The mess involving a faked audit report in New Mexico is growing. The former controller wasn’t acting alone and the faked audit report isn’t the only issue.
The controller has been arrested for alleged securities fraud. It is now alleged that the former controller coordinated with the Chief Operating Officer (COO) in misstating the financial statements. The COO has also been arrested.
On August 8th, the New Mexico Securities Division issued a press release, which is reprinted in NM Finance Authority Chief Operating Officer and Former Controller Arrested on Racketeering Charges from the New Mexico Watchdog.
Since it’s a press release, I’ll quote more than I would otherwise:
SANTA FE – The former controller and the current chief operating officer for the New Mexico Finance Authority have been arrested today in connection with submitting a forged audit and misrepresenting financial statements for the fiscal year 2011.
Gregory M. Campbell, the former controller for NMFA, has been charged with eight counts of securities fraud, four counts of forgery and one count each of racketeering and conspiracy to commit racketeering, according to a criminal complaint filed by the Securities Division of the New Mexico Regulation and Licensing Department.
John Duff, the current chief operating officer for NMFA, has been charged as an accessory on eight counts of securities fraud and racketeering. Duff, who was the immediate supervisor of Campbell, also has been charged with allegedly conspiring to engage in a pattern of racketeering activity by fraudulently misrepresenting the financial statements of the NMFA to ratings agencies, investors, bond buyers, and the State of New Mexico, according to the criminal complaint.
(See update below)
Some background on how the faked financials were prepared:
According to the criminal complaint, Campbell admitted to forging the 2011 audit report. “Campbell stated he obtained the audit reports from the fiscal year 2010 audit and ‘copied and pasted’ the letterhead and signatures onto a printed copy of the PDF file. Campbell stated he then copied the entire report and scanned it into a PDF file in order to disseminate copies of the financial statements and forged reports to external and internal recipients” as the 2011 audit report, the complaint alleges.
The regulators allege a $40M misstatement of the financial statements, which is described as follows:
The criminal complaint also alleges that Campbell, with the explicit knowledge and permission of Duff, misrepresented approximately $40 million in the financial statements for NMFA for 2010 and 2011. Instead of reporting a loss of $40 million in revenues, they are accused of concealing that loss by fraudulently reporting it under grant expenses. According to the complaint, “…Campbell represented that the decision to reclassify the reduction in appropriations revenue as ‘grant expense’ was in fact a misrepresentation of the fiscal year 2011 financial statements as it did not reflect the true financial condition of the NMFA. Campbell accepted the characterization that the action to fraudulently misrepresent the financial statements was in fact ‘cooking the books’ of the NMFA.”
I’ve not dived into the misstatement allegation, but here is core: A $40M reduction in assistance from the state, apparently done as a transfer of funds from NMFA to the state, was recorded as an expense instead of reduction in revenue. I don’t quite understand the issue, but do know the state regulators assert it should have been a reduction in revenue and they assert it was an intentional misstated.
In addition, the current CEO was placed on administrative leave with pay.
Here are a few articles:
- NM Finance Authority Chief Operating Officer and Former Controller Arrested on racketeering Charges – New Mexico Watchdog
- Fake audit leads to two arrests, including the COO of the NM Finance Authority, for “cooking the books” – New Mexico Watchdog
- NF Finance Authority exec, ex-controller arrested – BusinessWeek
- NM Finance Authority’s CEO put on leave
Update: A federal grand jury refused to indict the chief operating officer, Mr. Duff. He has been cleared of charges. see followup post.