It should go without saying that CFOs should be ethical. 
Most of the ones I’ve met are.

But if you’re a public company CFO, you should be aware that there are circumstances in which the enforcement division of the Securities and Exchange Commission may assume there’s a good chance you are not ethical. Even if you are.

I spent almost four years dealing with the real-world consequences of that mindset. I recently emerged from that experience, which was frustratingly bizarre. My story should serve as a warning to all public company executives.

The Background

I’d been with Osiris Therapeutics, a fast-growing public biotech company, for 10 months as vice president of finance before being appointed CFO in September 2015. During those first months I was tangentially involved with day-to-day accounting. My focus was implementing new accounting, financial reporting, and management reporting systems and processes for a company that was transitioning from a research and development focus to commercializing three new products with a new 100-person sales organization.

Shortly after I became CFO, an employee responsible for revenue accounting presented me with a concern over the accounting for a particular sales agent. It led to me telling the employee to reverse, in the third-quarter financials, an immaterial amount of revenue that had been recognized in the previous two quarters.

About four weeks later, I was presented with questionable documentation of a sale to a distributor. I immediately began investigating the sale’s legitimacy and shared my concerns with a trusted member of the senior executive team.

A few days after that, the company’s external auditors notified me that the Public Company Accounting Oversight Board had selected the company’s previous year’s audit for inspection.

The inspection didn’t go well for the auditors. The PCAOB asked a number of questions they couldn’t answer, which led the auditors to pose a flood of questions to the company. The pushback from the PCAOB inspection led the auditors to change their position on the recognition of revenue for several of the company’s distributors.

Many of the revenue adjustments were based on the PCAOB inspectors challenging the external auditors’ workpapers. Ultimately, Osiris announced in its 2015 third-quarter earnings release that it would restate revenue for the fourth quarter of 2014 and the first two quarters of 2015.

The experience of providing support to the external auditors during the PCAOB inspection, and later the nature of their questions about the company’s distributors during the third-quarter financial statement review, demonstrated to me that they didn’t understand the company’s business. They asked such basic questions that I questioned whether they had gained enough evidence during prior audits to issue valid opinions.

All of this made it clear that a change of auditors was required. Working with the company’s audit committee, a determination was made to switch to a Big Four audit firm. We selected Ernst & Young. In December, just before the date we planned to notify the existing auditors of the decision, they resigned as our auditors.

Two Investigations, Three CEOs, 
Two Subpoenas

In early 2016 the company began a review, assisted by an external forensic accounting firm, into a number of the distributor revenue recognition issues that created the need for a restatement.

The forensic accounting firm began to report the results of their findings to me as I continued to review the previously reported revenue accounting. The company continued to work with the external auditors that had resigned to restate the previously issued financials in the pending 2015 10-K.

Turmoil began to hit the executive management team. The CEO resigned in early February, which, coming after the announcement of a revenue restatement and resignation of the auditors, led to rampant speculation from Wall Street and others following the stock. The chief business officer was named interim CEO, and about a month later he became permanent CEO. In rapid succession, two respected members of the executive management team left the company, which left me very concerned.

It was around this time, in March 2016, that the company received a subpoena from the SEC.
The board’s audit committee then retained a law firm and forensic accounting firm to conduct an independent external investigation of the revenue recognition issues. In May, the U.S. Attorney’s Office for the Southern District of New York (SDNY) issued its own subpoena. By this time, the audit committee-backed investigation had progressed to the point that the law firm was questioning employees. In June, the recently appointed CEO resigned, and a new interim CEO was appointed.

The audit committee investigation was completed in August 2016. My conduct as CFO was determined to be completely proper before, during, and after the issues that had led the company to announce the restatement.

The accounting organization then shifted from the investigations to completing the restated financials. Based on the forensic audit, it was ultimately decided to do a multiple-year restatement covering 2012 through the previously reported periods of 2014. The restatement was issued on March 27, 2017.

The SEC Closes In

While the audit committee’s investigation was in progress, the SEC delayed its own probe pending the results. In August 2016, at the request of my attorney, I voluntarily went to the SDNY offices in lower Manhattan for a proffer session.

