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Xerox charged with fraud
Copier maker to pay $10M penalty to settle fraud complaint filed by the SEC.
April 11, 2002: 3:01 PM EDT

NEW YORK (CNN/Money) - Federal regulators formally filed civil fraud charges against Xerox Thursday, ending a two-year investigation of the troubled copier maker, but people close to the case said an investigation of the company's former executives and its auditor are moving ahead.

The SEC filed the civil complaint in federal district court and fined Xerox $10 million -- the biggest fine the agency has ever levied for accounting fraud -- adding that under a settlement agreement Xerox neither admits nor denies the fraud allegations.

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Xerox stock barely reacted to news of the agreement, which Xerox announced last week.

"I think with regard to this issue, last week was really the news rather than today," Goldman Sachs analyst Jack Kelly said. "Xerox has been turning things around, other than their accounting, by cutting costs. With regard to accounting issues, I would say they've been closely scrutinized."

The complaint, filed in U.S. District Court for the Southern District of New York, alleges that between 1997 and 2000, Xerox used a variety of "accounting actions" and "accounting opportunities" to meet or exceed Wall Street expectations, and hide its true performance.

The SEC said the fuzzy accounting accelerated the company's recognition of equipment revenue by over $3 billion and increased its pre-tax earnings by about $1.5 billion.

"For Xerox, the accounting function was just another revenue source and profit opportunity," SEC Enforcement Director Stephen Cutler said in a statement. "As a result, investors were misled and betrayed."

The $10 million fine is the largest ever levied against a firm for financial reporting fraud, the SEC said, topping the $3.5 million America Online (AOL: down $0.85 to $19.85, Research, Estimates) agreed to pay in May 2000.

The news comes a day after published reports that the SEC informed former Xerox chairman Paul Allaire, former chief financial officer Barry Romeril, KPMG partner Michael Conway and several others that they are being investigated as part of a widening probe into the company.

A source familiar with the situation confirmed Thursday that those investigations are continuing, but that the agency's investigation of Xerox is finished.

Xerox said the settlement allows the company to move on with its turnaround plan.

"The settlement with the commission effectively resolves Xerox's outstanding issues with the SEC," CEO Anne Mulcahy said. "Xerox today is a stronger company with a new management team that has taken all the right steps to turn our business around."

Xerox first announced the settlement last week, agreeing to pay the $10 million fine and restate results back to 1997. The agreement ends the SEC's two-year probe into questionable accounting practices that first began in the company's Mexico unit, but was later expanded to include how it accounted for equipment leasing.

Xerox later acknowledged it had uncovered some irregular accounting practices following its own internal investigation, saying the practices did not comply with Generally Accepted Accounting Principles (GAAP). The fuzzy accounting reduced shareholders' equity by $137 million and net worth by $76 million, Xerox said.

Xerox began settlement talks with the SEC's Division of Enforcement in March after the agency notified Xerox of plans to recommend action against the company for its alleged securities law violations.

A company spokeswoman said the fine would likely not affect financial results since Xerox has$4 billion in cash on hand.  Top of page