In 1998, Rent-Way Inc. could no longer sustain the unrealistic earnings estimates that Jeffrey A. Conway, its chief financial officer, was giving to Wall Street analysts. The Erie, Pa., company had recently doubled its size to 1,100 stores and become one of the largest "rent-to-own" retailers in the nation. The company's stock price had increased more than 200 percent since it went public in 1993.
So Conway instructed the company's controller, Matthew J. Marini, to "do whatever needed to be done to meet the Company's earnings targets, but not to disclose" to him what steps were taken so that Conway could maintain "plausible deniability," according to a Securities and Exchange Commission complaint.
Marini then conducted "greaseboard sessions" in which the accounting staff was asked to make false entries. In 1999, Conway and Marini were promoted, and the company's stock continued a climb that would eventually peak at more $30 a share.
But in 2000, after employees approached company officials and an internal investigation revealed the deception, the company's chief executive, William E. Morgenstern, approached the SEC.
A reckoning came yesterday when Conway, Marini and former senior vice president Jeffrey K. Underwood pleaded guilty in federal court in Erie to charges stemming from the falsification of Rent-Way's accounting records. Sentencing was scheduled for Nov. 6.
The SEC also announced a settlement with the three former executives that permanently bars Conway and Marini from serving as officers or directors of public companies. Conway will pay $359,417 in penalties. The former executives neither admitted nor denied wrongdoing.
"This case sends a message that those who try to insulate themselves cannot do so just by ordering others to do the dirty work," said Mark Schonfeld, an SEC associate regional director.
The SEC said Rent-Way improperly accounted for more than $95 million in 1999 and 2000. The company was forced to reduce its reported earnings in 2001 by $127 million for the previous three years.
Conway's lawyer released a statement in which Conway "regrets what occurred three years ago at Rent-Way." Marini, reached by phone at his home, refused to comment. Calls to Underwood's lawyer were not returned.
Company officials refused to comment directly on yesterday's pleas. They issued a press release saying they "are pleased that the investigation has been completed and believe the final results are consistent with our internal investigation."
After alerting the SEC to the accounting fraud, company executives cooperated with the government's investigation. The decision to cooperate "was a major factor in the decision not to charge the company with criminal fraud" or seek fines against the company, said Mary Beth Buchanan, the U.S. attorney in Pittsburgh.
The company's cooperation has done little to appease stockholders, who are still angry about what the fraud did to Rent-Way's share price, which fell 78 percent, to $5 per share, the day after details of the investigation were announced. Three years later, it has not recovered.
A class-action lawsuit by shareholders against the company was filed in 2000. The suit has been "settled in principal" for $25 million, said Rob Ferris, a company spokesman.
The irregularities that Marini oversaw have been corrected, company officials said. But the consequences of the improper accounting reverberated through the company's financial structure, increasing borrowing costs and distracting management from day-to-day operations, said Mike Gallo, an analyst who follows Rent-Way for C.L. King and Associates of New York.
Today, Rent-Way operates only 753 stores in 33 states, including Maryland and Virginia, specializing in furniture, appliances and electronics. The company's stock closed yesterday at $4.65 a share. The company sold 295 stores to a competitor in February, and in May issued senior secured debt of $205 million paying interest close to 12 percent, indicating that investors still demand high interest from the company even when national interest rates are at record lows.
Morgenstern has remained chief executive and chairman throughout the investigation but the company may not recover until he leaves, Gallo said. "When you're CEO and something like that happens, ultimately you're responsible whether you knew or not," he said.