In a proffer session with the DOJ, of which the SDNY is a component, the department, and in this case the SEC, ask you questions. In return for answering truthfully, the DOJ agrees not to use any evidence obtained during the session against you.

In total, I spent about eight hours being questioned by four assistant U.S. attorneys, one SEC attorney, and three SEC accountants, while a U.S. postal inspector (wearing his weapon) took notes. The attorneys were exceptionally professional but asked tough questions. I answered all of them with extensive detail.

The questions the SEC accountants asked were illuminating. They weren’t difficult, but they revealed the accountants’ limited understanding of the company’s business and the specific transactions they were questioning.

For example, the accountants repeatedly confused the company’s distributors with its agents. I tried repeatedly throughout the day to explain things, but ultimately, they didn’t seem to accept my version of events. By the end of the session, it appeared to me that not only did they misunderstand the business transactions, but that they’d already formed an opinion that I had participated in what they viewed as maleficence by the company’s executive team.

The investigation was completed in August 2016. My conduct as CFO was determined to be completely proper before, during, and after the issues that had led the company to announce the restatement.

After the meeting the investigation picked up in earnest. One evening, postal inspectors simultaneously showed up unannounced at the residences of two company employees. Both were interviewed without lawyers present.

One of the employees was disgruntled over changes made to strengthen internal controls. The other was the one who had created the suspicious sale documents that I had investigated. He was later determined to have participated in a scheme to create false documents to support a fake transaction in a bid to deceive the accounting organization about a sale.

The DOJ and SEC also issued subpoenas and interviewed other employees, distributors, agents, and Wall Street analysts. Some of these people spoke willingly; others exercised their Fifth Amendment rights. The company’s former external auditors were also interviewed.

After my initial interview with the DOJ and SEC, I didn’t hear back from them for a year. Two months after the restatement was filed in March 2017, I left the company to pursue other opportunities.

That August the government agencies asked me to return to New York for another interview. This one lasted two days. It was clear that the SEC had become more hostile toward me since the previous year.

The commission seemed to have developed a narrative where everyone at Osiris was involved in a conspiracy to fool the company’s external auditors. Questions were around a theory that the auditors had been asking questions about distributors throughout 2014 and 2015 and they were lied to about everything.

The theory with regard to me was absolutely incorrect, because I knew I had been fully transparent with the auditors, and that the same applied to information provided by others with respect to the transactions I was aware of. It was becoming clear to me that the SEC’s theory of the case was driven by a narrative from the external auditors.

The auditors were in a tough situation with the SEC and PCAOB at the time the company announced the restatement in November 2015. Two months earlier the SEC had charged the audit firm and five partners with respect to an audit of another public company. It was in October 2015 that the PCAOB selected the firm’s 2014 audit of Osiris for inspection.

This was the inspection I referenced earlier, where the audit performance was determined to have been a failure. In fact, the firm failed 74% of its PCAOB-inspected 2014 audits in 2015.

Given the issues the audit firm was having with the PCAOB and the types of questions the SEC was asking me, I became even more certain that the firm was throwing the company, and me, under the bus.

Wells Notice, SEC Lawsuit, 
New Law Firm

In early September 2017 my attorney informed me that he’d received a Wells Notice announcing the SEC’s intention to charge me with fraud in a federal lawsuit. We had 60 days to file a response.

To say I was shocked would be an understatement. The allegations seemed as if they’d been dictated by the external auditor’s engagement partner. I was certain that our response letter would put all of this nonsense to rest, because I knew there were numerous emails, documents, and individuals that could prove each allegation was wrong.

On November 1, 2017, my attorney informed me that the SEC would be filing a lawsuit against me the next day. As you can imagine, I started to wildly consider all of the potential ramifications.

Responding to a Wells Notice is a nightmare for the target. It consists of sitting in a conference room with attorneys for countless hours, dissecting each line of the letter and formulating a response to each allegation.

My attorneys requested access to my Osiris email and documents from the company and the SEC. The company refused to provide anything, severely limiting my ability to defend myself. The SEC agreed to provide a limited set of emails, obtained from the company under its subpoena, that it had determined were relevant to my defense.

