by T. GormanPosted on Posted in SECActions

There are probably few Commission actions centered on financial misstatements tied at least in part to a toy. There may be even fewer financial misstatement cases where the company announced a restatement tied in part to a toy. Yet this is precisely the situation in which Mattel Inc. found itself. In the Mater of Mattel, Inc., Adm. Proc. File No. 4355 (October 21, 2022).

Mattel is a California based toy maker. The firm’s shares are listed on NASDAQ under the symbol MAT. The Order in the action centers in part on Thomas the Tank Engine, a toy marketed and sold by Mattel.

In August 2019 the company received a whistleblower letter. It stated that the firm’s financial statements may have material errors. The letter also claimed that the engagement partner for the audits conducted on the firm’s financial statements may not be independent.
The company took action. First, a then on-going offering of notes was halted. Second, the Audit Committee launched an investigation. Investigators determined that there were in fact errors in the company financial statements.
Specifically, the investigators discovered that the tax-related valuation allowance for Q3 2017 was understated by $109 million. They also found that the tax expense for Q4 2017 was overstated by $109 million. The valuation understatement in Q3 resulted from Mattel’s Thomas the Tank Engine being classified as a definite lived asset that should be amortized. That conclusion was wrong. At the time the toy was classified as indefinite lived.

In October 2019 Mattel announced that it would restate the financial results for Q3 and Q 4, 2017. While the under and over statements in Q3 and Q 4 were each $109 million, there were additional issues. Mattel’s Q3 2017 provision for income taxes was understated by 14% and net loss and net loss per share were understated for income taxes by 15%. Likewise, for Q4 2017 the firm’s provision for income taxes was overstated by 62% and net loss and net loss per share were overstated by 63%. The engagement partner also violated the auditor independence rules. A restatement was conducted in 2019.

The errors resulted from two material weaknesses in internal control with regard to financial reporting. One resulted from a failure to design and operate an internal control over the review of the income tax valuation allowance analysis. That was remediated by the end of December 2018.
The other weakness resulted from a failure to design and operate internal controls to properly assess and communicate known financial statement errors and internal control deficiencies in a timely manner to those correcting the error. In the end, the outside auditors also restated their report on internal control over financial reporting, issuing an adverse opinion. A restatement of the financial statements for the periods was made in November 2019.

The Order alleges violations of Securities Act Sections 17(a)(2) & (3) and Exchange Act Sections 13(a), 13(b)(2)(A) and 13(b)(2)(B). The company cooperated with the Commission’s investigation. The CFO also left the firm. Mattel resolved the proceedings, consenting to the entry of a cease-and-desist order based on the Sections cited in the Order. The company also agreed to pay a penalty of $1.5 million. See also In the Matter of Joshua Abrahams, CPA, Adm. Proc. File No. 321214 (October 21, 2022)(proceeding naming engagement partner as Respondent alleging violations of Rule 102(e)(1)(iv)(B); the matter will be set for hearing).

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by T. GormanPosted on Posted in SECActions

The Commission seems to be returning to its roots in the enforcement area. Last week the cases brough centered on offering frauds and the misappropriation of investor funds. Nevertheless, on the horizon no doubt is a large array of cases and a plethora of rule making initiatives.

Be careful, be safe this week

SEC Enforcement – Filed and settled actions

Last week the Commission filed 3 civil injunctive actions and no administrative proceedings, exclusive of 12j, default, conflicts (which are included in the tabulation of cases). tag-a-long and other similar proceedings.

Offering fraud: SEC v. Willis, Civil Action No. 22-2744 (D. Colo. Filed October 18, 2022). Brent Willis is named as Defendant in the action. He was appointed CEO of New Age, Inc. in March 2016 and continued in that position until earlier this year. The company claims to be based in Utah and the developer and global seller of “organic and healthy” products. Its shares are traded on NASDAQ under the symbol NBEV. Over a four-year period, beginning in early 2018, CEO Willis touted the supposed agreements and contracts of New Age. For example, in the first half of 2018 he touted an arrangement supposedly obtained by New Age with the U.S. military. The company, it was claimed, was selling beverages to the Armed Forces at all commissaries and exchanges world-wide. In fact, there was no contract; no sales; and no inventory. Later in the year CEO Willis told potential investors that New Age had developed a portfolio of Cannabidiol, or CBD, infused beverages. The sales pitch was geared to tie into the then current trends and publicity regarding CBD products. In fact, the company never completed development of a CBD product. In addition to the direct sales pitches, Mr. Willis drove other promotions for the company. For example, in early 2018 he made selective disclosures regarding the business activities of New Age and the claimed agreements with the U.S. Military by communicating the information to some equity analysts. Later he sent product information regarding the CBD beverage products to select equity analysts prior to the public announcement. The complaint alleges violations of Securities Act Section 17(a) and Exchange Act Sections 10(b), 13(a) and Regulation FD. The case is pending. See Lit. Rel. No. 25562 (October 18, 2022).

