The Securities and Exchange Commission’s press relations team had a busy week to close out fiscal 2023, as the annual rush of open, pending, and settled lawsuits hit the wires.
Not including insider trading and Financial Corrupt Practices Act violations, the SEC announced five cases against non-financial corporations for misleading investors or failing to disclose information. Almost all of the cases involved inaccurate or misleading sales and revenue numbers. Only one CFO was charged, despite “individual accountability” being a pillar of SEC enforcement.
Here’s a rundown:
The one CFO sued by the SEC also had criminal charges brought against him. Edward O’Donnell, former CFO of Pareteum, a mobile device network platform, along with the company’s CEO, Victor Bozzo, were sued by the SEC for engaging in fraudulent revenue recognition practices.
The “scheme,” according to the SEC, involved non-binding purchase orders for SIM card services that did not carry an obligation to pay Pareteum. Not only did O’Donnell and Bozzo inflate the company’s revenue to make it appear more profitable, charged U.S. Attorney Damian Williams, they “took steps to mislead the company’s auditor,” in particular when the auditor tried to test Pareteum’s accounts receivable numbers. The SEC is seeking to claw back some of O’Donnell’s compensation.
“Both groups were confused as to the other’s role: operations did not fully appreciate how accounting used the data they provided, and accounting did not fully understand what the data reflected and its limitations.”
SEC case against GTT Communications
GTT Communications admitted to the SEC in 2020 it had made more than $35 million in unsupported adjustments to its cost of revenue that boosted its operating income during parts of 2019 and 2020. The cause of its woes was systems-related, as after a series of acquisitions, it couldn’t reconcile cost of revenue (COR) data coming from two different systems.
In addition, said the SEC, there was “a knowledge disconnect” between the operations and accounting staff. “Both groups were confused as to the other’s role: operations did not fully appreciate how accounting used the data they provided, and accounting did not fully understand what the data reflected and its limitations.”
GTT’s mistake was in reporting the unsupported amount without disclosing material facts about the adjustment. When GTT discovered the problem, it “spent more than a year and tens of millions of dollars in an attempt to correct its filings,” according to the SEC lawsuit. To no avail. GTT subsequently launched an internal investigation and self-reported the problems to the SEC. It settled the case but was not fined because it cooperated with investigators.
Lack of Traction
Companies making products and parts for the alternative energy vehicle sector are eager to show sales progress, especially on the way to or once being public. Sometimes too eager. Hyzon Motors and Spruce Power Holding (XL Fleet at the time of the violations) are just the latest transgressors. Both companies went public via a reverse merger.
The revenue projection, said the SEC, included “sales to potential customers with whom XL Fleet had little or no contact” and “stale sales opportunities that had not been updated within the company’s systems.”
Hyzon Motors and two of its executives were charged with misleading investors about its products' status and sales before and after its SPAC transaction in 2021. The company even went as far, said the SEC, as “posting a misleading video of [a] vehicle purportedly running on hydrogen, when the vehicle was not equipped to operate on hydrogen power.” Hyzon's former CFO, Mark Gordon, who was not charged in the case, returned $122,500 in compensation he had earned during the periods of the misstated financials to the company.
XL Fleet provided hybrid electric vehicle systems for commercial fleet vehicles, and it to was eager to prove it had customers on the hook. According to the SEC settlement order, XL Fleet claimed in pre-SPAC filings it had a $220 million, 12-month sales pipeline.
The sales pipeline, according to the SEC, was misleading because the numbers were derived from a customer relationship management system for the sale team, “not designed to make revenue projections.” The revenue projection, said the SEC, included “sales to potential customers with whom XL Fleet had little or no contact” and “stale sales opportunities that had not been updated within the company’s systems.” The company changed its name to Spruce Power Holding in 2022.
Don’t Count That
Newell Brands isn’t a household name, but it’s products — Sharpie markers, Graco pack ‘n plays, and others — are. The company and its former CEO, Michael Polk, were charged with misleading investors about Newell’s core sales growth, a non-GAAP (Generally Accepted Accounting Principles) financial measure.
The violations occurred in 2016 and 2017, and partly involved shipping product orders early to boost shortfalls in quarter-end sales. In addition, Newell reclassified some customer payables, which should have reduced the sales numbers, to cost of goods sold or SG&A expenses, that did not affect the non-GAAP reporting measure core sales, said the SEC. Both Polk and Newell agreed to settle.