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Xerox Faces Criminal Inquiry Tied To Financial Restatement

Sep 24, 2002 | The Wall Street Journal

Federal authorities have opened an inquiry into whether to file criminal charges related to the massive misstatement of earnings at Xerox Corp., deepening the scrutiny of events that led to a financial restatement by the copier giant earlier this year, Tuesday's Wall Street Journal reported.

Xerox, which is dealing with a heavy debt load and pressure from rivals, has repeatedly asserted that it has placed the accounting scandal behind it. The early-stage criminal inquiry, however, as well as a Securities and Exchange Commission civil investigation that is focusing on both current and former company executives have the potential to keep the matter alive. The company has settled its case with the SEC, but the securities watchdog has informed additional individuals, including current Xerox Treasurer Greg Tayler, that they could face a civil charge in the case, according to people familiar with the inquiries.

People familiar with the criminal investigation say that Federal Bureau of Investigation agents, working with the U.S. Attorney's Office in Bridgeport, Conn., recently questioned James Bingham, a former assistant treasurer at Xerox, who has asserted that he was fired for trying to rein in unethical accounting at the company.

Information provided by Mr. Bingham was crucial to the SEC's civil case against Xerox, which the company settled earlier this year by paying a $10 million fine and restating its financial results dating back to 1997. Although Xerox neither admitted nor denied any wrongdoing in the case, the restatement showed it had misbooked $6.4 billion of equipment revenue, and overstated its pretax income by 36%, or $1.41 billion, over the five years through 2001.

It couldn't immediately be learned which entities or individuals federal prosecutors were focusing on. Robert Appleton, an assistant U.S. attorney in Bridgeport, said he could offer "no confirmation or denial" of the existence of a Xerox probe. In a statement last night, Xerox confirmed that it is being investigated and said it will fully cooperate with the U.S. Attorney's office.

The SEC, Mr. Bingham, and a number of accounting experts and plaintiffs in a civil suit against Xerox say the company wrongly booked long-term copier-leasing contracts to take more of the revenue and profits than it should have during the early years of the agreements. In addition, the SEC faulted the company for failing to disclose one-time sales of receivables that boosted results, and for using a so-called cookie-jar reserve that ostensibly was to be used for paying merger costs, but in fact was used to help meet earnings expectations.

From 1997 through 2000, the SEC alleged, senior Xerox management reaped over $ 5 million in performance based compensation and over $30 million in profits from the sale of stock.

Although the SEC has settled its case against Xerox, it has informed, via so-called Wells notices, Xerox's former accountant, KPMG LLP, plus a number of former and current KPMG and Xerox employees that they could still face civil charges. The list of those receiving such notices, which give the targets a chance to rebut allegations against them, includes at least eight former and current individuals at the company and at KPMG, say people familiar with the matter. In addition to Mr. Tayler, the current Xerox treasurer, previously unidentified Wells recipients include Philip D. Fishbach, a former Xerox controller, and Daniel Marchibroda, a former assistant controller. The SEC's case is separate from the criminal investigation, and there is no information that any of the Wells-notice recipients are targets of the federal inquiry. None of the men responded to requests for comment.

KPMG has said it did nothing wrong in its work for Xerox and was, in fact, fired for forcing Xerox to conduct an independent accounting examination that resulted in Xerox restating results. That restatement last year preceded the broader, SEC-prompted one this year. George Ledwith, a KPMG spokesman, said that as a "matter of policy the firm did not discuss client matters or investigations."

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