The Family Behind Orkin Pest Control Has Connections to Massive Accounting Fraud

John W. Rollins Sr.

Ted Rollins, CEO of Campus Crest Communities, has been the subject of numerous posts here at Legal Schnauzer, focusing on his questionable legal tactics and business practices. Rollins has strong ties to Alabama because of a curious divorce case he brought in Shelby County against Sherry Carroll Rollins, even though the case had been initiated by Ms. Rollins in South Carolina--and litigated there for three years. Also, Ted Rollins' primary corporate law firm is Birmingham-based Bradley Arant, and he has a $26.3-million student-housing development planned for Auburn University.

Alabama residents have plenty of reasons to scrutinize Ted Rollins, and that point was driven home recently when we discovered that the Rollins family has ties to massive accounting fraud. In fact, the case unfolded throughout the 2000s, it involved both civil and criminal penalties, and it sounds an awful lot like the scandal that engulfed Birmingham's own HealthSouth.

Stockholders filed securities lawsuits and wound up with settlements worth about $44.5 million. At least two executives pleaded guilty to criminal charges, and one was sentenced to 70 months in prison.

Ted Rollins, as we have noted, belongs to one of the wealthiest families in the country, the folks behind Orkin Pest Control and other profitable enterprises. Orkin operates under the banner of Rollins Inc., which is based in Atlanta and headed by brothers Randall and Gary Rollins, Ted's cousins. According to the Atlanta Business Chronicle, Randall and Gary Rollins each had stock wealth in 2005 of more than $700 million. That probably means they both have stock worth of more than $1 billion by now--and God only knows their total net worth.

How did the Rollins family get so filthy rich? Well, it looks like they used some under-handed business practices along the way.

The Rollins accounting scandal involved a company called Safety-Kleen, which was the result of several mergers in the 1990s. John W. Rollins Sr., Ted's father, was the man behind all the shuffling. Here is how one publication described the process that left Safety-Kleen under the Rollins umbrella:

In May 1997, Rollins Environmental, Inc. ("Rollins"), the largest hazardous waste incineration company in North America, acquired Laidlaw's hazardous and industrial waste division and changed its name to LES. LES' financial strategy was to grow through acquisitions. LES acquired Old Safety-Kleen in April 1998 for $2.1 billion, with LES paying $18.30 in cash per share and 2.8 LES shares for each Old Safety-Kleen share (including those tendered in response to earlier offers). As part of the Merger, certain Defendants who held executive positions with LES assumed similar positions with the new combined entity, effectively assuming management control over the Company. On June 22, 1998, LES announced that effective July 1, 1998, it would begin doing business as "Safety-Kleen."

John W. Rollins Sr. died in 2000, but he apparently created a culture at Safety-Kleen that played fast and loose with numbers. How did the scheme work? Federal prosecutors described it when they indicted four Safety-Kleen executives in 2002:

The government alleged that the executives misled investors by materially overstating Safety-Kleen's revenue from at least November 1998 through March 2000 to meet Wall Street's pro-forma profit projections.

According to the complaint, Safety-Kleen executives used inappropriate accounting adjustments and other gimmicks after realizing they wouldn't meet projected cost savings of $500 million related to the April 1998 merger with Canadian-based Laidlaw Environmental Services.

To meet quarterly earnings estimates, they improperly recognized revenue, operating expenses and reserves. The executives also fraudulently recorded $38 million from speculative derivative transactions, the government said.

By using the improper accounting adjustments, Safety-Kleen overstated its quarterly earnings by 40 percent to 158 percent from 1998 to 2000, the government said.

Safety-Kleen later restated its financial results downward by $534 million for fiscal years 1997 through 1999 after the accounting troubles surfaced. The Columbia, S.C.-based firm reported a fiscal 2000 loss of $833 million.

The bottom line? A Rollins company engaged in more than $500 million of accounting fraud. Among those named in lawsuits related to the fraud were John W. Rollins Jr. (Ted Rollins' brother) and Henry B.  Tippie, an Austin, Texas, resident who long has been hailed as the financial guru behind many of the Rollins enterprises. Tippie is such a wizard with numbers that the business school at the University of Iowa is named for him. Yep, Iowa has the Henry B. Tippie College of Business--even though its namesake has clear ties to massive accounting fraud.

Henry B. Tippie

Interestingly, neither Tippie nor Rollins Jr. wound up being targeted for criminal prosecution. The fall guys would be Controller William Ridings, who pleaded guilty to conspiracy and other charges in 2002, and Chief Financial Officer Paul Humphreys, who pleaded guilty to securities and bank fraud charges in 2007.

Humphreys was sentenced to a 70-month term in federal prison.

The Humphreys indictment makes it clear that Safety-Kleen's problems started when it was acquired by Rollins:

When Rollins acquired Safety-Kleen in 1998, the merged Company predicted to the investing public that within one year of the merger, the Company would realize combined annual earnings of approximately $500 million because of "synergies" and cost savings resulting from the combination of the two companies. After the merger, however, the Company’s operations did not meet those predictions.

In an attempt to show the Company was meeting the predicted earnings and to meet the earnings numbers expected by Wall Street analysts and the public, Humphreys and others participated in an unlawful scheme to falsify Safety-Kleen’s general ledger and its financial statements. In furtherance of the scheme, they artificially inflated the earnings disclosed by Safety-Kleen in its Form 10-K annual reports, Form 10-Q quarterly reports, quarterly results press releases, and quarterly results conference calls.

What kind of environment produced Ted Rollins? It's one where executives use buzzwords ("synergies") to create expectations they can't match, then they falsify financial statements to inflate the earnings that are disclosed to investors and regulatory agencies.

It's an environment of smoke and mirrors, of schemes and scandals, of fraud and fakery. It's the kind of environment that almost ruined HealthSouth. And Ted Rollins has brought that business style to Alabama. Our citizens would be wise to pay attention.