SEC Charges Data Intelligence Executives With Revenue Fraud Scheme
The SEC alleged that executives at a global data intelligence company, abetted by the company's largest customer, engaged in a scheme designed to make the company appear more attractive as a candidate for a merger with a special purpose acquisition company.
In a Complaint filed in the U.S. District Court for the Southern District of New York, the SEC alleged that the executives caused the company to engage in a fraudulent accounting scheme with a partner firm to overstate reported revenue by an average of 27% during the relevant time period. The SEC claimed that the scheme involved the company and its partner "invoicing one another for grossly inflat[ed] [amounts], sometimes by as much as 98%," allowing the company to recognize the full amount of cash received as revenue even though the funds originated from the company itself. The SEC further alleged that the executives intentionally made false statements about revenue and growth during earnings calls and in reports filed with the Commission.
The SEC also claimed that the former Chief Executive Officer "misappropriated over $300,000 from [the company] to pay for the rental of a luxury single-family residence," presenting false invoices claiming the amounts were for "professional services." The SEC said the executives allegedly "fabricated documents [and] made misstatements to conceal the scheme from ... independent auditors," including providing false management representation letters. The SEC also alleged that the executives falsified invoices to make it appear that "other vendors were billing [the company] to mask payments" made to the partner firm.
The SEC charged the executives with violations of Section 17(a) ("Fraudulent Interstate Transactions") of the Securities Act and Section 10(b) ("Regulation of the Use of manipulative and deceptive devices") of the Securities Exchange Act and Rule 10b-5 ("Employment of manipulative and deceptive devices") thereunder. Additionally, the SEC charged the executives with violations of Section 13(b)(5) ("Periodical and other reports") of the Securities Exchange Act and Rules 13b2-1 ("Falsification of accounting records") and 13b2-2 ("Representations and conduct in connection with the preparation of required reports and documents") thereunder.
The SEC seeks a final judgment permanently enjoining the defendants from future violations, prohibiting the executives from serving as officers or directors of any public company, ordering the disgorgement of ill-gotten gains with prejudgment interest, and imposing civil penalties.