In March 2002, the Securities and Exchange Commission shut down trading in shares of ACLN, a Belgian-Cypriot shipping company. This marked the first time in 20 years that the SEC had halted the shares of a stock trading on the New York Stock Exchange. When the Commission issued its full report later in the year, they described ACLN as being little more than a shell, a complete fraud. The SEC filed charges against ACLN and several of its officers, the Cyprus branch of its audit firm, BDO, and two Cypriot auditors.

ACLN may not have had the size or breadth of damage as the frauds at Enron or WorldCom. It lacks the garishness of Tyco's woes (NYSE:TYC), it didn't even rise up to the SEC charges against Dynegy (NYSE:DYN). All of these took place at about the same time. But the SEC had some special words for ACLN.

In the words of the SEC's complaint, ACLN was "the vehicle for an exceptionally bold and elaborate financial fraud that resulted in losses of hundreds of millions of dollars to investors in the U.S. and abroad." Among the problems that the SEC identified:

  • The company claimed it held $117 million in cash, and it did not;

  • The company claimed to own a $6 million car transport ship, and it did not;

  • Several insiders sold more than $80 million of stock without disclosing such;

  • Its auditors failed to do the most basic audits that would have uncovered the fraud.

One would think that the person holding the title of "Chief Financial Officer" for such a mess would be the next best thing to unemployable. But Christian Payne, the CFO of ACLN in 2001, has reappeared, listed as the CEO of Kellogg & Andelson, a consulting firm that specialized in, among other things, "tax minimization." According to the Kellogg and Andelson website, they merged with Catalyst Business Systems, which Payne founded, in 2002.

This means that Payne made an awfully quick transition. He took over the role of CFO of ACLN in Jan. 2001, and had previously served as a vice president for investor relations from April 1999 through Jan. 2000. When he took over as CFO, Payne didn't relocate to Belgium or Cyprus to join ACLN's corporate offices -- he remained in Southern California. His salary was $1, but he also was to receive 1% of any equity or debt financings undertaken at the company. Not a normal contract for a CFO, but neither was this: ACLN leased space in California from Catalyst Business Systems. He was expected to devote "substantially all of his business time" to ACLN, which he did up until the company was exposed as being a fraud and a shell.

So once ACLN collapsed as a fraud, its CFO slipped out the side door and began focusing on another company he owned and had occasionally worked at some years before. He was able to convince a 60-year-old firm into not only merging with his company, but also making him the CEO and president of the combined outfit. That's BOLD. What interests me is that Mr. Payne's curriculum vitae on the Kellogg and Andelson website does not so much as mention the position he held at ACLN. Instead, it only mentions Catalyst Business Services and omits any direct mention of what Payne was doing in 2001 and early 2002. To compare, you can see the text from a 20-F form from the SEC website, which ACLN filed in June 2001:

CHRISTIAN L. PAYNE has served as our chief financial officer since January 2001. Prior to rejoining our company in January 2001, Mr. Payne was the co-founder of Catalyst Business Systems, Inc., a consulting firm providing outsourced infrastructure services to middle-market companies in the areas of accounting, human resources, recruiting, and information technology and telecommunications. Mr. Payne previously served as our vice president of finance from March 1999 until January 2000. From 1997 until 1998 Mr. Payne was employed by Cruttenden Roth, Inc. as an Associate of Corporate Finance. Prior to that, Mr. Payne worked in the corporate finance group of Arnold & S. Bleichroeder, Inc. and at Citibank.

And here is what's listed on the Kellogg & Andelson site. Note the lack of reference to ACLN:

Christian Payne is CEO and President of Kellogg & Andelson. Christian joined K&A in 2002 through the acquisition by K&A of Catalyst Business Systems, LP. Mr. Payne was Co-Founder and Chief Executive of Catalyst Business Systems, which provided outsourced Accounting, Information Technology services to middle market companies, provided capital markets advisory and strategic consulting to its Clients.

Mr. Payne currently has responsibility for overseeing all of the firm's financial and technology operations. Mr. Payne has experience in advising companies in a broad array of Industries in public & private debt, equity capital raising, mergers, acquisitions and leveraged re-capitalization transactions. Mr. Payne has had primary responsibility for raising over $300 million since 1999.

I contacted Kellogg & Andelson for comment but have received no response. I find it particularly noteworthy that Payne mentions all of the money he raised since 1999 -- which would apparently include money raised for ACLN -- but does not mention at all that funds he raised on behalf of ACLN ended up down a rat hole.

Perhaps Payne would simply like to forget ACLN. So would I, brother. So would I. But I can't. It was the worst investing mistake I've ever made, and it's a company that I proclaimed publicly as being of interest to investors. Only it wasn't -- it was actually interesting to prosecutors. I made the mistake of looking at an ugly little company, adding 1+1+1 and getting 3. Trouble is, according to the SEC, the correct answer was "exceptionally bold and elaborate financial fraud." It is somewhat interesting that I noted in Dec. 2001 that Payne "show[ed] a lack of knowledge of the company's operational numbers."

When the SEC pounced, about the only thing it could do would be to shut down trading -- the company and its officers were beyond its reach, and its home country securities regulators didn't have the same motivation to pursue the issue.

But in this case, there was at least one domestic target the SEC could have gone after. But Payne -- ACLN's most senior financial officer -- somehow avoided being named as a defendant in what was at its root a financial fraud.

Since he's the head of another financial company, I'd have to say that I'm not sure which explanation is worse. Either Payne was a naïve stool pigeon CFO, left ignorant of the monumental levels of financial fraud going on all around him at the company, or he was complicit and not only helped soak investors of millions, but also failed to keep the ruse up.

If he did know what was taking place at ACLN, he made no apparent moves to separate himself from the company. In fact, Mr. Payne took part in multiple earnings and investor presentations during 2001, as well as in 1999. He only departed after the SEC shut down trading. It would be very surprising if he did not know what was going on around him, if he actually was responsible for the finances of the company without any knowledge of the actual financial condition of it.

Neither outcome ought to be comforting to Kellogg & Andelson's customers -- it seems that he's either complicit in a big fraud, or lucky and not terribly smart. If I hear back from the company, I'll be sure to let you know.

Bill Mann owns none of the companies mentioned in this article. For a list of complete holdings, check his profile. The Motley Fool is investors writing for investors.

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