Federal investigators charge Swisher Hygiene with fraud

Charlotte-based Swisher Hygiene has been charged with criminal fraud for misrepresenting its financial results and deceiving investors, the U.S. Attorney’s Office said Wednesday.

A former senior accounting official has agreed to plead guilty to the charges, and the company has entered into a deferred prosecution agreement with the government. Swisher, a provider of janitorial and cleaning-supply services that’s being acquired by Ecolab in a $40 million deal, will accept responsibility for the fraud and pay a $2 million fine.

“Our financial markets depend on corporate executives and employees honestly reporting their financial results,” said U.S. Attorney for Western District of North Carolina Jill Rose. “We will continue to hold criminally responsible both corporations and the individuals who run and work at those corporations when they cook the books.”

The charges are the latest chapter for a Charlotte firm that was once named the fastest-growing company in the U.S., before shareholder lawsuits, allegations of fraud and a blizzard of restated financial results that showed the company was doing worse than it had portrayed publicly.

Federal charging documents filed Wednesday in Charlotte depict a wide-ranging conspiracy that involved a half-dozen executives and other employees who manipulated results. Four unnamed executives and employees are listed as unindicted co-conspirators.

Swisher employees received earnings targets they were expected to reach. They also received a “hit list” of accounting entries that they could adjust to misstate results and hit the predetermined targets, according to court filings. Entries that boosted profits were called “good guys” and those that hurt earnings were called “bad guys,” and “good guys” were subbed in for “bad guys” to keep the earnings looking good, the documents state.

The company’s aim was to make sure earnings hit management forecasts and conceal poor results from creditors and the public. The employees also lied to the board and investigators during the subsequent investigation, prosecutors said.

John Pierrard, 49, has agreed to plead guilty, the government said. The company and Pierrard are both charged with one count of conspiracy to commit securities fraud, to falsify books, records, and accounts of Swisher, and to make misleading statements to Swisher’s auditors and accountants. Pierrard faces up to five years in prison and will be sentenced at a later date. His attorney could not be reached for comment.

Prosecutors say an unindicted co-conspirator known as Executive A emailed a division chief financial officer in October 2011 to tell him to provide another $220,000 worth of earnings. The employee responded “We scrubbed the hell out of our #s this month hoping to get closer to budget.”

Executive A replied: “Do your best to get $200k. We need to stretch a bit to get the numbers in Q3.”

Swisher hit its numbers that month.

“When companies fraudulently misrepresent their earnings and overall financial strength through illicit accounting practices, not only do shareholders suffer, but the integrity of our financial market is put at risk. Corporate fraud at any level will not be tolerated,” said FBI Special Agent in Charge John Strong, who oversees the bureau in North Carolina.

A Swisher spokeswoman could not be reached for comment.

Allegations stretch back years

Swisher, founded in Charlotte, pursued a strategy of rapid growth by buying dozens of smaller rivals in a fragmented market, after Swisher was acquired by former Blockbuster and Waste Management founders and owners Steve Berrard and Wayne Huizenga.

But in 2012, the fast-growing company announced that it was conducting an internal investigation of its accounting practices after a former employee raised concerns. Swisher’s stock plummeted and shareholders sued the company after Swisher announced it would have to restate three quarters of results from 2011 to reflect higher losses.

Accounting executives used a variety of tricks to juice the results, prosecutors said.

For example, court documents say, accountants and executives would take expenses that should have been booked towards losses and move them instead to the company’s balance sheet, inflating profits. When Swisher acquired other companies, it would sometimes inflate acquired company’s liabilities. The inflated liabilities could later be reduced, fraudulently increasing earnings.

Swisher also used so-called “cookie jar” accounting, the government says, inflating reserves when acquiring a company and then fraudulently reducing those reserves to boost income.

The scheme started to unravel in early 2012, when an employee refused to make fraudulent accounting entries, prosecutors say. The employee said he or she would seek advice from BDO, then Swisher’s audit firm.

An executive fired the employee and lied to the board of directors, saying the termination was due to poor job performance, court documents say. But BDO and Swisher’s general counsel interviewed the employee, which touched off an internal investigation in March 2012.

In May 2012, Swisher announced it had fired chief financial officer Michael Kipp and two other accounting employees as part of the internal investigation. Kipp is not named in the charging documents.

The documents describe unindicted co-conspirator Executive A as a senior executive and member of the management team in charge of the company’s accounting and preparing financial statements, who was fired in May 2012. Such high-level employees orchestrated the scheme, the government said.

For example, in July 2011 Swisher was finalizing its second quarter results. Executive A told employees they needed to hit adjusted earnings of between $3 million and $4 million. Although then at about $2.37 million, Executive A said in an email that “based on what I see right now we can close at slightly above $3 million.”

By adjusting various numbers, the company hit its target.

Observer reporter Katherine Peralta contributed

Ely Portillo: 704-358-5041, @ESPortillo