by T. GormanPosted on Posted in SECActions

Financial fraud actions have long been a staple of the SEC’s Enforcement Division. In recent years, however, the number of those cases has been declining. Many of actions traditionally followed from restatements of the financial statements caused by material errors. The decline in the number of the cases seems to roughly track the downward trend in the number of issuers restating their financial statements. Since the number of restatements declined following the passage of the Sarbanes-Oxely Act, many argue that the statute is proving effective . While that may well be correct, the Commission continues to bring cases in the areas. Its latest example is not only based on a top down financial fraud, but involves an issuer that is a recidivist. In the Matter of Marvell Technology Group, Inc., Adm. Proc. File No. 3-19454 (Sept. 16, 2019).

Marvell is a producer of semiconductor components used in items such as data storage/hard drives, mobile phones and network devices. The firm operated through two divisions, Data and Storage. Previously Marvell settled an enforcement action with the Commission which alleged violations of the antifraud, internal control and books and records provisions based on the backdating of stock options. SEC v. Marvel Technology Group, Ltd., Civil Action No. CV-082367 (N.D. Cal Filed May 8, 2008).

By fiscal 2016 the firm had decided to reverse its traditional process for setting sales targets. The company had long built the models from the bottom up. After missing guidance for a period, the company initiated a top down process which imposed sales quotas. The sales staff believed that the targets generated by this process were not realistic. There was significant pressure to meet them. Turmoil resulted.

The new process did not spawn the desired results. At the same time sales were declining. The result was a top-down “pull-in” scheme implemented by senior management which assistance from the firm’s Financial Planning and Analysis unit that tracked the gap between actual and forecast revenue.

Under the plan Marvell’s customers were incentivized to accept delivery of product at an earlier time than would have been required. Many customers were reluctant to participate in the plan. There was significant internal dissent. Nevertheless, the company offered customers rebates, discounts, free products and extended terms to participate in the scheme during the fourth quarter of fiscal 2015 and the first two quarters of the next year. Thus, for example, in the last quarter of fiscal 2015 after the sales manager expressed concern at his ability to meet the revenue target, the firm had about $24 million in pull-ins. When the financial results were announced for the period the company had revenues of $85 million. It missed the low-end revenue guidance of $880 million but beat its EPS guidance by one penny. The misleading results were recorded in a Form 10k filed with the Commission.

In the first quarter of fiscal 2015 the pressure to use pull-ins continued. By mid-April the Financial Planning unit raised an alarm at the growing gap between actual and forecasted revenue. The firm reduced guidance. That reduction permitted Marvell to hit the forecast target for revenue guidance of $710 to $740 million The revenue numbers included $64 million in pull-ins. The inflated numbers were recorded in a Form 10-K filing with the Commission. The program continued.

The next quarter was no different. Several weeks into the period Marvell’s senior management renewed the pressure on sales managers to continue with the scheme. Public guidance was set at $710–$740 million. The Financial Planning group estimated that declining demand plus the impact of the pull-ins left the firm about $100 million short of goal. Yet by the end of the period the company had pull-ins of about $77 million or 11% of total revenue for the quarter. Again, the results were included in Commission filings. As a result, investors were misled as were the firm’s auditors. The internal controls of the firm had failed to halt the program.

Ultimately the board of directors became aware of the program. An internal investigation was launched. The Order alleges violations of Securities Act Sections 17(a)(2) and (3) and Exchange Act Section 13(a).

To resolve the proceedings the firm consented to the entry of a cease and desist order based on the sections cited in the Order. Merrill will also pay a penalty of $5.5 million.

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by T. GormanPosted on Posted in SECActions

A trend toward increased telecommuting has been developing for years. Many firms have adopted the practice, permitting some employees to perform all, or at least part of their duties at home. The practice can have significant benefits for employees and firms in an era of rising real estate prices. The practice depends, however, on the employee actually rendering services. That does not seem to be the case in the SEC’s most recent enforcement action where the CFO is apparently missing. The person listed as the CFO for a Texas oil firm with offices in New York City apparently lived in Shanghai, China and there was little evidence that she ever visited the company. SEC v. Simeo, Civil Action No. 1:19-cv-08621 (S.D.N.Y. Filed September 17, 2019).

Defendant Tom Simeo is the CEO, Treasurer, Director and Chairman of the Board of Viking Energy Group, Inc. whose shares are listed on the OTC Markets Group’s OTCQB. The firm is engaged in the acquisition, exploration, development and production of oil and natural gas properties.

Mr. Simeo’s former wife introduced him to Guangfang “Cecile” Yang in Shanghai, China in 2013 when he was operating Viking as an incubator for Chinese companies. He retained Ms. Yang as the CFO shortly after the introduction.

In February 2013 Ms. Yang was announced as the CFO and a member of the board of directors of Viking in a Form 8-k filed with the Commission. Subsequent filings represented that Ms. Yang had worked at an audit firm from 1998 to 2006 and furnished services for certain companies that conducted initial public offerings. She received a business degree from an international business school, according to Viking. The information apparently was taken from her resume, furnished to the General Counsel of Viking by Mr. Simeo.

Over a two-year period, beginning in 2014, that Ms. Yang was held out in a number of firm filings as its CFO. The CFO represented in SOX certifications filed during the period that she was in fact the CFO. Nevertheless, there is no evidence that she performed any work over the two-year period. Few company documents reference her. Those that do suggest she had no role at the company. No written communications with Ms. Yang were produced to the staff. One document did state that someone named “Cecile” would forward Mr. Simeo her written signature to affix to a management representation letter for Viking’s auditor. In fact, here electronic signature appears on each of the eight annual and quarterly reports that Viking filed over the period.

In a Form 8-k, filed in July 2016, Viking stated that Ms. Yang had resigned. Prior to that date the firm raised about $2 million from investors in an offering. Throughout the offering Ms. Yang was represented to be the CFO of the company. The complaint alleges violations of Securities Act Section 17(a)(1) and (3) and Exchange Act Section 10(b). The case is pending. See Lit. Rel. No. 24599 (Sept. 17, 2019).

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