Regina Case

Regina Company Inc. was known as a complacent slow-growth company and was dominated by Hoover and Eureka within the floorcare industry. Donald Sheelen was a promising young individual when he was hired first as the head of the marketing division in Regina, and then became its president. Shortly after becoming company president, Sheelen set out to make Regina the industry’s number one company and repeatedly vowed to “bomb” Hoover, the number one firm in the industry at the time.
Sheelen expanded Regina’s product line and started an aggressive advertisement campaign to promote Regina’s products over Hoover’s. His strategy paid off, as Regina’s profits grew substantially, and after Regina went public, its stock price soared by nearly 500 percent, making Sheelen and the company’s other principal stockholders millionaires many times over. However, it turned out that the impressive financial figures released by Regina after it went public were fabricated by Sheelen. Instead of a growth company with bright prospects, Regina was a dying company mired in mounting losses. ” The major reason behind Regina’s financial difficulties was the poor quality of its new products, which resulted in a reported 50 percent customer return rates. After realizing that Regina was in a deep trouble, Sheelen, with the help of Regina CFO Vincent Golden, came up with several illicit accounting schemes to keep the company’s stock prices at a high level.
In addition to significantly understating customer product returns and company’s cost of goods, they recorded bogus sales to inflate sales revenues, and implemented a so-called “ship-in-place” booking scheme. After realizing that he could no longer conceal the company’s deteriorating condition, Sheelen decided to let the public know of the company’s dire financial condition. Although Sheelen and Golden initially blamed the computer system for errors, they later pleaded guilty to federal mail and security fraud charges in 1989. Sheelen served 1 year in prison in a halfway house, and paid a mere $25,000 in fines.

One of the charges was that Sheelen and Golden had repeatedly and intentionally misled the company’s audit firm, Peat Marwick. In a sharp contrast to the Mattel case, SEC did not fault Peat Marwick for failing to uncover the massive fraud by Sheelen and Golden, although several articles in financial press did criticize the audit firm. It is interesting that while SEC heavily criticized Arthur Andersen for failing to uncover Mattel’s fraudulent activities, there was not apparently a similar scrutiny of Peat Marwick for failing to uncover the fraud in Regina.
Based on this article, it seems that Peat Marwick simply trusted Golden’s assurance that no fraudulent transactions had been recorded in Regina’s accounting records, and that Peat Marwick was therefore not to be blamed for failing to uncover the fraud in Regina’s financials. Given that the fraud schemes in both Mattel and Regina were of very similar nature, one wonders why Peat Marwick was not scrutinized to the same degree as Arthur Andersen. There is definitely more to this story than what is told in this article.