In the Matter of Michael Marchese

In 1996, Michael Marchese (defendant) joined Chancellor Corporation’s (Chancellor) board of directors. Until 1999, Marchese sat on Chancellor’s audit committee. Marchese’s friend, Brian Adley, was chairman, chief executive officer, and controlling shareholder of Chancellor. Marchese did not oversee accounting and “generally deferred” to Adley. In 1997, Chancellor had to write off $1.14 million in unsubstantiated payments to companies controlled by Adley. Chancellor signed a letter of intent to acquire MRB in August 1998. Chancellor listed that date as the date of the acquisition for accounting purposes and consolidated MRB’s revenue with its own. Chancellor’s independent auditors determined that Chancellor did not have sufficient control to consolidate the companies’ financial statements until February 1999 under Generally Accepted Accounting Principles (GAAP). Adley had Chancellor’s chief financial officer backdate a management agreement to justify the 1998 date, but the auditors would not accept it. With Marchese’s approval, Adley fired the auditors and hired new ones, whom he presented with fabricated documents. The new auditors accepted the 1998 date. Marchese knew about the discrepancy between the auditors’ decisions, but made no investigation. Chancellor was charged $3.3 million in unsubstantiated consulting fees by Vestex Capital Corporation (Vestex), a company Adley owned. Adley had Chancellor list the fees as an asset rather than an expense, as it should have. Marchese was aware of the fees and the earlier write offs. Chancellor filed its annual report with the Securities and Exchange Commission (SEC), Form 10-KSB, in April 1999. The form listed MRB’s acquisition date as August 1998 and included MRB’s finances, as well as the miscategorized $3.3 million fee to Vestex. Adley and Marchese signed the form. After Marchese left the board, he wrote to the SEC about Chancellor’s financial practices.