Ponzi scheme: SEC v. Merrill, Civil Action No. 18-cv-2844 (D. Md.) is a previously filed action in which the Court entered final judgments against nine Defendants. On September 13, 2022, the Commission filed an emergency action alleging that Kevin Merrill, Jay Ledford and business entities controlled by them were operating a $345 million Ponzi scheme that had defrauded over 230 investors. Amanda Merrill and Laiaine Ledford, respectively the wives of Defendant Merrill and Ledford were added as defendants. Later a parallel criminal case was filed in which Defendants Kevin Merrill pleaded guilty and was sentenced to serve 264 months in prison. Mr. Ledford also pleaded guilty and was sentenced to serve 168 months in prison. The two men were ordered to pay restitution of $189,116 on a joint and several basis. Defendant Camaron Jezierski also pleaded guilty and was directed to serve 24 months in prison and pay $45,093,384 in restitution. The final judgments in the Commission action find lliable Jay Ledford, Global Credit Recovery, LLC, Deimarver Capital, LLC, Rhino Capital Holdings, LLC, Rhino Capital Group, LLC, Deville Asset Management Ltd., and Riverwalk Financial Corporation on a joint-and-several-basis, for $183,973,833 in disgorgement plus $5,671,794 in prejudgment interest. The final judgment against Cameron Jezierski orders him to pay $105,000 in disg in prejudgment interest. The final judgment against Cameron Jezierski directs him to pay $105,000 in disgorgement and $2,913 in prejudgment interest. The judgments are deemed satisfied in view of the recoveries made by the Court appointed receiver and the restitution ordered against Kevin Merrill, Jay Ledford, and Cameron Jezierski in the criminal case. See Lit. Rel. No. 25561 (October 18, 2022).

Offering fraud: SEC v. In Ovations Holdings, Inc., Civil Action No 118-cv-05026 (E.D.N.Y.) is an action which named as defendants the firm and its CEO Mark Goldberg. Defendant Goldberg caused the firm to issue false or misleading press releases over a one-year period beginning in 2014. The point was to increase the price since Mr. Goldberg had been paid about $250,000 to cause a price increase by one or more stock promoters. The final judgment, entered on October 6, 2022 by consent, enjoins Mr. Goldberg from future violations of Exchange Act Section 10(b) and imposes an officer/director bar and penny stock bar. It also requires him to pay disgorgement of $250,000 along with prejudgment interest of $44,889.86. Those obligations are deemed satisfied by the restitution order imposed in the parallel criminal case against Mr. Goldberg in U.S. v. Goldberg, Crim. No. 18-cr-76 (E.D.N.Y.). See Lit. Rel. No. 25559 (October 17, 2022).

Misappropriation: SEC v. The Estate of Stephen Romney Swensen, Civil Action No. 1:22-cv-00135 (D. Utah Filed October 14, 2022) is an action which names as defendants the estate of Stephen Swensen and, in addition, Crew Capital Group LLC, a fund started by Mr. Swensen prior to his death. Over an eleven-year period, beginning in July 2011 Mr. Swensen defrauded at least 50 investors of at least $29.3 million. During the period Mr. Swensen induced investors to put their cash in Crew Capital by claiming it was a safe investment. In fact, Mr. Swensen took the investor cash and moved it to an account in his name at Wells Fargo. The funds were then at times used to pay other investors and the personal expenses of Mr. Swensen. The complaint alleges violations of Securities Act Section 17(a) and Exchange Act Section 10(b). The case is pending. See Lit. Rel.. No. 25560 (October 18, 2022).

Hong Kong

Initiative: The Securities and Futures Condition of Hong Kong welcomes the Chief Executive’s initiative to enhance Hong Kong’s competitiveness. The remarks outlined a vision for enhancing Hong Kong’s position as a global fundraising platform and offshore business center. (October 19, 2022)(here).

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