by T. GormanPosted on Posted in SECActions

One way to meet earnings targets is to accelerate the recognition of revenue. Another is to fabricate it. That is precisely what the defendants did in the Commission’s latest financial fraud action. SEC v. Lime Energy Co., Civil Action No. 1:16-CV-8088 (S.D.N.Y Filed October 17, 2016).

Lime was in the business of planning and delivering clean energy solutions to facilitate client goals regarding energy efficiency. Lime centered is business on three markets: the utility market, the public sector and institutional market and the commercial and industrial market. Its clients included utilities, energy service companies, government entities, educational institutions and commercial and industrial businesses as well as property owners and managers.

Four of the firm’s senior officers were named as defendants: James Smith, Julianne Chandler, Joaquin Almeida and Karen Raina. They were, respectively during the period, the executive vice president of operations, the corporate controller, the vice president of operations for the new Utilities Division which is the center of the actions here and the director of operations for that division.

The Utilities Division was the fastest growing segment of the company in 2010. It recognized revenue using the percentage of completion method. The firm’s internal accounting controls did not require documentary support for journal entries given to Lime’s company financial reporting personnel. Rather, reliance was placed on only assurances from operations personnel that in fact supporting documents existed.

Beginning in at least 2010 Mr. Almeida, along with Ms. Raina who reported to him, sought to have revenue recognized on some projects for which the firm did not have documentation for the corresponding costs – that is, prior to the time it would be recognized under firm policy. Employees who recorded the costs were directed to book expenses prematurely. As a result, in the Utilities Division Lime’s records reflected costs for several projects where there were customer agreements but for which the supporting documents had not been received. Revenue was thus improperly recognized.

In November 2011 the firm filed a Form 8-K with the Commission, together with a press release, indicating that the firm’s revenue for the first three quarters of the year was $75.4 million. Projected revenue for the fourth quarter was expected to be $47 to $53 million and, according to the release, $122.4-128.4 million for the year. Subsequently, the Public Sector and Utilities Division targeted these projections.

In January 2012, when it appeared that November would be a bit “light,” Ms. Chandler had the books for November re-opened. Appropriate journal entries were prepared and uploaded to the system, reflecting additional revenue. This resulted in millions of dollars in revenue being improperly recorded and recognized in Lime’s November 2011 books and records.

Following the additions to November, a year end “push” was discussed by defendants Smith, Almeida and Raina. The Utilities Division staff was then instructed to prepare the necessary journal entries to reflect millions of additional dollars in revenue for recognition in December 2011. The revenue was for contract that hand yet to be executed by firm customers. The necessary agreements would be executed in January 2012.

In late January and early February 2012 defendants Raina and Chandler also arranged for the firm to recognize additional revenue on what were called “pipeline projects” — those for which the project had been presented to but not agreed with the client. Eventually this resulted in the recognition of millions of dollars in revenue prematurely along with some that was fabricated. In March 2012 the firm filed its annual report on Form 10-K. It reported firm revenue for the year of over $120 million, an amount just over the firm’s internal revenue target for the year.

In May 2012 Lime entered into a subscription agreement to sell one million shares of common stock to board members at the most recent NASDAQ Capital Market closing price for the shares. The prospectus contained the 2011 annual financial statements. The firm received about $2.5 million from board members in exchange for one million shares.

Two months later, as a result of a partial internal investigation by Lime’s CFO, the firm announced that its financial statements for 2010 and 2011 could not be relied upon. During the following investigation defendants Almeida, Raina, Smith, Chandler and a Utilities Division bookkeeper involved in the scheme, were terminated. By year end the firm announced, based on an expanded investigation, that its financial statements for 2008 and 2009 could no longer be relied upon.

In July 2013 Lime filed restated financial results for 2008-2011 and the first quarter of 2012. The company concluded that over $5 million in revenue had improperly been recognized in 2010 and $16 million in 2011. The complaint alleges violations of Securities Act Section 17(a) and Exchange Act Sections 10(b), 13(a), 13(b)(2)(A) and 13(b)(2)(B).

Each defendant agreed to settle with the Commission. The firm agreed to pay $1 million. Defendant Smith will pay a $50,000 penalty and be barred from serving as an officer or director of a public company for five years. Defendant Chandler agreed to pay a $25,000 penalty, to an officer/director bar for five years and, in a separate action, to be suspended from appearing and practicing before the Commission as an accountant with the right to apply for reinstatement after five years. Defendant Almeida agreed to a permanent officer/director bar. Defendant Raina agreed to pay a penalty of $50,000. CEO John O’Rourke and then CFO Jeffrey Mistarz reimbursed the company, respectively, $67,728 and $118,196.01 for cash bonuses and certain stock awards received during the period, obviating the need for a SOX clawback action.

