SEC Files Charges against Issuer for Reporting Inflated Revenue

The SEC filed charges against a water technology company (the "Company") and a former finance director (the "Director") for fraudulent accounting practices that resulted in material misstatements on its reported revenue at the time of the Company’s initial public offering.

In the Complaint, filed in the U.S. District Court for the District of Rhode Island, the SEC alleged that the Company improperly recognized revenue from sales transactions of products that lacked proper documentation, which the Company had not yet shipped to the customer prior to the end of the relevant reporting period. The SEC found that the Director “intentionally or recklessly” took steps to increase the Company’s already inflated revenue as a response to pressure to generate additional revenue in advance of the Company’s IPO. The SEC argued that by inflating revenue, the Director violated Generally Accepted Accounting Principles ("GAAP") by (i) approving the recognition from sales transactions that were inconsistent with revenue recognition and (ii) directing and allowing the Company to “fraudulently” recognize revenue in periods prior to completing transactions with customers.

As a result of these violations, the SEC said that the Company appeared to be earning more revenue than it actually was at the time of its IPO by reporting nearly $12 million of additional expected revenue in its securities registration statement and prospectus. The SEC emphasized that the registration statement and prospectus for the IPO are “key” documents used by companies to market their shares, and by potential investors to evaluate a company’s prospects.

To settle the charges, the SEC is seeking (i) permanent injunctions , (ii) a civil monetary penalty, (iii) disgorgement (plus prejudgment interest) of ill-gotten gains and (iv) a prohibition for the Director from serving as an officer or director of any issuer with registered securities.