The Massachusetts District Court entered a final consent judgment against the former controller of a public company for improperly inflating the company’s revenue, misstating financial information and misleading investors as to the company’s true financial condition over a two-year period. The complaint, filed by the SEC in 2007, asserted 12 counts for violations of various sections of the Exchange Act and Securities Act including Section 10(b) and Rule 10b-5 of the Exchange Act and Section 17(a) of the Securities Act against the company’s CFO, controller and director of finance.
The complaint alleged that the three defendants negotiated a series of deals with a reseller that required the reseller to make royalty payments prior to shipping its product to customers. To further their scheme, the SEC alleged that the defendants engaged in various illegal transactions including falsifying documents, misleading external auditors about the terms of the deal with the reseller, allowing the auditors to rely on documents known by the defendants to be false and misleading, helping the reseller to improperly recognize revenue and improperly recording $2 million of royalty prepayments as revenue in the company’s books and records.
Without the controller admitting or denying any of the allegations of the complaint, the Court enjoined the controller from aiding and abetting violations of the books and records and periodic reporting provisions of the Exchange Act and ordered him to pay a $20,000 civil penalty. The SEC had sought a lifetime bar against the controller from serving as a director or officer of a public company but the Court declined to impose this sanction. The anti-fraud provisions of the securities laws were dropped without explanation.
The company’s former CFO previously settled and was enjoined from similar violations of the securities laws. He was also permanently barred from serving as a director or officer of a public company and ordered to pay a $100,000 penalty. The former director of finance also previously settled on the books and records provisions of the Exchange Act and was required to pay a $25,000 penalty.
The editors would like to thank the following contributors for their assistance with this issue of Securities & Financial News to Note:
Allison Beth Hoagland
Alexandra P. Lumpkin