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SEC Sues W.R. Grace

December 22, 1998

WASHINGTON (AP) _ Federal securities regulators, extending their campaign against falsified financial reporting by big companies, sued W.R. Grace & Co. for alleged fraudulent manipulation of earnings of a former subsidiary.

Grace denied the allegations and said it planned to contest them in court.

The Securities and Exchange Commission announced Tuesday it was seeking an unspecified civil fine against Grace and an injunction barring the company and its officials from committing future violations of securities laws. The SEC filed the lawsuit in federal court in Miami.

The market watchdog agency said the alleged fraud involved earnings of former Grace subsidiary National Medical Care Inc. from 1991 to 1995. National Medical Care, once described as the world’s largest kidney dialysis company, was spun off by Grace in June 1996 and merged with a German firm.

In a related action, the SEC said it also had taken administrative action against seven former officials of Grace and National Medical Care, including Jean-Paul Bolduc, a former Grace president, chief executive officer and chief operating officer. A hearing will be held before an administrative law judge at the SEC.

Grace, based in Boca Raton, Fla., said in a statement that its financial statements were not fraudulent and that it planned to ``vigorously contest the allegation of fraud.″

Grace also maintained that its outside auditor, Price Waterhouse, had given its approval to the company’s financial statements in each of the years in question.

The one-time conglomerate has shed a number of businesses in recent years and now is mainly a specialty chemicals company.

SEC Chairman Arthur Levitt recently has pushed publicly traded companies to improve their financial reporting and avoid manipulating their earnings to meet Wall Street analysts’ projections. The agency plans to issue new accounting rules soon that would force companies to disclose more information on certain items.

The SEC this summer began a formal investigation of Sunbeam Corp.’s finances, after shareholders filed lawsuits challenging the accuracy and integrity of the household products maker’s 1997 financial statements.

David Nelson, the deputy regional director in the SEC’s Miami office, said the agency has a simple message for companies: ``It is absolutely improper to manipulate earnings.″

In its suit against Grace, the SEC alleged that senior officials of Grace and National Medical Care falsely reported results in quarterly and annual statements during that period. The SEC said that Grace deferred reporting income earned by National Medical Care mainly to ``smooth″ the earnings of Grace’s health care group, of which National Medical Care was its main component.

Grace used reserve funds to manipulate the reported earnings of the health care group and the parent company, the SEC charged. It said the excess reserves were used mainly to bring the health care group’s results in line with Grace’s financial targets and to increase Grace’s earnings per share.

Grace also disseminated ``false and misleading″ statements to the public about its earnings through press releases and talks with financial analysts, the SEC said.

In addition to Bolduc, the former company officials cited by the SEC are Brian J. Smith, a former Grace executive vice president and chief financial officer, who also is a certified public accountant; Richard N. Sukenik, a former Grace vice president, controller and principal accounting officer, who also is a CPA; Philip J. Ryan III, a former assistant controller in charge of Grace’s financial reporting department; Constantine L. Hampers, a former executive vice president and director of Grace and a former chairman and chief executive officer of National Medical Care; A. Miles Nogelo, a former vice president, chief financial officer and treasurer of National Medical Care; and Robert W. Armstrong III, a former vice president and controller of National Medical Care, who also is a CPA.

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