A few attorneys went through every one of those emails and found one after another that refuted the SEC’s claims. Specifically, emails documented that information had been provided to the external audit firm that the Wells Notice alleged had not been not provided. We sent our response to the SEC and waited.

On November 1, 2017, my attorney informed me that the SEC would be filing a lawsuit against me the next day. As you can imagine, I started to wildly consider all of the potential ramifications.

The case, called Securities and Exchange Commission v. Philip R. Jacoby, et al., Civil Action No. 17-cv-03230-CCB, was filed in U.S. District Court for the District of Maryland. The SEC sent out a press release that described in inflammatory language why it had sued the company and four of its former executives.

It was at this point that I found out the company had already settled and paid a $1.5 million fine to the SEC. It was free to move on. I also found out that the CFO I replaced had been indicted and pled guilty to providing the external auditors with falsified documents.

As a result of the lawsuit, the following week I lost a consulting position. Soon thereafter, an investment firm closed my brokerage account. A couple of months later, another investment firm did the same. The recruiters that had been contacting me weekly about CFO positions stopped calling.

Some people in my professional network became difficult to reach. People in the finance and accounting ecosystem that knew me socially acted measurably different around me even while never mentioning what was all over the newspapers, financial sites, blogs, and message boards.

The most difficult thing for me was having to explain to my wife, children, and parents what had occurred. They all knew me to be an honest, ethical person, and fortunately they all believed me when I told them that all of the allegations were untrue. They stood by me, and my true friends did as well, but my world had suddenly become very small.

In February 2018 I decided to speak with other defense attorneys. Enough of them thought the SEC’s case against me was meritless. The most common phases I heard were “complete garbage” and “weak tea.” I retained the law firm of Zuckerman Spaeder.

The SEC’s Case Blows Up

Any entity filing a federal lawsuit must turn over all of its collected evidence in a process called discovery. That’s why most entities that file such cases have a high level of expectation that they’ll prevail.

The SEC is unique in this regard because the individuals in the enforcement division that conduct investigations and bring lawsuits do not try the case in court. The case is taken over by SEC trial attorneys.

My lead attorney was Aitan Goelman, a former SDNY Assistant U.S. Attorney and a former director of enforcement at the U.S. Commodities Futures Board. He assembled a team of attorneys to request and review documents from the SEC, Osiris, and Osiris’ former external auditors. During the document review, I started hearing from Aitan that his team was finding more and more exculpatory evidence.

The discovery also yielded some troubling evidence about behavior by others at the company, most of which I was seeing for the first time. Some of this evidence indicated that what I had thought were legitimate documents or honest errors may have been intentional acts of fraud.

We also found exculpatory evidence in subpoenaed personal text messages and emails between parties affiliated with the company. There were texts to the effect of, “don’t respond to Greg’s questioning about this transaction until we talk.” There were emails with attached documents that the meta data in the files showed were created weeks after they purportedly were created.

My attorneys also found critical inconsistencies in external auditors’ emails and workpapers that directly refuted the SEC’s allegations that the auditors hadn’t been told certain things.

It should have been obvious to the SEC that if there was something nefarious going on, it certainly didn’t involve me. In fact, the SEC knew from documents in their possession that I was constantly challenging things I was told or provided with. The fact that we found all of these exculpatory items means that either the SEC never looked at them, or worse, they found them and chose to ignore them.

From February 2018 until December 2018 we focused on reviewing documents to prepare to depose various parties. The depositions occurred from December 2018 through September 2019. Without exception, the deposed parties testified to my ethical behavior and the very black-and-white, conservative view of revenue accounting I practiced. Many of them refuted the SEC allegations about the external auditors being unaware of certain items.

There were texts to the effect of, “don’t respond to Greg’s questioning about this transaction until we talk.”

One of the most basic things the SEC got wrong was an allegation that I had told the auditors the company was experiencing receivable collections issues because it had lost its collections employee. In fact, the company had never employed a collections person until I retained a contractor for that purpose in September 2015. The allegation, so easily refuted, nonetheless was featured prominently in the complaint as an example of a lie that I told to the auditors.

