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FOR IMMEDIATE RELEASE
Tuesday, April 13, 2010
Former Owner and CEO of Kentucky Business Pleads Guilty for Role in Conspiracy to Inflate Personal Earnings as Part of Purchase Agreement

The founder and chief executive officer of Image Entry Inc., pleaded guilty today for his role in a conspiracy to inflate his earnings resulting from the company’s 2001 acquisition by SourceCorp Inc., announced Assistant Attorney General of the Criminal Division Lanny A. Breuer and U.S. Attorney James T. Jacks of the Northern District of Texas.

Bill D. Deaton, 62, of Ocala, Fla., pleaded guilty before U.S. Magistrate Judge Paul D. Stickney to a one-count criminal information charging him with conspiracy to commit wire fraud. Image Entry is a London, Ky., data processing company with facilities located in the southeastern and midwestern United States. SourceCorp, a consulting and information management corporation located in Dallas, purchased Image Entry in March 2001.

According to court documents and evidence presented at the hearing, the purchase agreement between Image Entry and SourceCorp contained three elements: approximately $32.8 million paid to Deaton at closing; an additional approximately $11 million would be held back and paid during the three succeeding years if Image Entry met its earnings targets; and an additional amount, referred to as an "earn out," of up to $25 million to be paid in three annual installments if Image Entry exceeded its target earnings. Specifically, in the first and second years after the purchase, the earn out would be triple the amount by which Image Entry exceeded its earnings target. In year three, the earn out would be calculated at quadruple the amount by which Image Entry exceeded its earnings target.

Deaton admitted that he and others conspired to fraudulently inflate Image Entry’s reported earnings, and subsequently Deaton’s earn out payments, by failing to report and recognize operating expenses incurred by Image Entry. Instead, Deaton admitted that he and his co-conspirators diverted the operating expenses for payment by Deaton using funds drawn from non-Image Entry accounts under Deaton’s control. According to the plea agreement, up to $971,036 in Image Entry operating expenses were diverted and paid in this manner, thus fraudulently inflating the incentive payments Deaton received by $1.9 million.

Deaton also admitted that he and others fraudulently inflated Image Entry’s reported earnings, and thereby Deaton’s earn out payment, by causing Image Entry employees to limit or entirely omit certain quality control procedures for a customer, the U.S. Department of Commerce, National Oceanic and Atmospheric Administration. Deaton admitted that Image Entry continued to recognize revenues as if the quality control procedures were still being performed.

According to court documents, Michael Wayne Sulfridge was Image Entry’s former vice-president of corporate finance and reported directly to Deaton. Deaton admitted that he paid Sulfridge additional compensation and bonuses, beyond his established salary, from Deaton’s personally-owned funds drawn from non-Image Entry accounts. Deaton admitted that these payments were not reflected as part of Image Entry’s operating expenses.

Deaton admitted that he and Sulfridge signed false certifications and provided them to SourceCorp, which falsely represented that Image Entry’s financial statements and the results of its operations and cash flows were presented fairly and in accordance with generally accepted accounting principles.

Sulfridge pleaded guilty on May 15, 2009, to a criminal information charging him with one count of conspiracy to commit wire fraud and securities fraud, and one count of tax evasion. A sentencing date is not currently scheduled in this matter.

At sentencing Deaton faces a maximum penalty of five years in prison and a fine of $250,000. Sentencing has been scheduled for July 2, 2010.

The case was prosecuted by Assistant Chief William H. Stapleton Jr., of the Criminal Division’s Fraud Section and James Etri of the U.S. Securities and Exchange Commission, acting as a Special Attorney assigned to the Criminal Division. The case was investigated by the FBI. The U.S. Attorney’s Office for the Northern District of Texas provided assistance in this case.

The SEC and the Criminal Division are Co-Chairs of the Securities Fraud Working Group of the Financial Fraud Enforcement Task Force. President Obama established the interagency Financial Fraud Enforcement Task Force to wage an aggressive, coordinated and proactive effort to investigate and prosecute financial crimes.  The task force includes representatives from a broad range of federal agencies, regulatory authorities, inspectors general and state and local law enforcement who, working together, bring to bear a powerful array of criminal and civil enforcement resources. The task force is working to improve efforts across the federal executive branch, and with state and local partners, to investigate and prosecute significant financial crimes, ensure just and effective punishment for those who perpetrate financial crimes, combat discrimination in the lending and financial markets, and recover proceeds for victims of financial crimes.

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