Published on May 27th, 2014 | Posted in Articles

The Securities and Exchange Commission today filed accounting fraud charges against a Dallas-based company and its former chief financial officer for manipulating its inventory accounts.

The SEC alleges that I. John Benson made repeated false accounting entries that materially inflated the value of inventory on the balance sheets at DGSE Companies Inc., which buys and sells jewelry, diamonds, fine watches, rare coins, precious metals and other collectibles.  Benson’s entries made it appear that DGSE owned certain inventory that actually still belonged to customers in consignment arrangements where DGSE held the goods on the owner’s behalf until they were sold.  Benson then misled the company’s independent auditors about the journal entries, and DGSE subsequently overstated its inventory by anywhere from 99.1 percent to 227.4 percent in public filings during 2009, 2010, and 2011.

DGSE agreed to settle the SEC’s charges, and Benson agreed to a settlement in which he will pay a $75,000 penalty, be permanently barred from serving as an officer or director of a public company, and be suspended from practicing as an accountant on behalf of any publicly traded company or other entity regulated by the SEC.

“Benson’s job as CFO was to protect the integrity of DGSE’s financial statements,” said David Woodcock, chair of the SEC Enforcement Division’s Financial Reporting and Audit Task Force and director of the Fort Worth Regional Office.  “Instead he took advantage of DGSE’s weak internal control environment to intentionally manipulate its public filings.”

According to the SEC’s complaint filed in the Dallas Division of U.S. District Court for the Northern District of Texas, deficiencies in DGSE’s accounting systems and controls led to problems that significantly compromised the integrity of the company’s financial data.  The deficiencies included the failure to properly record intercompany transactions such as inventory transfers between stores.  As a result, DGSE’s intercompany accounts became out of balance by millions of dollars.

The SEC alleges that Benson subsequently made a number of fraudulent accounting entries in order to bring the intercompany accounts and DGSE’s general ledger as a whole back into balance.  The entries resulted in a number of errors in DGSE’s financial statements including the large overstatement of DGSE inventory by millions of dollars.  Benson concealed the improper entries by manipulating inventory detail listings to improperly reflect the consigned inventory as being owned by DGSE.  Benson sent these listings to DGSE’s external auditor, and misled the auditor to believe the consigned goods were owned by DGSE.  Benson then knowingly signed misleading public filings by DGSE, including annual reports for the 2009 and 2010 fiscal years as well as quarterly filings.  Benson also signed false management certifications that were attached to these filings.

Benson is charged with violating the antifraud, reporting, recordkeeping, lying-to-accountants and internal controls provisions of the federal securities laws.  DGSE is charged with reporting, recordkeeping, and internal controls failures.  DGSE and Benson each consented to injunctions against future violations of these provisions.  DGSE also agreed to the appointment of an independent consultant to review the company’s accounting controls, and DGSE has taken or agreed to take remedial steps to correct its deficiencies. 

The SEC’s investigation was conducted by Chris Davis, Keith Hunter, and Joann Harris of the Fort Worth Regional Office.