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Ernst & Young settles charges in Bally Total Fitness fraud
SEC: Partners failed to detect and report accounting issues
By Julie Wernau, Tribune reporter
December 18, 2009
Ernst & Young LLP agreed to pay $8.5 million to settle charges against six current and former partners—five based in Chicago—for failing to detect and report accounting fraud at Chicago-based Bally Total Fitness Holding Corp., the Securities and Exchange Commission said Thursday.
The SEC also settled charges Thursday against former Bally Chief Financial Officer John Dwyer and former Controller Theodore Noncek, pending court approval.
Dwyer agreed to pay $250,000 and has been permanently barred from serving as an officer or director at a public company. Noncek consented to similar injunctions for two years.
A Bally representative said the company had no comment on the settlements.
The Ernst & Young partners audited Bally from 2001 to 2003 and failed to find and report fraud despite the fact that Ernst & Young had previously identified Bally as its riskiest account in the Chicago area.
Bally overstated its year-end 2001 stockholders’ equity by $1.8 billion and understated net losses in 2002 by $92.4 million and by $90.8 million in 2003.
In February 2008 the fitness center operator was charged with fraud after the SEC found that from at least 1997 to 2003 the company had recognized revenue it didn’t have from initiation fees, prepaid dues and reactivation fees. Bally emerged from bankruptcy for the second time in two years in August. It wasn’t required to pay a penalty for the fraud.
Three Ernst & Young partners who were charged remain at the firm. They are Randy Fletchall, who was in charge of its national office in New York, and two based in Chicago, Mark Sever, Ernst & Young’s national director of area professional practice, and Kenneth Peterson, the professional practice director.
The other three from the Chicago office are no longer with the firm. They are Thomas Vogelsinger, the area managing partner until October 2003, William Carpenter, engagement partner for the 2003 audit, and John Kiss, the engagement partner for the 2001 and 2002 audits.
The SEC barred Sever and Kiss from practicing before the SEC as accountants for three years and barred Peterson and Carpenter from practicing for two years. For repeated instances of unreasonable conduct Vogelsinger was barred from practicing for nine months, and for a single instance of highly unreasonable conduct Fletchall was censured.
All those charged agreed to settle without admitting or denying charges against them.
Attorneys for the men either declined to comment or referred questions to Ernst & Young.
In a statement the firm said, “These settlements allow us and several of our partners to put this matter behind us and resolve issues that arose more than five years ago.”