In the Matter of Michael Marchese

Michael Marchese (defendant) served on Chancellor Corporation's (Chancellor) board and audit committee, generally deferring to his friend Brian Adley, Chancellor's chairman, CEO, and controlling shareholder. After Chancellor wrote off $1.14 million in unsubstantiated payments to Adley-controlled companies in 1997, Chancellor's independent auditors later refused to accept a backdated management agreement Adley used to justify treating a 1998 letter of intent (rather than the actual February 1999 acquisition date) as the date Chancellor gained sufficient control to consolidate MRB's financials under GAAP; with Marchese's approval, Adley fired those auditors and hired replacements who accepted fabricated documents supporting the 1998 date. Marchese knew of this discrepancy between the two auditors' conclusions but never investigated. Chancellor also paid $3.3 million in unsubstantiated consulting fees to Vestex, another Adley-owned company, which Adley had listed as an asset rather than an expense — again with Marchese's awareness but no inquiry. Chancellor's April 1999 Form 10-KSB, which Marchese signed alongside Adley, used the false 1998 acquisition date and included the miscategorized Vestex fee. After leaving the board, Marchese wrote to the SEC about Chancellor's practices.