Accounting and Financial Reporting Enforcement Round-Up

28 October 2019
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The Accounting & Financial Reporting Enforcement Round-Up is produced by Debevoise’s White Collar & Regulatory Defense and Capital Markets practice groups, including lawyers who focus on securities enforcement, securities litigation, internal investigations and corporate governance matters. The lead partners are Andrew Ceresney, Arian June, Matthew Kaplan and Jonathan Tuttle. Associates Mark Flinn and Jonathan DeMars also contribute to the report.

This issue of the Round-Up highlights a number of notable accounting and financial reporting-related enforcement actions brought by the SEC during 2019, several of which involved parallel criminal charges brought by DOJ. In particular, the cases covered by this issue reflect the SEC’s continued focus on auditor independence and financial reporting issues such as non-GAAP reporting, revenue recognition, and impairment accounting.

  • Court Orders Cryptocurrency Firm to Pay $6.8 Million for Falsifying Revenue and Fraudulently Securing NASDAQ Listing
    On September 26, 2019, the U.S. District Court for the Southern District of New York entered a default judgment against Longfin Corp. (“Longfin”), a defunct fintech company that promoted cryptocurrency, holding it liable for more than $6.8 million after missing a deadline to respond to SEC allegations that the company and its CEO, Venkata Meenavalli, engaged in offering fraud and falsified Longfin’s revenue in SEC filings.
  • Media Analytics Firm and Former CEO Settle Revenue Recognition Charges
    On September 24, 2019, Comscore, Inc. (“Comscore”) agreed to pay $5 million to settle SEC charges stemming from a fraudulent revenue recognition scheme that the company’s former CEO allegedly directed from February 2014 through February 2016. Comscore provides media measurement and analytics data to enterprises, media advertising agencies, and publishers. According to the SEC’s order, Comscore overstated its publicly reported revenue by approximately $50 million and made false and misleading statements about key performance metrics, which enabled the company to exceed analyst targets in seven consecutive quarters.
  • SEC Charges PwC and Partner with Violating Auditor Independence Rules
    On September 23, 2019, PwC agreed to pay approximately $8 million to settle SEC charges related to auditor independence violations and improper professional conduct. The SEC’s order states that PwC violated the SEC’s auditor independence rules through its involvement with the design and implementation of software relating to an audit client’s financial reporting. PwC also allegedly failed to obtain proper audit committee approval prior to performing non-audit services for fifteen SEC-registered audit clients from 2013 through 2016. According to the SEC’s order, PwC’s independence violations were caused by Brandon Sprankle, a partner at the firm who also agreed to settle SEC charges.
  • Bancorp and Two Executives Settle Charges Related to Loan Impairment Allowances
    On September 20, 2019, The Bancorp, Inc. (“Bancorp”), a Delaware bank holding company, agreed to pay a $1.4 million civil penalty to settle an SEC enforcement action alleging violations of the reporting, books and records, and internal controls provisions of the Exchange Act and the rules thereunder based on accounting failures related to the company’s allowance for loan and lease losses (“ALLL”) and its provision for loan and lease losses (“PLLL”). Bancorp’s chief credit officer, Donald McGraw, Jr., and former chief risk officer, James David Hilty, were charged with causing certain of Bancorp’s violations.
  • Marvell Technology Pays $5.5 Million to Settle SEC Charges of “Pull-In” Scheme
    On September 16, 2019, Marvell Technology Group, Ltd., a producer of semiconductor components used in hard drives, mobile phones, and network devices, agreed to pay $5.5 million to settle SEC charges that it failed to disclose its practice of accelerating, or “pulling in,” sales scheduled for future quarters into current quarters in order to close the gap between its actual and forecasted revenues.
  • RSM Settles Auditor Independence Violations
    In August 2019, public accounting firm RSM US LLP agreed to pay $950,000 to settle SEC charges that it violated the agency’s auditor independence rules by providing non-audit services to, or having an employment relationship with, affiliates of at least 15 audit clients between 2014 and 2015. The SEC alleged that RSM US and associated member firms of the RSM International network provided non-audit services to affiliates of RSM US audit clients, which violated independence rules.
  • SEC and DOJ Charge REIT and Four Former Executives with Manipulating Non-GAAP Measures
    The SEC and DOJ filed charges in August 2019 alleging that four former executives of the publicly-traded real estate investment trust (“RETT”) Brixmor Property Group Tnc. (“Brixmor”), manipulated the company’s same property net operating income (“SP NOT”) metric to meet consistent growth targets in public filings with the SEC between the third quarter of 2013 and the third quarter of 2015. The SEC filed charges against Brixmor and its former CEO, CFO, chief accounting officer, and senior vice president for management accounting.
  • Engine Manufacturing Executives Charged in Fraudulent Revenue Recognition Scheme
    Parallel charges filed by the SEC and DOJ in July 2019 alleged that the former CEO and two former sales executives of Power Solutions International, Inc. (“PSI”), a publicly traded engine manufacturer, fraudulently inflated PSI’s revenue by recording sales of products that were not complete, that the customer had not agreed to accept, and for which the price was falsely inflated. The SEC also alleged that PSI recorded sales from improper “bill and hold” arrangements and that the executives misled and concealed information from PSI’s internal accountants and external auditors in an effort to meet the company’s revenue targets.
  • SEC Charges Six Individuals with Misrepresenting and Overvaluing Clean Energy Projects
    In June 2019, the SEC charged four former executives of Blue Earth Inc. (“Blue Earth”), a now-bankrupt energy company, alleging that the executives overvalued a construction in progress (“CIP”) asset that purportedly reflected seven combined heat and power plant projects that it claimed would transform the company from an unprofitable venture to a profitable one. The SEC also alleged that the executives repeatedly misrepresented the company’s construction, ownership, and operation of the projects when in it had only secured contracts for two power plants and had limited prospects of actually performing those contracts or obtaining additional contracts.
  • KPMG Agrees to $50 Million Settlement for Using Stolen PCAOB Data and Cheating on Training Exams
    In June 2019, KPMG agreed to pay a $50 million civil penalty to settle SEC charges alleging that KPMG employees participated in a scheme to obtain and misuse confidential information about upcoming PCAOB inspections. The SEC’s order states that, in an effort to avoid potential audit deficiency findings, KPMG altered its documentation of past audit engagements after obtaining information leaked by PCAOB staffers who sought jobs at KPMG. The order further states that KPMG employees cheated on training exams mandated by a prior SEC order by improperly sharing answers and manipulating test results.
  • Deloitte Japan Settles Auditor Independence Allegations
    In February 2019, Deloitte Japan agreed to pay $2 million to settle SEC charges that it violated the agency’s auditor independence rules by issuing audit reports for an audit client at a time when a number of the firm’s partners and audit engagement team members maintained bank accounts with the audit client’s subsidiary. The SEC also charged Deloitte Japan’s former CEO as well as the firm’s reputation and risk leader and director of independence, both of whom agreed to a settlement and have been suspended from appearing and practicing before the SEC as accountants.

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