In The Matter Of Michael Marchese Release Nos.

34-47732; AAER-1764; Administrative Proceeding File No. 3-11092 (April 24, 2003)

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Nature of the Case

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Facts

Marchese (D) was a director of Chancellor Corporation from December 1996 to June 1999. Chancellor's common stock was registered with the Commission pursuant to Section 12(b) of the Exchange Act. D was a member of the audit committee. Brian Adley was the chairman/CEO and controlling shareholder of Chancellor. D and Adley were acquaintances. D never reviewed Chancellor's accounting procedures or internal controls. He generally deferred to Adley when board action was required. As such, the following occurred which could have easily been stopped by D. Chancellor entered into a letter of intent to acquire MRB and a final closing took place on January 29, 1999. Chancellor improperly designated August 1, 1998, as the MRB acquisition date for accounting purposes. The auditors reviewed the agreement and informed Chancellor's management that it did not give Chancellor sufficient control of MRB during 1998 to justify consolidating the two companies' financial statements for accounting purposes. The auditors sent a memorandum to Adley and D in February 1999 setting forth their position that GAAP required a 1999 consolidation date. With D’s approval, Adley fired the auditors and hired new ones and presented false documents to the new auditors who accepted them. D knew that Chancellor's prior auditors had disagreed with Chancellor's management and had stated that a 1998 acquisition date did not comport with GAAP. D made no inquiry into the reasons for the new auditor's contrary view. Nor did he determine whether there was any factual support for the 1998 acquisition date. Adley also caused Chancellor to record $3.3 million in fees to Vestex Capital Corporation, a private entity he owned. The fees were for consulting services, including identifying, negotiating, and closing the MRB acquisition. This was all a sham as nothing was really done by Vestex other than for Adley and Chancellor personnel to fabricate documents to give to the auditors. At Adley’s direction, Chancellor recorded as an asset on its balance sheet the $3.3 million in unsupported Vestex fees rather than recording them as an expense on its income statement. This was inconsistent with GAAP, which provides that costs payable to an outside consultant in business combinations may be capitalized only if the consultant has no affiliation with the companies involved in the acquisition. D was aware of prior improprieties by Adley and Adley controlled entities, and despite a prior attempt to write off $1.14 million D did nothing to determine if the $3.3 million was legitimate. D also signed a materially misleading Form 10-KSB wherein Chancellor reported annual revenues of $29,639,000, 177% higher than the $10,708,000 revenue figure for Chancellor without the MRB consolidation. It also reported assets of $29,569,000 rather than $8,186,000 (261% higher). The accounting treatment did not comply with GAAP because during 1998, Chancellor did not have the effective control of MRB needed to justify accounting for MRB's acquisition. D left Chancellor in 1999 and wrote a letter to the SEC expressing his doubts about Chancellor.