Risk & Compliance

Ex-Kit Digital CFO Accused of Accounting Fraud

Robin Smyth and the firm's former CEO allegedly created a slush fund to make it appear Kit Digital was being paid for sales.
Matthew HellerSeptember 9, 2015

The U.S. Securities and Exchange Commission has charged the ex-CEO and ex-CFO of Kit Digital of falsifying financial statements to mislead investors about the now-bankrupt software company’s true profitability.

According to the SEC, former CEO Kaleil Isaza-Tuzman, 43, and former finance chief Robin Smyth, 61, committed accounting fraud by, among other things, using Kit Digital’s own money to make it look like the company was being paid for its products.

The cash was supposed to finance a January 2012 acquisition but nearly $8 million was actually wired to third parties, creating a “slush fund” from which Isaza-Tuzman and Smyth generated the phony payments, the SEC said in a civil complaint.

The U.S. Attorney in Manhattan has brought a parallel criminal case. Isaza-Tuzman was arrested Monday in Colombia, while Smyth was arrested Tuesday in Australia. Both are being held pending extradition proceedings.

From 2010 to 2012, the two executives recognized $6 million in improper revenue, overstated company assets by $7.9 million, and understated $4.4 million in losses, prosecutors said.

“We allege that Isaza-Tuzman and Smyth brazenly falsified the financial condition of a public company and misled investors and auditors about the company’s revenues and ability to deliver the products it was touting,” Andrew M. Calamari, director of the SEC’s New York regional office, said in a news release.

Isaza-Tuzman became CEO of Kit Digital’s predecessor company, ROO Group, in early 2008; Smyth had been its CFO since 2003. In mid-2010, the SEC said, they concocted a scheme to create the false appearance that the company had delivered a software product called VX Manager to a client for nearly $1.5 million.

“[T]hey knew or recklessly disregarded that the company had not delivered the required product to the purchaser and thus was not entitled to recognize revenue on the sale,” the SEC alleged.

As a result of the alleged slush fund scheme, Kit Digital received nearly $4.4 million from purported customers. In reality, the SEC said, those companies were “simply returning a portion of the money [Kit Digital] had sent them days prior.”