iPayment, the payment processor based in Nashville until it moved to New York last year, says a number of former executives and some contractors colluded to defraud the company of more than $11 million over the past four years.
In September, iPayment’s leadership said it had fired longtime COO Robert Torino as well as Vice President of Technology John Hong over unspecified ethical lapses. At the time, the company also said Controller Bronson Quon had resigned from his position. Since then, the company owned and led by Carl Grimstad hired law firm Debevoise & Plimpton as well as forensic accountants from Ernst & Young to investigate the alleged wrongdoing.
Those firms’ investigation has revealed that certain employees and contractors created false obligations, overstated vendor invoices — mostly from IT contractors — and falsified expense reimbursements and other payments. Those activities, the firms say, date back to the third quarter of 2008 and cost iPayment $11.4 million through the first half of this year.
“The Company has entered into cooperation and restitution agreements with several participants in the misconduct and is in discussions regarding similar agreements with the remaining participants,” the company said in a filing with the Securities and Exchange Commission. “There can be no assurance, however, that it will reach additional settlement agreements or that it will be able to recover a material portion of the losses described above.”
Of the lost money, about $6.6 million is being classified as property, equipment and other intangible assets and will affect iPayment’s reported financial statements. As a result, the company says its reports dating back to 2009 should no longer be considered to be accurate. Through the first half of 2012, the company now says it posted a pre-tax loss of $13.0 million — well above the previously reported $10.6 million — and will file restated results by February.
Because of the disclosures, iPayment execs also say their financial reporting processes have material weaknesses and that they are implementing new procedures, including hiring new personnel, to strengthen their accounting department.