The Commission prevailed on a partial summary judgment motion in a financial fraud action. The case centered on recognizing revenue in software transactions.
The agency also filed two new enforcement actions. Each involved crypto assets.
Be careful, be safe this week.
SEC Enforcement – Litigated Actions
Financial fraud: SEC v. Rosenberger, Civil Action No. 1:22-cv-04736 (S.D.Y.Y. Summary judgment entered January 26, 2024). Named as defendants are Karen Rosenberger and Joanna Lanni, former officers of Synchronoss Technologies, Inc. The action centered on the recognition of revenue in five transactions. The Commission moved for summary judgment on two claims while defendants filed a similar motion but as to all claims. The Court granted the Commission’s motion as to two claims and denied the one filed by defendants.
The two claims at the center of SEC’s motion involved: 1) The sale of the Local Network Portability software of Synchronoss to AT&T, Inc., and 2) the sale of a perpetual software license to Windstream Communications, Inc. The resolution of each issue centers on the applicable GAAP provisions regarding revenue recognition tied to software. Each Defendant in this action is a CPA and was employed by the company during the applicable period.
On July 2, 2018, following an internal investigation, Synchronoss filed a Form 10-K in which it restated the financial statements for fiscal 2015 and 2016. The restatement included the revenue for each of the transactions involved here.
As to the first transaction, GAAP provides that revenue from a software transaction can be recognized if four criteria are met: 1) There is persuasive evidence that an arrangement exists; 2) delivery has occurred; 3) the vendor’s price is fixed or determinable; and 4) collectability is reasonably assured. The first transaction was booked by company in 2015. It is clear that the deal was being discussed in 2015. Those discussions continued into 2016, the year the deal was booked. The documentation for the deal was backdated to 2015 Accordingly, the deal was booked incorrectly.
The second transaction centers on a software-as-a-service arrangement or “SaaS.” One of the amendments to the arrangement included a hosting arrangement over time. The firm recognized $5.3 million in revenue from one component of the arrangement in its 2Q16 Form 10-Q. GAAP requires that when considering a software sale, the firm determine if multiple agreements are part of a single arrangement or MEA. The key here as to GAAP is not one factor but to evaluate the entire transaction. There is also a presumption that if the arrangements were all negotiated as a package it is one transaction.
At the same time, however, the agreement had several transactions in which the Company had an explicit or implied hosting agreement that was not initially identified Under these circumstances revenue is recognized over the period as acknowledged in the restatement, not initially, Summary judgment was granted in favor of the SEC. See Lit. Rel. No. 25936 (February 2, 2024).
SEC Enforcement – Filed and Settled Actions
Statistics: This week the Commission filed 2 new civil injunctive action and no new administrative proceedings, excluding tag-along actions and those that present a conflict for the author.
Crypto assets: SEC v. Sewell, Civil Action No. 1:24-cv-00137 (D. Del. Filed February 2, 2024) is an action which names as defendants: Brian Sewell and Rockwell Capital Management LLC, respectively, the founder and CEO of the American Bitcoin Academy and Defendant Rockwell Capital Management, LLC. Beginning in May 2017, and continuing for the next year, Defendant Sewell convinced potential investors that he ran a school that taught courses about bitcoin assets and that he would invest their capital in crypto assets and make a profit. In fact, he did invest their money and lost it in trading. After about one year he furnished the 15 investors who entrusted them with their money false account statements. At one point he also persuaded some of the investors to “roll” their investment into Zion Traders, LLC, another firm he created. Again, the investor capital was lost. The complaint alleges violations of Securities Act Section 17(a) and Exchange Act Section 10(b). Defendants have agreed to settle the charges, consenting to the entry of permanent injunctions based on the Sections cited in the complaint. They also agreed to pay disgorgement and prejudgment interest in the amount of $1,602,089. Mr. Sewell agreed to pay a penalty of $223,229. See Lit. Rel. No. 25936 (February 2, 2024)
Muni bonds: SEC v. Comer Capital Group, LLC Civil Action No. 19-cv-04324 (N.D. Ill.) is a previously filed action which named as defendants Comer Capital Group LLC and Brandon L Comer. The complaint alleged that defendants breached their fiduciary duty in connection with a $6 million municipal bond offering by the Harvey Public Library District of Harvey, Illinois. Specifically, the adviser failed to properly advise on the retention of an experienced adviser and the pricing of the bonds. Defendants consented to the entry of a final judgment based on Exchange Act Section 15B(c)(1). In addition, Defendant will pay disgorgement in the amount of $25,000 plus prejudgment interest and each Defendant will pay a penalty in the amount of $30,000 and $20,000 respectively. See Lit. Rel. No. 25935 (January 31, 2024).
Crypto assets — Offering fraud: SEC v. Lee, Civil Action No. 24-cv-00296 (D. Md. Filed January 29, 2024). Named as defendants in this action are: Xue Samuel Lee, known as Sam Lee and Brenda Indah Chunga, known as Bitcoin Beautee. Sam Lee is an Australian national who resides in Dubai. He is the co-founder of HyperFund and Blockchain Global Ltd. Bitcoin Beautee resides in Maryland. Defendants operated a crypto asset, multi-level marketing pyramid and Ponzi scheme that is claimed to have raised over $1.7 billion worldwide through a series of projects called HyperFund. HyperTechGroup, supposedly a blockchain tech conglomerate, was founded by Defendant Lee and others in 2020. The sales pitch centered on claims that the firm had a decentralized or DeFi finance ecosystem for crypto asset market participants. Defendants’ goal was to brand and rebrand the schemes. Over a two-year period, beginning in 2020, Hyper Fund offered what were called Membership packages. Returns were passive, supposedly from crypto mining operations. The operation promised returns of 0.5% to 1% per day. Investors were told that they could triple an investment in 600 days. HyperFund was in fact a pyramid and Ponzi scheme. It had no actual source of income except investors. Contrary to claims, HyperFund did not engage in large scale crypto asset mining. The firm did hire an actor to pose as CEO when HyperVerse was launched. Since that time there has been no real revenue — investor returns were paid with new cash from other investors. Investor capital, the only real source of revenue, was generated by making a series of false statements. In 2022 the firms collapsed. The complaint alleges violations of Securities Act Sections 5(a), 5(c) and 17(a) and Exchange Act Section 10(b). The case is in litigation. In the parallel criminal investigation, being conducted by the U.S. Attorney’s Office for the District of Maryland, Defendant Chunge pleaded guilty to conspiracy to commit securities and wire fraud. See Lit. Rel. No. 25933 (January 30, 2024).
FinCEN
Alert: The Financial Crimes Enforcement Network issued a release, dated February 1, 2024, on potential red flags that financial institutions should consider related to the financing of Israeli extremist settler violence against Palestinians in the West Bank (here),
Australia
Remarks: Sarah Court, ASIC Deputy Chair, delivered remarks at the Super Chair Forum, February 1, 2024, in which she discussed enforcement priorities in the superannuation sector (here)
Hong Kong
Alert: The Hong Kong Securities and Futures Commission published an alert regarding two suspicious crypto-related products. One is called “FlokiStaking Program.” The second is known as “TokenFi Staking Program.” (here).
