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In Massachusetts, SEC Investigates Financial Fraud Case

SEC Settles Civil Action with Former Massachusetts Company's President, Outside Director and Auditors
The Securities and Exchange Commission announced today the settlement of civil charges against four defendants named in a pending financial fraud litigation filed against Chancellor Corporation, a now defunct Boston, Massachusetts transportation company, and others in 2003. The Commission's action alleges that from 1998 through 2001, Chancellor officials schemed to inflate Chancellor's reported assets, revenue and profits using fabricated documents and fraudulent accounting, and that the company's auditors and certain outside directors failed in their responsibilities to address the fraud. Franklyn E. Churchill, Chancellor's former president/COO, and Rudolph Peselman, a former outside director consented to the entry of judgments barring them from serving as officers or directors of public companies and Churchill agreed to pay a $55,000 civil penalty. BKR Metcalf Davis, the company's former audit firm, and, Gregory Davis, the Metcalf Davis audit partner on the Chancellor audit, agreed to the entry of judgments requiring civil penalties of $50,000 and $25,000 respectively. In a separate administrative proceeding, the Commission ordered that BKR Metcalf Davis refrain from public company audits for a period of one year and barred Davis from practicing before the Commission as an accountant, with a right to reapply for admission after five years.

Without admitting or denying the allegations of the Commission's complaint, Churchill and Peselman consented to the entry of permanent injunctions enjoining them from violating the anti-fraud, reporting, record keeping, and internal control provisions of the federal securities laws, specifically: Sections 10(b), 13(a), 13(b)(2)(A), 13(b)(2)(B) and 13(b)(5) of the Securities Exchange Act and Exchange Act Rules 10b-5, 12b-20, 13a-1, 13a-11, 13a-13, 13b2-1 and 13b2-2. Churchill and Peselman also agreed to orders prohibiting them from serving as officers or directors of any public company and Churchill agreed to pay a $55,000 penalty.

Davis and the audit firm, BKR Metcalf Davis, again without admitting or denying the allegations of the Commission's complaint, consented to the entry of judgments requiring Davis to pay a $25,000 civil penalty and BKR Metcalf Davis to pay a $50,000 civil penalty. The SEC agreed to the dismissal of its fraud claims against Davis and BKR Metcalf Davis in lieu of a settled administrative enforcement proceeding finding non-fraud securities law violations. Davis and BKR Metcalf consented to the entry of an administrative order, without admitting or denying the findings therein, in which the Commission found that they had willfully violated the provisions of the securities laws related to conducting public company audits and aided, abetted and caused Chancellor's violations of the periodic reporting provisions of the federal securities laws. The Commission also found that Davis and BKR Metcalf Davis engaged in improper professional conduct pursuant to Rule 102(e) of the Commission's Rules of Practice, by recklessly engaging in conduct that resulted in violations of professional standards. The Commission ordered that Davis and BKR Metcalf Davis cease and desist from violating the reporting provisions and Section 10A of the Securities Exchange Act of 1934, which requires auditors to take adequate steps to detect and report suspected fraud. The Commission denied Davis the privilege of appearing or practicing before the Commission as an accountant, with a right to reapply for reinstatement after five years. Additionally, the Commission censured BKR Metcalf Davis and the firm agreed that it would not perform audit services for any public company for one year. If, after at least one year, the firm decides to engage in public company accounting, it has agreed to take remedial steps to improve its qualifications, quality control and training, as well as to hire an independent consultant.

The Commission previously settled with six other defendants, including: Chancellor Corporation; the company's former acting Chief Financial Officer, David Volpe; the company's former treasurer, Jonathan Ezrin; a former Chancellor director and member of the audit committee, Michael Marchese; and two other members of the BKR Metcalf Davis audit team, David Decker and, concurring partner, Theodore Fricke.

The Commission's case against the remaining defendant, Brian Adley, Chancellor's former Chairman, CEO and controlling shareholder, is scheduled for trial later this year.

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