03-28-02
RTO Online

Rent-Way stock was up over 8% on Wednesday to close at $8.18. For those of you keeping score, that's double it's 52 week low. 

The federal civil hearing into allegations of fraudulent accounting practices, initially reported in October of 2000, will begin in Erie on April 9th.

The suit claims Rent-Way and their accounting firm, PricewaterhouseCoopers, conspired for three years to manipulate the company's expenses and financial filings. 

The two sides actually agree on one point. Rent-Way's accounting troubles were rooted in the company's rapid growth during the late 1990s. (179 stores to 1,134 in less than 3 years)

During that time, RWY stock went from $18 per share at the beginning of 1998 to more than $32 per share in mid 2000.

The suit alleges the company's faulty numbers were the result of a conspiracy involving everyone from the janitor to the CEO.

Those manipulations, according to the complaint, led the company to cut its stated earnings by $127 million from fiscal 1998 through fiscal 2000.

"Accounting frauds of the magnitude alleged in the complaint simply do not happen by magic," Cramer Rosenthal said in a motion filed with U.S. District Judge Sean J. McLaughlin. "They are accomplished through intentional acts of persons who believe that, beyond their group of confidants, their misdeeds will go undetected..."

Rent-Way's internal investigation, now complete, claims the 'cooking of the books' was performed by a few executives (no longer with the company), without the knowledge of it's most senior management.

Rent-Way acknowledges they had "serious problems" with internal controls, but vigorously denies any widespread scheme by senior management to inflate Rent-Way's stock price. 

The complaint also casts significant blame on auditor PricewaterhouseCoopers, stating they ignored obvious "red flags" and could have stopped Rent-Way from issuing false financial reports

Rent-Way has filed a motion to dismiss the suit claiming that the improprieties were "concealed from senior management", and a result of sloppy bookkeeping during a period of rapid growth. In these 'Enron days', the suit is unlikely to be dismissed.

Whatever problems Rent-Way had seem to be on the mend. A solid plan is in place and being adhered to. Financial controls are tight. Bill Morgenstern is back in the Rent to Own business and out of the merger business. Investors are, slowly but surely, regaining confidence. And for those that got burned when the stock fell, some advice...If you buy a stock with a PE ratio higher than your IQ, don't complain when it crashes. 

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