The United States Attorney's Office for the District of Oregon, the
Securities and Exchange Commission, the Portland Division of the Federal
Bureau of Investigation, and the Seattle Division of the U.S. Postal
Inspection Service announced the filing of criminal and civil securities
fraud charges against James T. Dooley, who served as Chief Financial
Officer and Chief Operating Officer and then Chief Executive Officer
of Electro Scientific Industries, Inc. (ESI), and James E. Lorenz, III,
the company's former Corporate Controller. ESI, which makes manufacturing
equipment for electronics and other high-technology manufacturers, is
one of Portland, Oregon's largest public companies. According to a federal
grand jury's 17-count indictment and the Commission's complaint, Mr.
Dooley and Mr. Lorenz engaged in a scheme to improperly inflate ESI's
financial results, reporting a false profit rather than a loss for ESI's
quarter ended August 31, 2002, and a substantially reduced loss for
the quarter ended November 30, 2002. After the fraud was discovered
in 2003, ESI was later forced to correct the results for both quarters
in a restatement of its financial results. The Commission also civilly
charged that John E. Isselmann, Jr., ESI's former General Counsel, failed
to provide important information to ESI's Audit Committee, Board of
Directors, and independent auditors regarding the key accounting transaction
that enabled ESI to report a profit rather than a loss in the quarter
ended August 31, 2002. Without admitting or denying the Commission's
allegations, Mr. Isselmann agreed to settle the enforcement action by
paying a $50,000 civil penalty and consenting to an order prohibiting
certain securities law violations.
According to the indictment and complaint against them, beginning in
at least the fall of 2002, Mr. Dooley, 50, of Cape Coral, Florida, and
Mr. Lorenz, 41, of Portland, Oregon, conspired to falsely inflate ESI's
declining financial results by covering up significant expenses through
various accounting devices. The fraud reached its climax during a late-night
meeting on September 12, 2002 when Mr. Dooley and Mr. Lorenz secretly
and unilaterally decided to eliminate all retirement and severance benefits
for ESI's employees in Asia in order to increase ESI's bottom line for
the quarter by $1 million. The accounting fraud caused ESI to issue
press releases and file quarterly reports with the Commission containing
materially false financial statements that understated expenses and
overstated net income. In certifications required by the recently enacted
Sarbanes-Oxley Act, Mr. Dooley also falsely stated that ESI's quarterly
reports filed with the Commission were truthful. As a result of the
restatement, ESI's net income for the quarter ended August 31, 2002,
was restated from a profit of $158,000 to a net loss of $3,394,000,
and ESI's net loss for the quarter ended November 30, 2002, was restated
from $9,548,000 to $12,908,000.
With respect to the former General Counsel Isselmann, the Commission
alleged that, although not involved in Mr. Dooley and Mr. Lorenz's late-night
activities on September 12, 2002, Mr. Isselmann failed to provide important
information to the Audit Committee, Board of Directors, and outside
auditors relating to one of the restated accounting transactions. Isselmann
attended a meeting with ESI's Audit Committee and independent auditors
to review the financial results for the quarter ended August 31, 2002,
where he did not question a false statement by Dooley that the decision
to eliminate the retirement benefits for employees in Asia had been
reviewed by legal counsel. Isselmann also was provided a document written
for ESI's independent auditors stating that ESI was under no legal obligation
to provide retirement benefits to its Japanese employees. Isselmann
later received written legal advice that contradicted what the Audit
Committee and outside auditors had been told. The advice stated that
the law prohibited the unilateral elimination of such benefits. Despite
having opportunities to convey the advice to ESI's Audit Committee,
Board, and independent auditors, Isselmann failed to do so. Isselmann's
failure allowed Dooley and Lorenz to hide an ongoing fraud. Moreover,
while in possession of the written legal advice stating that the law
prohibited the unilateral elimination of the benefits, Isselmann was
involved in the review process for ESI's quarterly report filed with
the Commission describing the elimination of the benefits and the resulting
impact on ESI's income. Isselmann's conduct was a cause of the Company
reporting materially false financial results for ESI's first quarter
ended August 31, 2002, and violated a Commission rule prohibiting officers
of public companies from omitting to state material facts to independent
auditors.
Karin J. Immergut, United States Attorney for the District of Oregon,
said: "We are committed to pursuing corporate fraud in Oregon,
and we are fortunate to have agencies such as the FBI and the Postal
Inspection Service equally committed to this objective."
