ONE FINANCIAL FRAUD, THREE CASES
The Commission filed three cases centered on a financial fraud at International Commercial Television, Inc. (“ICT”). The first is an action against the company, charging violations of Exchange Act Sections 13(a), 13(b)(2)(A) and 13(b)(2)(B). SEC v. International Commercial Television, Inc., Case No. 3:10-cv-05555 (W.D. Wash. Filed Aug. 9, 2010). The second names Karlheinz Redekopp, the former CFO of International Commercial Television as a defendant. It is based on claimed violations of Securities Act Section 17(a) and Exchange Act Sections 10(b), 13(a), 13(b)(2)(A), 13(b)(2)(B) and 13(b)(5), along with the pertinent rules. SEC v. Redekopp, Case No. 3:10-cv-05557 (W.D. Wash. Filed Aug. 9, 2010). The third is an administrative proceeding based on Rule 102(e) against the outside auditors of ICT, Dohan + Company CPA and its founding partner Steve Dohan, the engagement partner, Nancy Brown and the manager of the audits, Erez Bahar. In the Matter of Dohan + Company CPAs, Adm. Proc. File No. 3-13997 (Aug. 9, 2010).
The allegations in each case center on three improper practices which ended with a restatement of ICT’s financial statements for the fiscal year ended 2007 and the first and second quarters of 2008. International Commercial Television’s primary product is a skin care application called Derma Wand. In 2007, the company entered into a relationship with the Home Shopping Network (“HSN”) to promote that product. Product was “drop-shipped” product for the Network as part of the arrangement. HSN however did not purchase the product. Rather, it facilitated sales. Typically, HSN sent International Commercial Television requests for product that would be sold in the future. Pending sale the product was stored at ICT’s warehouse. Later, it was shipped to customers after which the Home Shopping Network would remit payment. Returns on product sold through HSN could be made for 60 days.
Beginning in the first quarter of 2007 and continuing through the second quarter of 2008, ICT recognized revenue on sales to HSN before the product was sold to the customer and prior to the expiration of the return rights. As a result, ICT reported revenue to investors for sales which had not been completed and under circumstances where the company had no assurance of being paid. This is contrary to GAAP.
During this same period ICT also recognized revenue on sales of a new product, Cell Rex. This product however failed a Home Shopping Network quality control inspection and was never sold through HSN. Nevertheless, the receivable remained on the books of International Commercial Television.
The company also improperly recognized revenue on direct sales. ICT sold product directly to customers and gave them a 30 day free trial period. Bills were not sent to customers until the end of the trial period. The company, however, recognized revenue on shipment, contrary to GAAP. The company also failed to properly account for returns despite disclosure in the financial statements representing that the company provided an allowance for returns based upon past experience.
In October 2008, ICT restated its financial statements for three periods. For the fiscal year ended 2007 the company had overstated reported net sales by 33%. For the first quarter of 2008 net sales were understated by 5%, but overstated by 34% for the second quarter.
ICT settled with the SEC, consenting to the entry of a permanent injunction prohibiting future violations of the reporting provisions cited in the complaint. The actions as to the former CFO and the outside auditors are in litigation. See also Litig. Rel. 21622 (Aug. 9, 2010).