by T. GormanPosted on Posted in SECActions

The transition from a privately held company to being part of a public entity can be difficult. As a private company there is no requirement that its financial reporting systems comply with the dictates of the Exchange Act which were designed to protect investors who entrusted their money to those running the company. Once the private entity becomes part of the public corporation however, the parent must have internal controls sufficient to effectively monitor the newly acquired entity and the subsidiary is required comply with the Exchange Act.

This lesson was recently learned by on-line media company The Street.com, Inc. when it acquired a privately held entity. The acquisition eventually resulted in a restatement and enforcement actions against the parent company, its former CFO and two officers of the subsidiary. SEC v. TheStreet, Inc., Civil Action No. 12-CV-9187 (S.D.N.Y. Filed Dec. 18, 2012); SEC v. Ashman, Civil Action No. 12-CV-9189 (S.D.N.Y. Filed Dec. 18, 2012); SEC v. Alwine, Civil Action No. 12-CV-9191 (S.D.N.Y Filed Dec. 18, 2012).

TheStreet.com, Inc., now TheStreet, Inc. acquired a privately held company in August 2007. The acquisition was designed to propel the company forward as a one stop shopping destination. Instead, it soon became apparent that the company was having difficulty reaching its financial targets.

First, the subsidiary recorded revenue prematurely in violation of GAAP. At the time, defendant Eric Ashman was the CFO of TheStreet. He permitted the company to book revenue when the work had not been completed by the subsidiary or there was an insufficient basis to believe that it had been completed. In four large transactions Mr. Ashman is alleged to have permitted the revenue to be recognized at a time when he knew, or recklessly disregarded the fact that the work was not completed in connection with the transaction.

Second, the subsidiary engaged in three round trip transactions with friendly counter-parties to create or inflate revenue. The transactions were structured by defendants Gregg Alwine and David Barnett, the co-presidents of the subsidiary. In support of the transactions the two men backdated at least one contract and obtained a false audit confirmation for another.

The books and records of the subsidiary were consolidated into those of TheStreet for financial reporting purposes. That entity did not maintain adequate internal controls and, according, the fraud at the subsidiary went undetected, according to the complaint. The financial statements of the parent for the first, second, third and fourth quarters overstated revenue by, respectively, 31%, 118%, 21% and 105% and by 152% for the entire year.

The Commission’s actions alleged violations of Exchange Act Sections 13(a), 3(b)(2)(A) and 13(b)(2)(B) by the company; Section 13(b)(5) and aiding and abetting violations of Sections 10(b), 13(a), 13(b)(2)(A) and 13(b)(2)(B) and failing to comply with SOX 304(a) by Mr. Ashman; and Sections 13(b)(5) and aiding and abetting violations of Section 10(b), 13(a) and 13(b)(2)(A) by Messrs. Alwine and Barnett.

Each defendant settled with the Commission, consenting to the entry of a permanent injunction based on the Sections cited in the pertinent complaint. In addition, Mr. Ashman agreed to pay a civil penalty of $125,000, to reimburse the parent company $34,240 under SOX 304 and to be barred from serving as a director or officer of a public company for three years. Messrs. Alwine and Barnett will pay penalties of $120,000 and $130,000 respectively and be barred from serving as officers or directors of a public company for ten years. See also Lit. Rel. No. 3232 (Dec. 18, 2012).

Hurricane Sandy: As we enjoy the holiday season please remember the victims of Sandy’s destruction with a donation to the Red Cross (here).

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by T. GormanPosted on Posted in SECActions

Allianz SE, the giant German insurer and asset manager, settled FCPA books and records and internal control charges with the SEC. In the Matter of Allianz SE, Adm. Proc. File No. 3-15132 (Dec. 17, 2012). At the time of the underlying events Alianz’s American Depositary Shares and bonds were registered with the Commission under the Exchange Act and listed on the New York Stock Exchange. After the company discovered the conduct involved here, but before the Commission started its investigation, the Allianz voluntarily delisted from all exchanges except those in Germany.

The conduct in the action involved payments by majority owned subsidiary PT Asuransi Allianz Ultama beginning in 2001 and continuing until 2008 to Indonesian officials to obtain and retain insurance business. Initially, the Marketing Manager at Ultama made payments from a special purpose bank account opened years earlier for a legitimate purpose with a local Indonesian broker years. The manager received approval from Ultama management to use the account to make the payments to obtain or retain business.

The improper payments were made by disguising them as part of the policy premium. To implement this system the premium was divided into two segments. One was the actual premium while the other part was for the foreign official. When the entire premium was paid, the Ultama manager had the second portion transferred to the special purpose bank account and paid to the official. Allianz was not aware of these payments because, according to the Order, its internal controls were not effective.

In 2005 Allianz received a complaint through its whistleblower hotline regarding the special purpose account. Internal audit examined the issue, focused largely on whether money had been misappropriated. Eventually the examination was concluded and the account ordered closed without determining the purpose for the payments.

Despite the directive to close the account the Marketing Manager continued to use it from 2005 through 2008 with the agreement of the Ultama’s management. While the Marketing Manager utilized various ways to make the payments none were detected by the parent company, further illustrating its flawed internal controls, according to the Order.

In 2009 there was a second whistleblower complaint at the parent company. Counsel was retained to investigate. The matter was not reported to the SEC. The next year, however, another whistleblower complaint was made. This time it was lodged with the Commission. The staff investigation uncovered 295 government insurance contracts obtained or retained through the payment of about $650,626 to Indonesian government officials from 2001 through 2008.

Over the course of the investigation the cooperation of the company, which changed counsel, improved according to the Order. A footnote indicates that Allianz did report that another German entity in which it had invested was under inquiry for tax issues in Germany. None of the issues involved government projects or payments to foreign officials. The Order alleges violations of Exchange Ac Sections 13(b)(2)(A) and 13(b)(2)B).

The company settled with the Commission, consenting to the entry of a cease and desist order based on the Sections cited in the complaint. It also agreed to pay disgorgement of $5,315,649, prejudgment interest and a civil penalty equal to the amount of the disgorgement.

Hurricane Sandy: As we enjoy the holiday season please remember the victims of Sandy’s destruction with a donation to the Red Cross (here).

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