Before Enron Corp. collapsed, and the Andersen accounting firm faced criminal indictment, a hard-driving wire and cable company in suburban Rosemont flamed out amid similar accusations of fraud and auditor complicity.
In the wake of the Enron debacle, securities regulators and federal prosecutors are taking a hard look at Anicom Inc. and its corporate leadership, including Chicago’s wealthy Anixter family, according to sources familiar with the case.
Anicom auditor PriceWaterhouseCoopers also is under scrutiny, and a Securities and Exchange Commission investigation covering at least 40,000 pages of Anicom-related documents could be wrapping up as soon as Friday, the sources say.
The government activity parallels an aggressive probe of the bankrupt company by its former shareholders, led by the State of Wisconsin Investment Board, which lost $23 million when Anicom went under in January 2001.
In a class-action lawsuit certified last year, the pension fund accuses Anicom’s managers of orchestrating a fake billing scheme that artificially boosted profits and sales even as the company spiraled toward bankruptcy.
All the while, the lawsuit alleges, PriceWaterhouse auditors, anxious to keep the company happy, ignored obvious signs of the alleged accounting fraud.
In court documents, Anicom’s top executives deny the accusations of wrongdoing in the lawsuit, and the accounting firm says it is not responsible for the firm’s collapse. Attorneys for the management and for PriceWaterhouse declined to comment, and no charges have been filed.
But no one disputes that until early 2000, the company reported nearly $35 million in profits that it never made.
After the financial problems came to light, the company filed for bankruptcy protection in January 2001 and shut down its operations. Its once-highflying stock became worthless.
“Anicom’s admittedly false financial statements have hurt a lot of innocent shareholders, as well as a lot of creditors and lenders,” said Kenneth McNeil, lead attorney in the class-action suit.
No ordinary venture
From the beginning, Anicom was no ordinary venture. Its board of directors included Michael Segal of the Near North National Group insurance brokerage, a Chicagoan known for his political clout. Segal, who was indicted in January on charges unrelated to Anicom that he embezzled some $20 million, served on Anicom’s audit committee.
Also on Anicom’s board was investor Peter Huizenga, a co-founder and former director of Waste Management Inc., which overstated earnings by $1.4 billion in the mid-1990s while Chicago’s Andersen signed off on the annual audits, according to the SEC.
The company’s chairman was Alan Anixter, a legendary Chicago entrepreneur who sold his homegrown Anixter Bros. Inc. wire and cable company to a Sam Zell company in the 1980s, then launched Anicom to compete with the old firm.
Anixter had no “day-to-day operational role in the company,” said his attorney, Chicago’s Michael Freeborn, who also represents Segal, Huizenga and other outside directors. “He was unaware of any wrongdoing.”
The outside directors are cooperating with the SEC and other investigators, Freeborn said. “They just don’t have a lot of information.”
For the post of chief executive, Anixter tapped his son, Scott, who had pleaded guilty to a misdemeanor charge in the FBI commodity-trading sting of 1989, then cooperated with federal authorities investigating his fellow Chicago Board of Trade members.
The Anixters recruited Harris Bank’s Donald C. Welchko as chief financial officer and Carl E. Putnam of their previous wire and cable company to manage operations.
For its auditor, the company looked to Gary Seidelman of what is now PriceWaterhouseCoopers in Chicago, who had “close interpersonal relationships” with the Anicom brass, according to the class-action lawsuit. While serving as the lead independent auditor, Seidelman also signed on as Anicom’s acquisition strategy consultant, the lawsuit says. Seidelman declined to comment.
Independence questioned
Just as in the Enron-Andersen relationship, PriceWaterhouse earned much more in fees from its consulting to Anicom than through its auditing, according to the lawsuit. In addition, the lawsuit says, three key finance executives at Anicom were former PriceWaterhouse employees.
All those factors compromised the auditor’s independence, the lawsuit alleges. To preserve its lucrative financial advisory and tax work with the company, PriceWaterhouse “covered up Anicom’s fraud rather than report it as required by law,” the suit alleges.
For its part, the accounting firm said in court documents that it can’t be held responsible for any misstatements by Anicom’s management.
In an effort to get the suit dismissed, PriceWaterhouse also disputed that it had a motive to commit fraud and said the allegations against it lack specifics, saying one example used against it in the case actually shows “good auditing.” In November, U.S. District Judge John W. Darrah declined to dismiss the auditor from the suit.
Although the case against Anicom is embroiling big players in Chicago’s corporate world, the company started small in 1993. The Anixters, Welchko and Putnam collaborated in an ambitious effort to build from scratch a $1 billion business through a series of acquisitions.
Within a few years after it went public in 1995, Anicom’s sales approached a half-billion dollars, and its stock had soared, peaking at $19 per share in 1997, according to the court record. Wall Street analysts urged their clients to buy, as Anicom kept snapping up small competitors in the fragmented wire and cable business.
Phony sales alleged
By early 1998, however, the company’s profits were under pressure. Its acquisitions weren’t meshing, and losses loomed.
Rather than report the true financial picture, the class-action lawsuit alleges, Anicom’s corporate leaders, anxious to meet quarterly financial projections, were recording fictitious large sales transactions.
Similarly, the company booked drop-ship orders that the lawsuit says Anicom’s customers never placed. Anicom did not properly recognize sales returns or allowances, nor did it account for freight charges, the lawsuit says.
In the summer of 1999, the company announced that its earnings would not meet Wall Street’s expectations–the bogus orders couldn’t keep up with the company’s decline, the lawsuit alleges.
Over the next year or so, its senior officers would be replaced, and its financial statements officially revised downward. On Nov. 13, 2000, Anicom said it had falsely reported $34.4 million in pretax net income. The bankruptcy came within two months.
No one from the SEC or Justice Department would comment for this story
