Endocare's former CEO, CFO charged with fraud by SEC

By Elaine Rigoli

Tampa, Fla., Aug. 11 - The Securities and Exchange Commission said it filed securities fraud charges against Endocare, Inc.'s former chief executive officer and chairman of the board Paul W. Mikus and former chief financial officer and chief operating officer John V. Cracchiolo for orchestrating a financial fraud perpetrated on the investing public in 2001 and 2002.

The SEC's complaint, filed in U.S. District Court in Santa Ana, Calif., alleges that Mikus and Cracchiolo significantly overstated Endocare's income by booking false sales, engaging in improper revenue recognition practices and improperly understating or delaying the recognition of expenses in order to inflate Endocare's earnings.

The complaint further alleges that, during conference calls with Wall Street analysts, Mikus and Cracchiolo misled investors about the number of procedures that had been performed using Endocare's medical devices.

According to the complaint, the procedure numbers were critical to Endocare because these numbers reflected the present and future market acceptance for Endocare's devices. The complaint alleges that, because of what it describes as fraudulent accounting, Endocare overstated net revenue by at least 16% for 2001, 17% for the first quarter of 2002 and 33% for the second quarter of 2002. Additionally, Endocare's financial statements understated its pre-tax loss for 2001 by 20% and falsely reported pre-tax earnings for the first two quarters of 2002, rather than properly reporting substantial pre-tax losses.

The complaint further alleges that Mikus and Cracchiolo approved a press release announcing the termination of Endocare's acting controller for conduct "materially injurious to the company" after the acting controller raised questions about Endocare's accounting practices. The complaint alleges that the press release was misleading because it was issued one week after Endocare had disclosed that the company's independent auditors, KPMG LLP, had concluded that KPMG could no longer rely on the representations of management, which included Mikus and Cracchiolo. As alleged in the complaint, the press release falsely implied that Endocare had terminated the bad actors responsible for KPMG's concerns.

The complaint also alleges that Mikus approved another misleading press release in which Endocare announced that, after an independent investigation, the audit committee had concluded that there "was no indication of fraud or intentional wrongdoing by management." The complaint alleges this statement was false and misleading because, first, the company had not conducted an "independent" investigation, and second, an internal review had revealed substantial evidence of fraud or intentional wrongdoing.

The SEC seeks permanent injunctions against Mikus and Cracchiolo, an order that they repay their ill-gotten gains, civil monetary penalties and an order barring them from serving as officers or directors of publicly traded companies.

Endocare, based in Irvine, Calif., develops medical devices for use in the treatment of various types of cancers and urological ailments.

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