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Endocare Will Pay $750,000 in Settlement

July 20, 2006|Kathy M. Kristof | Times Staff Writer

Endocare Inc., an Irvine-based maker of medical devices, agreed Wednesday to pay $750,000 to settle Securities and Exchange Commission allegations of accounting fraud.

Three former company officers who were accused of helping to perpetrate the fraud also settled civil charges with the SEC.

Separately, Endocare signed an agreement with the Justice Department under which the company will cooperate in the department's probe of its accounting but won't be prosecuted if investigators find criminal wrongdoing by employees.

Endocare Chief Executive Craig T. Davenport said the agreements with the SEC and the Justice Department were "a critical step forward" for the company.

The settlement with the SEC stemmed from a 3-year-old investigation into the company's financial reporting and recordkeeping practices during 2001 and 2002.

According to the SEC complaint, Endocare fabricated sales and understated or deferred expenses to inflate earnings and show a history of consistent revenue growth.

During the period, Endocare raised fresh capital from investors and bought another company with its stock, the SEC said.

What's more, after learning of the improper accounting from its auditors, the company "compounded its already serious accounting fraud by falsely telling the public that an independent investigation had found no indication of fraud," said Randall Lee, the SEC's regional director in Los Angeles.

Endocare agreed to the SEC settlement without admitting or denying the allegations.

Lee said the $750,000 penalty assessed to the company "reflects Endocare's egregious and widespread misconduct and the benefits it received from its violations of law, but also takes into account its current financial condition."

The company has been losing money for the last three years. It had sales of $7.3 million in the first quarter.

Endocare stock, which rose 5 cents to $2.55 on Wednesday before the settlement was announced, has plunged from a peak of $23 in 2001. It is down 7% year to date.

The three former executives who settled charges with the SEC are Kevin Quilty, 52, Endocare's former senior vice president of sales; Jerry W. Anderson, 59, former president of an Endocare subsidiary; and L. Michael Hart, 58, former director of sales for the firm's Southeast region.

Quilty, of Washington Crossing, Pa., agreed to pay $48,749 in disgorgement, interest and penalties; Anderson, of Gunter, Texas, agreed to a $35,000 penalty.

Hart, of Fort Pierce, Fla., did not face a financial penalty.

None of the three executives admitted or denied the SEC's allegations in their settlements.

In its agreement with the Justice Department, Endocare agreed to use discretion in deciding whether to pay legal fees for any employees who are criminally indicted, rather than automatically advancing funds to employees in that situation.

Endocare settled civil suits related to its accounting more than a year ago, agreeing to pay investors about $8 million plus attorney's fees, spokesman Matthew Clawson said.

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