In depositions, several parties critical to the SEC’s case testified that they either had not met or spoken to me, didn’t know I existed, or that I could not have divined that a critical report they had provided was incorrectly used for reporting revenue before I became CFO. My attorneys began to wonder why I wasn’t immediately dismissed as a defendant in the lawsuit.

In July 2019, the external audit firm partner was deposed. One of my attorneys, Paula Junghans, a former Acting Attorney General of the DOJ’s tax division and an expert in deposing individuals in financial and accounting matters, handled the deposition. The partner was confronted with a number of items over two days of deposition that made it very clear that my version of events was the truth.

Throughout the deposition, the attorneys representing the audit firm and its partner claimed “PCAOB privilege” regarding their conversations and documents with the board. In effect since the board was created by the Sarbanes-Oxley Act in 2002, it ensures that communication between the PCAOB and audit firms during a PCAOB inspection remains confidential. I had never heard of it. I was shocked to learn that a large CPA firm would be allowed to hide behind this.

Based on my defense’s contention that the audit firm had potentially exculpatory evidence that was being shielded through the invocation of PCAOB privilege, my attorneys filed a motion to compel the testimony we were seeking. The audit firm’s attorneys filed counter motions to block our motion.

One of the next people deposed was the person who had created the false sale documentation. He had been given immunity from criminal prosecution in exchange for testifying against the company executives that were later sued by the SEC.

After testifying with immunity in front of a grand jury in the criminal case, this individual repeatedly invoked the Fifth Amendment when deposed during discovery in the SEC’s civil case. Later, two of my co-defendants took the Fifth as well. My predecessor as CFO was the only defendant that gave testimony without taking the Fifth during his deposition.

At this point, the SEC had finally heard enough. A week before I was scheduled to give my deposition, it was canceled. I was the only defendant that wasn’t deposed during the discovery process.

Voluntary Dismissal

Immediately after the audit firm partner’s deposition, the SEC trial team hinted to my legal team that they had serious concerns about why I was included in the lawsuit. Two months later, they filed the dismissal.

It took 690 days, from November 2, 2017 to September 23, 2019, for the SEC to admit it had mistakenly included me in its lawsuit. It didn’t issue a press release announcing the dismissal. The original press release announcing the lawsuit remains on the SEC’s website with no notation regarding the dismissal.

To date, there have been no public announcements of any investigations or sanctions against the external audit partner or firm concerning things that came out about them during discovery. The former Osiris senior staff member that was given immunity and later took the Fifth is employed as a vice president of another public company.

One of my co-defendants settled with the SEC and paid a $40,000 fine. As of the time I wrote this article in January 2020, the case against two of the four original defendants continued. The motion concerning the issue of PCAOB privilege still hasn’t been decided.

The final tab for my legal fees, paid by Osiris because it had indemnified me, approached $2 million.

How Do I Get My Reputation Back?

The SEC did issue a press release about a month after I was dismissed from the case. It was titled “SEC Obtains Final Judgment Against Former Executive Charged with Lying to Auditors.” My dismissal was mentioned in the second sentence of the fourth paragraph, with no context.

It is beyond unconscionable that the SEC would make an error of this magnitude and not issue a release announcing that the case against me had been dismissed and the reason for the dismissal. The commission was very quick to ruin my reputation but did not take responsibility for this life-altering error.

The federal government should be better than this. They could have at least offered an off-the-record apology from the enforcement staff investigators.

My loss of earnings, spent savings, and impact on future earnings this lawsuit cost me have been significant. I cannot sue or otherwise recover any of this from the SEC or the SEC employees that knew or should have known that I shouldn’t have been included in the lawsuit. Sadly, the SEC doesn’t hold itself to the same exacting standards it holds company executives to.

It took 690 days, from November 2, 2017 to September 23, 2019, for the SEC to admit it had mistakenly included me in its lawsuit. It didn’t issue a press release announcing the dismissal.

Since I was dismissed from the lawsuit, I’ve been able to write and speak publicly about my experience.

I have learned that when defendants settle cases with the SEC, they’re routinely required to sign a nondisclosure agreement precluding them from ever discussing the case. Attorneys I have spoken with have told me innocent defendants that settle for the sake of expedience find themselves unable to restore their reputation, with the SEC’s version of events being the only public record.

