Three former executives of a small engine manufacturer are facing multiple fraud charges connected to a scheme to overstate revenue by nearly $25 million, which ultimately prompted the company to restate its financial statements.
The U.S. Department of Justice has issued an indictment against Gary Winemaster, former chairman and CEO of Power Solutions International near Chicago, charging him with one count of securities fraud, 10 counts of wire fraud, two counts of making false statements to an auditor, and one count of failing to certify financial reports. Also indicted are Craig Davis, former vice president of sales, and James Needham, former general manager, who are each charged with one count of securities fraud and 10 counts of wire fraud.
The SEC says the company overstated revenue by $846,000 in the fourth quarter of 2014 and by more than $24 million in fiscal year 2015. In addition to correcting a 6.6 percent overstatement of revenue, the company’s eventual restatement also unraveled a reported $13.9 million in income and more properly identified it as $12.6 million loss for fiscal year 2015.
According to the indictment and the SEC’s complaint, PSI started to experience a downturn in business in 2014 under slumping oil prices, as its largest customers buy engines to be used in the oil and gas industry. To prop up sagging sales, Winemaster, Davis, and Needham worked with others to cause the company to recognize revenue it had not earned by undertaking a variety of fraudulent schemes, the SEC and DOJ allege.
“The defendants concealed material information about special terms of sales to customers, causing the company’s accounting department to recognize inflated revenue figures for those transactions,” the DOJ said. “Winemaster and Davis also authorized shipments of products to customers who had not agreed to accept delivery.”
The SEC says the defendants intentionally misled and concealed key information from the company’s internal accounting staff and external auditor. The activities came to light in 2016 when a member of senior management left the company in an employment dispute, reporting the activity to the company’s board of directors upon his departure. The SEC says Winemaster’s efforts to conceal the fraudulent accounting for the transactions with two specific customers continued even after the SEC got involved in the investigation.
PSI announced Winemaster’s retirement in May 2019, the day before the company filed its restatement, which references “deficient operational and accounting controls,” but makes no mention of allegations of abuse. The company also disclosed a series of audit firm changes and further problems with accounting dating back to 2013, which were also corrected with its 2019 restatement.
Winemaster and his father founded the company in 1985. The company was delisted by Nasdaq in April 2017 and transitioned to an over-the-counter market.