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DAYTON — After years of impressive earnings and revenue growth, the wheels began to come off for MCSi Inc. and its chief executive, Michael E. Peppel, beginning in mid-2000, federal investigators charge.

But MCSi's shareholders had no idea the company's fortunes had taken a turn.

Thurday's 26-count criminal indictment of Peppel points to the company's alleged falsified accounting of business dealings with customer FedEx, which was buying personal computers from MCSi, as the start of bogus bookkeeping that investigators said Peppel directed to shore up MCSi's stock prices.

MCSi's senior management directed that fraudulent records of computer sales to FedEx be noted for the quarter ended June 30, 2000, according to federal investigators.

By September 2001, Kettering-based MCSi had intentionally made a fraudulent $1.25 million entry designed to record income from a purported "FedEx rebate," the federal indictment alleged. The "rebate" represented more than 27 percent of what MCSi reported as net income for the third quarter of 2001, but there was a problem, federal investigators said.

"FedEx and MCSi never had any rebate relationship whatsoever," the indictment said.

Federal prosecutors alleged that two key players in the bogus recording of business with FedEx were unindicted co-conspirators whom the indictment identifies only by initials as the chief financial officer, I.H.S., and the corporate controller, J.R.A. Ira H. Stanley was MCSi's chief financial officer and Jim Ahrns was the controller during that time, according to both MCSi records and lawsuits filed against the company.

Similar bookkeeping tricks involved other companies that did business with MCSi, the indictment alleged.

Fraudulent bookkeeping misrepresented the company's dealings with ClearOne, a Salt Lake City-based computer software company; and Skytron Corp., a California company that installed video screens at trade shows and shopping malls, the indictment alleged. MCSi also used blank purchase orders from Mercatum Ltd., an England-based computer and audio-visual equipment supply company, to record millions of dollars in inflated income, the indictment alleged.

The federal Securities and Exchange Commission began asking questions in what became a civil investigation. It led to a four-year criminal investigation involving the SEC, FBI, Internal Revenue Service and postal inspectors, who concluded that the mails and electronic communications were used to further the bogus financial reporting.

The indictment charges Peppel with securities fraud, conspiracy to commit securities fraud, filing false SEC reports, mail fraud, wire fraud and money laundering.

He is also charged with two counts of violating the Sarbanes-Oxley Act, the 2002 law Congress enacted to improve corporate accountability after Enron Corp.'s collapse. The indictment alleged that Peppel deliberately kept information from an outside auditor hired to examine MCSi's books.

Peppel is also charged with a fraudulent sale of 300,000 shares of MCSi stock in December 2001 that netted him more than $6.8 million in proceeds. The most serious charges carry a potential 25-year prison term. If convicted, he could also face millions of dollars in fines.

Between 2000 and 2003, Peppel and the chief financial officer — identified only as I.H.S. in the indictment — were committed "at all costs" to seeing that MCSi met analysts' estimates of stock price market performance, the indictment alleged. "Mike Peppel and Ira Stanley showed absolute contempt for the shareholders and investors," said John Ellis of Vandalia, a former MSCi employee who said his approximately 50 shares of the company stock were rendered worthless by its plunge into bankruptcy.

The indictment charges only Peppel with crimes. Lawyers who have represented Peppel and Stanley in a related federal civil investigation did not return telephone messages left with their offices on Friday.

MCSi's meteoric rise was documented in the 2000 annual report, which said the company's net sales had escalated from $107.5 million in 1997 to $828.6 million in 2000.

But by 2001, net sales had dropped to $810.4 million and inventory was piling up. That is when MCSi management, led by Peppel, began to take "creative measures to prop up the bottom line," including a series of sham inventory sales and falsified balance sheets, according to a 2004 lawsuit by National City Bank, PNC Bank, Fifth Third Bank and four others that had combined to provide a $125 million line of credit to MCSi.

The banks said MCSi's management failed in its requirement to truthfully report financial performance. An undisclosed settlement was reached in the lawsuit, according to a notation filed in August 2006 in Montgomery County Common Pleas Court.

Shareholders weren't the only ones confused by the company's inflated performance.

At MCSi's request, the Dayton-Montgomery County Port Authority issued bonds that were bought by Fifth Third Bank to construct a two-story, 75,000-square-foot building across Hempstead Station Drive from MCSi's former Kettering headquarters in 2002, so the company could stay in town and expand. Fifth Third Bank granted a construction loan that was to have been succeeded by a loan from the Ohio Department of Development after construction was completed, said Ron Parker, the port authority's executive director.

But MCSi employees told the port authority that MCSi was having financial problems, Parker said Friday. The port authority alerted state officials, who did a financial review and withdrew the state's loan commitment to avoid involving taxpayers in the problems, he said.

MCSi moved into the building at the beginning of 2003, but filed for bankruptcy reorganization in the summer of 2003 and relocated its headquarters to the Atlanta area. That left Fifth Third with a building that stood vacant for several years. This year, MeadWestvaco Corp. committed to move into the building by March 2007.

MCSi's collapse cost at least 1,300 employees their jobs and left stockholders with worthless shares.

"This hurt a lot of people: the employees who worked there, the investors who invested in the company, the bank who loaned them money," Parker said. "The damage that was done was tremendous."

Contact this reporter at (937) 225-2242 or jnolan@DaytonDailyNews.com.