This has become such a contentious issue that in January 2019 the Cato Institute sued the SEC in federal court, challenging the constitutionality of the commission’s routine gag orders of defendants in SEC-filed lawsuits.

By comparison to these former defendants, I’m actually somewhat fortunate. I was dismissed from the case in 690 days, while many of these cases go on for five years. I’m doing consulting work while word gets around that the SEC’s case against me was completely false. After my experience, I have to wonder how many other cases like mine there have been, as more people reach out to me to share similar stories.

EDITOR’S NOTE: The viewpoints in this article are the author’s and do not necessarily represent those of CFO. 

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6 responses to “The SEC Falsely Accused Me of Fraud”

  1. Gregory,

    A tragedy. I had a major issue with the US Army when I was an enlisted person from 1968 to 1971. The bottom line, I contacted my US Senator and US Congressman and both took action immediately. The matter was resolved with my being found innocent. You may want to contact your US Senator and US Congressman and share with them your tragedy requesting that the SEC published a dismissal, etc.

    You should be able to get your career back.

  2. Thank you CFO magazine for publishing Greg’s story. Citizens cannot keep our government accountable if we are unaware of its excesses.

  3. Thank you for posting your experience and recommendations for future employees. I used this for a paper for one of my classes. Best wishes!

  4. I am a proud retiree of the Federal Government (not the SEC). However, I am ashamed of this kind of behavior on behalf of my beloved former employer, The Fed. I strive for integrity in my personal and professional behavior … and I certainly expect it from my employer. Once I lose respect for you, I want no part of you … PERIOD. Thank goodness my professional experience was NOT with this branch of Federal Government. Still, I’m ashamed on their behalf.

  5. And how much of this was driven by people who had a financial interest in driving down your company’s value, i.e. powerful and connected hedge funds short your stock? All? We’ve seen it before. Think the SEC has not been corrupted for the benefit of a few? If not, think again!

  6. Gregory,

    Thank you for illuminating an enormous problem that we have in the US. You are brave to do so.

    In a nut shell, Americans believe that we have the fairest judicial system in the world. Nothing could be further from the truth. Our system allows bullying of its citizens into settlements because they have the upper hand on finances. Where did they get those finances? You and I fund them.

    Governments should NEVER be allowed to use their power advantage to win cases. It should be the opposite. They should have obvious cases because we are at a financial disadvantage. If they lose their case, the individuals responsible at the agency just move on. No harm no foul. We lose either way. If we win, we are either bankrupt or our reputations are ruined forever. If we lose, we lose twice, we are bankrupt and our reputation is gone.

    Consider this, no other civilized country allows their government to put a press release when charging someone without proving it first (the “perp” walk”). Other countries do not allow their governments to use intimidation and threaten their citizens into submission.

    I content that part of the SEC is made up of garden variety “thugs”. These are people who in many cases couldn’t get job in the real world so we slapped a hat on them and turned them into brown-shirts. The SEC encourages successful outcomes in such a way that its employees are incentivized to get “scalps”. I know this because my attorney started as a senior enforcement officer at the SEC. His conscience did not allow him to continue in that role. Can we request documents from the SEC under FOIA to release their compensation structure and finally expose them? Sounds like a great project for an investigative journalist! No that won’t work, they are busy trying to empty the jails because it seems unfair that someone convicted of theft, shouldn’t be persecuted.

    Now I am not advocating that we don’t need oversight over market conduct. But we have given so much power to the SEC, that they are corrupt and untouchable. They cannot differentiate between “Bernie Madoff”, who we need protection from and someone who has not dotted an “I” or crossed a “T” in a prospectus.

    I think you mentioned that you were out $2 million dollars at the end of your case. I know that is horrible and your reputation is marred, probably forever. Consider this though, I had a similar experience, did not have the $2 million to defend myself, was bullied into a settlement on the eve of the court case, and cannot get a job EVER in my field. In fact, the eve before my case, the legal team sent me an email saying that if I won my case, no problem, they will just appeal. How can I possibly win? I took a settlement. I regret it. But it is done. I am now working towards finding a way to stop this nonsense from happening to others and find a way to get this off my record, because as you say, it is there forever. Talk about unjust

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