In another case, the Securities and Exchange Commission charged TheStreet Inc. and three executives for their roles in an accounting fraud that artificially inflated company revenues and misstated operating income to investors. The SEC alleged that TheStreet Inc., which operates the website TheStreet.com, filed false financial reports throughout 2008 by reporting revenue from fraudulent transactions at a subsidiary it had acquired the previous year. It was alleged that the co-presidents of the subsidiary – Gregg Alwine and David Barnett – entered into sham transactions with friendly counterparties that had little or no economic substance. The SEC also alleges that TheStreet’s former chief financial officer Eric Ashman caused the company to report revenue before it had been earned.
It was alleged that the executives also fabricated and backdated contracts and other documents to facilitate the fraudulent accounting. Barnett is also charged with misleading TheStreet’s auditor to believe that the subsidiary had performed services to earn revenue on a specific transaction when in fact it did not perform the services. The three executives agreed to pay financial penalties and accept officer-and-director bars to settle the SEC’s charges. Andrew M. Calamari, Director of the SEC’s New York Regional Office, stated:
Alwine and Barnett used crooked tactics, Ashman ignored basic accounting rules, and TheStreet failed to put controls in place to spot the wrongdoing. The SEC will continue to root out accounting fraud and punish the executives responsible.
According to the SEC’s complaints filed in federal court in Manhattan, the subsidiary acquired by TheStreet specializes in online promotions such as sweepstakes. After the acquisition, TheStreet failed to implement a system of internal controls at the subsidiary, which enabled the accounting fraud. The SEC alleges that through the actions of Ashman, Alwine, and Barnett, TheStreet:
• Improperly recognized revenue based on sham transactions,
• Used the percentage-of-completion method of revenue recognition without meeting fundamental prerequisites to do so, including reliably estimating and documenting progress toward the completion of relevant contracts, and
• Prematurely recognized revenue when the subsidiary had not performed actual work and therefore had not really earned the revenue.
The SEC alleged that when the subsidiary’s financial results were consolidated with TheStreet’s financial results for financial reporting purposes, the improper revenue on the subsidiary’s books resulted in material misstatements in the company’s quarterly and annual reports for fiscal year 2008. On February 8, 2010, TheStreet restated its 2008 Form 10-K and disclosed a number of improprieties related to revenue recognition at its subsidiary, including transactions that lacked economic substance, internal control deficiencies, and improper accounting for certain contracts.
Ashman will pay a $125,000 penalty and reimburse TheStreet $34,240.40 under Section 304, the clawback provision of the Sarbanes-Oxley Act, and he will be barred from acting as a director or officer of a public company for three years. Barnett and Alwine will pay penalties of $130,000 and $120,000 respectively, and will be barred from serving as officers or directors of a public company for ten years. The three executives and TheStreet will be permanently enjoined from future violations of the federal securities laws. I have to wonder how much of this sort of thing has been going on – undetected – with innocent persons who invested their money being hurt. I suspect it is more common than we know.
Source: Corporate Crime Reporter
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