Internal controls have been a key theme for the Enforcement Division in recent months. Last fall for example, the Division issued a section 21(a) report discussing internal controls based on a series of cyber-security investigations. That discussion was grounded in the fundamentals of the Exchange Act provisions first enacted as part of the Foreign Corrupt Practices Act in 1977. It also added comments on elements such as training and knowledge – human components not typically referenced in control issue discussions.
In its second group of post-shutdown case filings, the Commission instituted settled administrative proceedings involving four issuers who have repeatedly admitted to internal control deficiencies to reinforce its point. The four proceedings involve a range of issuers. Each admitted to years of violations, from seven to ten years. Three of the four firms cured the deficiency – only one had not. Each firm settled, consenting to a cease and desist order precluding future violations. Each firm paid a penalty from a low of $35,000 to a maximum of $200,000. Only one firm was directed to implement an undertaking – it has failed to cure the deficiencies after ten years.
Typical of the proceedings is the action involving Lifeway Foods, Inc.: In the Matter of Lifeway Foods, Inc., Adm. Proc. File No. 3-18970 (Jan. 29, 2019). Respondent is a dairy food producer incorporated in 1986 which is based in Morton Grove, Illinois. The firm is controlled by a family.
For nine years Lifeway Foods had “significant deficiencies in the aggregate that constituted a material weakness in 2016,” according to the Order. Those material weaknesses, beginning as early as 2007, resulted from maters such as: Incomplete, inadequate and undocumented financial reporting processes; the lack of adequate financial statement review; and the failure to consistently demonstrate effective preparation, support and review of journal entries and account reconciliation. Many of the weaknesses recurred and were tied to financial reporting, accounting or entity controls. During the period three restatements were announced.
In late 2013 Respondent began remediating the issues. Two years later a SOX consultant was retained to assist. By the end of 2017 the process was completed. The consultant continues to work with the company. The Order alleges violations of Exchange Act section 13(a), 13(b)(2)(A) and 13(b)(2)(B).
To resolve the proceedings Respondent consented to the entry of a cease and desist order based on the sections cited in the Order. The firm also agreed to pay a penalty of $100,000. See also Digital Turbine, Inc., Adm. Proc. File No. 3-18971 (Jan. 29, 2019)(seven years of violations ending in 2018; resolved with a cease and desist order based on Exchange Act section 13(b)(2)(B) and payment of a $100,000 penalty); In the Matter of Cytodyn Inc., Adm. Proc. File No. 84994 (Jan. 29, 2019)(nine years of violations ending in 2017; resolved with a cease and desist order based on Exchange Act section 13(b)(2)(B) and the payment of a $35,000 penalty); In the Matter of Grupo Simec S.A.B. De C.V., Adm. Proc. File No. 3-18972 (Jan. 29, 2019)(ten years of violations which are currently being remediated; resolved with a cease and desist order based on Exchange Act section 13(b)(2)(B), an order to comply which certain undertakings which in part requires the retention of an independent consultant; and the payment of a penalty in the amount of $200,000).