Earlier settlement with ICE

Mr Webb executed most of those trades on an electronic trading operated by Ice Futures US (‘ICE’) which is part of a public company that is itself regulated by CFTC. Back in December 2016, Mr Webb settled with ICE over allegations that he entered into 52 fictitious transactions. (I think the 52 is a subset of the 63 trades cited by the CFTC). He agreed to pay disgorgement of $303,627 and a penalty of $503,627. In addition the company agreed to pay a fine of $250,000. An employee of Classic Energy also agreed to pay a fine of $100,000 for entering some fictitious transactions.

The CFTC stated that the $413,065 disgorgement would be reduced by whatever Webb had paid ICE in relation to the $303,627 from the December 2016 settlement.

Settlement with NFA

Mr Webb has also had issues with National Futures Association. In December 2016 he settled with the NFA over inadequate record keeping and misreporting the time of trades ($250,000 penalty). In June 2019 he settled charges of inadequate record keeping ($200,000 penalty).

Commodity Futures Trading Commission – press release

 

Takeover of Houston company falls through after 18 months

The takeover of Houston-based Stewart Information Services by Fidelity National has fallen through after the Federal Trade Commission sought to block the proposed merger.

The FTC said that the acquisition would substantially reduce competition in state markets for title insurance underwriting for large commercial transactions, and in several local markets for title information services. It would reduce ‘The Big 4’ to 3 competitors.



Fidelity had agreed to buy Stewart in March 2018 for cash and stock worth $50.20. That valued the company at $1.2 billion at the time. Stewart’s shares are currently trading at $34.50 (market cap $800 million).

Fidelity has agreed to pay a $50 million termination fee to Stewart.

Stewart also announced that current director Frederick Eppinger will become CEO. However, current CEO Matthew Morris, who has been CEO since 2011, will remain with the company. He will assume the role of President.

CFO David Hisey was appointed to his position in September 2017. Interestingly Mr Hisey has some unique clauses in his employment contract. If Mr Hisey’s employment is terminated without cause within one year of naming a new CEO,  he will get additional compensation above and beyond what he would normally get. According to the latest annual proxy, his severance package would be valued at $2.5 million versus $1.8 million normally.

If Mr Hisey were to voluntarily terminate his employment for ‘Good Reason’ within 180 days of the company naming a new CEO, he would get a severance package worth $1.3 million.

How long before he resigns?

https://www.businesswire.com/news/home/20190910005351/en/

Houston attorney convicted of offshore tax evasion scheme

Jack Stephen Pursley, a.k.a Steve Pursley has been convicted in an offshore tax evasion scheme. After a four day trial, he was convicted of one count of conspiracy to defraud the US and three counts of tax evasion.

Mr Pursley was friends with Shaun Mooney from college at Texas Christian University. Mr Mooney ran a company that, until 2009, provided personnel services to clients who owned offshore oil rigs, primarily in the Middle East.  However, Mr Mooney had a problem. He had $18 million held in an offshore bank account in the Isle of Man. He wanted to remit it back to the US without paying tax on it.



Mooney and Pursley created a company in which Mooney owned 76% and Pursley 24%. Mr Pursley used that company to transfer the money back to the US. He disguised the transfers as stock purchases in US corporations that they owned. Mr Pursley evaded taxes by claiming the withdrawal of funds were non-taxable loans and returns of capital.

At trial, the government proved that Mr Pursley received more than $4.8 million and didn’t pay taxes on this income between 2007 and 2010. Instead he used the money to buy two houses in Houston and a vacation home in Vail, Colorado.

Court documents suggested that Mooney provoked the federal investigation when he disclosed the tax scheme to the authorities in 2013 under the Offshore Voluntary Disclosure Program.

Sentencing will occur in December. He faces a maximum of five years in prison for the conspiracy count and five years for each count of tax evasion. He also faces a period of supervised release, monetary penalties and restitution.

https://www.justice.gov/opa/pr/houston-attorney-convicted-offshore-tax-evasion-scheme

Houston woman pleads guilty to defrauding Dr Pepper Snapple

Anna Maria Sites, aged 42, from Friendswood, has pleaded guilty to committing fraud against beverage company Dr Pepper Snapple Group (DPSG).



Ms Sites was originally indicted in October 2018. She handled human resources and accounting for a company called FulFill Plus. It is based in northwest Houston and managed various rebate advertising campaigns for DPSG across the US.

The rebates included returned bottle caps or for switching to DPSG brand drinks in restaurant/convenience store soda dispensers. DPSG, based in Plano, Texas, paid FulFill to administer those campaigns.

Ms Sites was indicted along with Joseph Isaac, the operator of FulFill. He is still awaiting trial in the case [UPDATE 09-11-19 Mr Isaac has now pleaded guilty as well]. As an aside, for a while, Ms Sites and Mr Isaac also owned a couple of restaurants together. They were based in the Montrose area of Houston (Bibi’s Kitbar and Eleven XI).

The fraud was not sophisticated at all. In 2014 and 2015 Ms Sites told DPSG to issue rebate checks to FulFill to reimburse the company for rebate claims that she had processed. In fact she hadn’t made the payments to the claimants. Of course, the restaurants kept pushing for their $75 rebate check. Eventually, after multiple complaints, Ms Sites would issue the rebate check.

The original indictment alleged that the fraud started as far back as 2010 and that some of the misappropriated funds were used for the personal use of the defendants. Funds was also allegedly used to cover general expenses of FulFill. The indictment didn’t quantify the extend of the alleged fraud.

The plea deal only refers to a specific rebate campaign in 2014 and 2015 and makes no mention of any personal gain by Ms Sites.  She will be sentenced in December 2019 and faces up to five years in prison and a possible $250,000 maximum fine.

https://www.justice.gov/usao-sdtx/pr/houston-woman-admits-defrauding-dr-pepper-snapple