The Securities and Exchange Commission has pushed back against a federal judge who is questioning the adequacy of a settlement between the regulator and a former CFO.

On Wednesday, in a court filing to the U.S. Court for the Eastern District of Wisconsin, the SEC defended an agreement with Koss Corp. and Michael Koss as “fair reasonable, adequate, and in the public interest.” A month ago, Judge Rudolph Randa asked the SEC to address concerns that the settlement lacked detail and to explain why the amount of compensation clawback agreed to by former CFO Koss makes sense.

In 2009 the company uncovered a years-long $34 million fraud by Sujata Sachdeva, Koss Corp.’s vice president of finance. Sachdeva, who reported to Koss, used the company’s money to buy clothing, fur, and jewelry at various luxury stores in Milwaukee. She has pleaded guilty to related criminal charges.

The SEC’s defense of the settlement with the company and Michael Koss — now the headphone maker’s CEO — comes just a few months after U.S. District Judge Jed Rakoff struck down the commission’s $285 million settlement with Citigroup, questioning its fairness. Rakoff, known for disputing a 2009 SEC settlement with Bank of America, also questioned the SEC’s allowing Citigroup to “neither admit nor deny” the charges. The SEC recently changed its policy to omit the phrase for cases in which companies have pleaded guilty to related criminal charges.

But in the Koss case, the company may still “neither admit nor deny” when the official settlement is released because it is not facing criminal charges. The SEC has not accused the company or Michael Koss of conducting the fraud: its filing describes the company as “the direct victim of Sachdeva’s theft.” But the commission’s charges against Michael Koss suggest that as both CEO and CFO (he held both titles at the time of the fraud), he bears some responsibility. In addition to filing materially false financial statements with the SEC, the company “failed to account for the embezzlement losses and thereby overstated Koss Corp.’s net income and assets, and understated liabilities,” the SEC charges.

If the settlement is approved, Michael Koss will reimburse the company more than $242,000 plus 160,000 in options and would be enjoined from violating certain securities laws in the future.

In his ruling a month ago, Randa described the SEC’s enforcement action as giving only a “vague injunction” and as lacking in details of when Koss Corp. would need to implement changes to internal controls and other remediation. The SEC’s response on Wednesday says a time line isn’t necessary and notes several ways Koss Corp. and its CEO have taken steps to address the company’s “internal control failures.”

Sachdeva and two other employees in the accounting department were fired long ago. The company restated its financials, dismissed its accounting firm, and changed several procedures in the finance department, including doing away with petty cash. Koss Corp. also hired a new CFO and has pledged to keep the CEO and CFO roles separate.

SEC chairman Mary Schapiro has acknowledged the frustration judges and the public have expressed about the regulator’s settlements. More cases could end up in litigation, consuming the regulator’s time, if agreements are more difficult to reach. Last year the commission made 682 settlements, virtually the same number as 2010, according to a NERA Economic Consulting study released earlier this week.


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