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by T. GormanPosted on Posted in SECActions

The Commission announced the filing of a record number of enforcement actions for the last fiscal year. The enforcement statistics highlight areas of concentration such as insider trading, investment advisers and private equity funds.

The agency also brought three enforcement actions this week. One penalized a firm for conducting games that sold interests that are securities based swaps without complying with the registration and prospectus delivery requirements. Two other actions focused on the failure properly implement procedures regarding inside information.

SEC

Rules: The Commission adopted rules which update the reporting and disclosure requirements for registered investment companies and enhance the liquidity risk management for open-ended mutual funds and exchange-traded funds (here).

Statistics: The Commission published statistics for its enforcement program over the last fiscal year showing that the program yielded a record number of enforcement actions. Specifically, during the last fiscal year the SEC brought 548 independent or standalone enforcement actions compared to 507 in the prior year and 413 in 2014. The actions brought as part of the program resulted in over $4 billion in disgorgement and penalties being ordered compared to $4.19 billion in fiscal 2015 and $4.16 in 2014. Included in the statistics were singe year records for the number of actions involving investment advisers or investment companies and the FCPA. The SEC also distributed a record amount of money to whistleblowers.

Notable areas of emphasis last year included the traditional area of insider trading where 78 actions were brought and a relatively new focus on private equity were 8 enforcement actions were filed. Two key examples of actions denominated as the “most significant” brought during the last fiscal year are the insider trading cases against Leon Cooperman and William Walters. Both actions are being contested in court.

SEC Enforcement – Filed and Settled Actions

Statistics: During this period the SEC did not file any civil injunctive action and 3 administrative proceedings, excluding 12j and tag-along proceedings.

Security based swaps: In the Matter of Forcerank LLC, Adm. Proc. File No. 3-17625 (Oct. 13, 2016) is an action in which the Respondent is a wholly owned subsidiary of Estimize Inc. Forcerank conducted mobile phone games in which players predicted the order in which ten securities would perform relative to each other. Each game ran for a week. Points were awarded for the best predictions. At the end of the week the player with the most points won the game. The firm kept 10% of the entry fees and anticipated over time that it would use the data to create a product that would be marketed to hedge funds. While the Respondent told the public that it was not selling security based swaps, in fact the Order alleges that entries were a security based swap because each participant paid to enter into an agreement with the firm that provided for the payment of points and in certain cases cash. Those payments were contingent on a potential financial, economic or commercial consequence since the outcome hinged on changes in the market prices of individual securities. As securities based swaps they must be on an exchange and offered with a prospectus. The Order alleges violations of Securities Act Section 5(e) and Exchange Act Section 6(1). To resolve the proceeding Respondent consented to the entry of a cease and desist order based on the Sections cited in the Order and agreed to pay a penalty of $50,000.

Procedures: In the Matter of Artis Capital Management, L.P., Adm. Proc. File No. 3-17624 (October 13, 2016) is a proceeding which names as a Respondent the firm, previously a registered investment adviser that advised several funds, and Michael Harden, who was employed by the firm as an analyst. In 2008 Matthew Teeple, an employee of the firm, obtained inside information about Foundry Networks, Inc. from an employee of that company in two instances. In both cases the information was provided to Artis and timely trades were placed in advance of public announcements by Foundry. Mr. Harden did not question Mr. Teeple about the source of the information or ask the CCO or any other colleague to look into the matter. By failing to respond appropriately to red flags Respondents did not reasonably supervise Mr. Teeple, contrary to Advisers Act Section 204A. To resolve the matter Artis consented to the entry of a censure and agreed to pay disgorgement of $5,165,862 and prejudgment interest. The firm will also pay a penalty of $2,582,991. Mr. Harden is suspended from the securities business for a period of 12 months after which he will furnish the Commission with an affidavit of compliance.

Procedures: In the Matter of Deutsche Bank Securities, Inc., Adm. Proc. File No. 3-17622 (October 12, 2016) is a proceeding which names the registered investment adviser and broker dealer, a subsidiary of Deutsche Bank AG, as a Respondent. The Order alleges that from January 2012 through December 2014 the firm failed to establish appropriate policies regarding the dissemination of material non-public information. This specifically related to policies and procedures tied to its equity research analysts and communications with customers and its sales force. This is contrary to Exchange Act Section 15(g). In addition, the firm published a research report on the stock of Big Lots that was not in accord with the personal opinions of the analyst, contrary to Rule 501 of Regulation Analyst Certification. Finally, Deutsche Bank failed to furnish promptly to the staff certain electronic communications related to its broker dealer operations, contrary to Exchange Act Section 17(a). To resolve the proceeding the firm consented to the entry of a cease and desist order based on the provisions cited above. In addition, the firm will pay a penalty of $9.5 million.

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