by T. GormanPosted on Posted in SECActions

Advertising can be important to any business. Telling the public about a line of products or services being offered is typically designed to inform people about the products or services available to draw in customers or clients for the firm, generating profits for its owners.

Untruthful advertising can have the opposite effect. It can, and often does, draw customers and clients to a business. While the business may make money, at least for awhile, the customers and clients do not receive value. Examples of the negative impact of false advertising are everywhere – think of greenwashing, or falsely claiming that the business focuses on environmental principles when it does not, or offering fraudulent securities that may be worthless.

One of the Commission’s most recent cases in this area is SEC v. Pereira, Civil Action No. 1:24-cv-20757 (S.D. Fla. Filed February 27, 2024). Named as defendant is Paul A. Periera, a resident of Miami who co-founded a firm later renamed Alfi, Inc. The firm purportedly focused on advertising technology which was used to measure and generate reporting on audience presence, demographics and responses to digital advertising. It shares were eventually listed on NASDAQ.

In May 2021 the company’s Form S-1 registration statement went effective. The company reportedly raised over $17 million. Investors also exercised warrants in the following months which brought the firm another $16 million. Alfi became a “meme stock.” Its share price vacillated from an opening price of $3.60 to as high as $22 per share. The price was volatile.

By June 2021 Mr. Pereira began posting materially false statements about the company on Stocktwits. A few days later Alfi filed its first Form 10Q. It reported $17, 450 in revenue. This filing was followed by an interview Mr. Pereira gave reporting a significant but false new business deal.

While Mr. Pereira continued to try and boost the share price of his firm with false advertising, his efforts failed. By late October the Board of Directors placed him on administrative leave and authorized an independent internal investigation. Eventually Mr. Pereira resigned and the firm was forced to file for Chapter 7 bankruptcy protection. The complaint alleges violations of Securities Act Sections 17(a)(1) & (3) and Exchange Act Section 10(b). The case is in litigation.

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by T. GormanPosted on Posted in SECActions

The Number of Accounting & Auditing Cases Increased in FY2023

There was a 22% increase in the number of accounting and auditing cases filed by the SEC in FY 2023, according to a new report published by Cornerstone Research, SEC Accounting and Auditing Enforcement Activity (here). The Report goes on to discuss key points regarding the actions initiated during the last Government fiscal year and compare them with those from earlier periods.

The Report begins by noting that 83 accounting and auditing enforcement actions were filed during FY2023. That represents a 22% increase over the prior year. It is also the highest number of accounting and auditing cases filed by the agency since 2019. The 44 actions initiated by the Commission during the fourth quarter of the fiscal year represented over half of the cases initiated during the period. This is also the largest number of cases filed in a single quarter in recent years, according to Cornerstone.

Cornerstone also found that 41 of the 83 actions filed referred to either a restatement and/or a material weakness in internal controls. Accordingly, over half of the cases were not identified as involving a restatement or being based on a material weakness in internal controls.

Most of the cases identified as involving an accounting or auditing issue were filed as administrative proceeding. All but 5 of those cases were settled at the time of filing. The Commission also filed 12 civil injunctive actions that are included in this group of cases. That represents a small decrease in number compared to the prior fiscal year. At the end of the fiscal year over half of those cases had not been resolved.

In fiscal 2023 the Commission initiated 11 of the actions in this group against non-U.S. parties. That represents an increase over the average of 9 filed from FY 2018 to FY 2022. The actions were brought against parties in Canada, the Netherlands, Ireland, the United Kingdom, Singapore and China.

The most common allegations in the 83 actions filed tied to revenue recognition and/or internal controls. One or both of those allegations were made n 63% of the cases filed during the period. Only 4 actions involved claims based on auditor independence, a small decline from the prior year. The number of cases involving a Section 304 claim also declined compared to the prior year.

Less than half of the cases brought by the Commission involved individuals. Cases that did involve individuals constituted 41% of those filed during the period. Nearly half of the individuals involved were either a CEO or CFO – 12 individuals who were either a CEO or CFO were involved in the cases. In contrast, 17 of the individuals involved were members of the board of directors.

Finally, the amount of civil penalties imposed in 2023 represented less than half of the total monetary settlements. Specifically, only 33% of the total monetary settlements were penalties – 67% represented disgorgement and prejudgment interest.