The settlement deal coincides with charges of securities fraud leveled by the SEC against McCann and Interpublic for years of botched bookkeeping -- primarily overseas -- and alleged failure by the agency and holding company to maintain adequate internal controls.
"McCann failed to properly account for its intercompany transactions, and because IPG issued consolidated results for its subsidiaries, including McCann, IPG's financial statements were inaccurate," the federal agency said in its complaint.
Ignored intercompany problems
"A subsidiary that feeds misleading financial results to its parent defrauds the parent's public shareholders and will be held accountable," Linda Thomesen, director of the SEC's Division of Enforcement, said in a statement. Added Mark Schonfeld, director of the SEC's New York regional office: "McCann ignored its intercompany problems year after year, and even worse purposely avoided addressing the problems to ensure it hit profit targets."
As part of the settlement pact, the ad agency and its parent neither admitted to nor denied the SEC's allegations.
McCann under the terms of the deal will pay $12 million in civil penalties and disgorgement of one dollar (funds previously reserved for by the company). The agency and Interpublic further agreed to an injunction against future violations of certain federal securities laws.
Separately, the SEC brought charges against and reached a settlement with former top executives Salvatore LaGreca and Brian Watson; each must pay penalties and disgorgement totaling less than $100,000. Messrs. LaGreca and Watson -- who respectively served as McCann's vice chairman-finance and operations and chief financial officer, and European-Middle East-Africa regional director of operations -- failed to ensure McCann reconciled its intercompany accounts for several years, at times purposely delaying the process because they knew restatements would cause write-offs that would interfere with the agency hitting internal profit targets, the SEC alleged.
Investigation began in 2002
Resolution of the charges, while anticipated, brings to a close a long-running federal investigation into the company's accounting practices that began in the fall of 2002 and prompted turmoil including a slew of financial restatements to fix its improper bookkeeping and a revolving door of senior leadership.
"We are very pleased to have settled with the SEC and we believe this matter is now behind us," said Interpublic Chairman-CEO Michael I. Roth. "Under current management, we have devoted considerable resources to replacing and expanding staff in the relevant areas and our efforts to remediate material financial control weaknesses and improve financial reporting have been a top corporate priority for all our agencies."
Interpublic stock jumped on the news, rising about 5% to its highest price this year. The holding company yesterday posted improved results, nearly halving its quarterly loss to $62.8 million for the first quarter of 2008 compared with a net loss of $125.9 million in the same period last year.
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Contributing: Brad Johnson