by T. GormanPosted on Posted in SECActions

Financial fraud has long been a staple of SEC enforcement. In the wake of the market crisis the agency has attempted to once again focus on the area creating, for example, a financial fraud task force two years ago. Last fiscal year the SEC had a significant up-tick in the number of financial fraud actions filed compared to the prior year. In an apparent effort to emphasis the area, yesterday the SEC announced in a single release the initiation of financial fraud actions against two issuers, several executives and an audit engagement partner.

One group of actions centered on a financial fraud at Logitech International, S.A. which involved four of its executives. In the Matter of Logtech International, S.C., Adm. Proc. File No. 3-17212 (April 19, 2016); SEC v. Bardman, Civil Action No. 3:16-cv-02023 (N.D. Cal. Filed April 18, 2016). The company and Michael Doktorczyk, formerly a v.p. of finance at the firm, and Sherralyn Bolles, formerly a director of accounting and financial reporting, are Respondents in the administrative action. Erik Bardman, formerly v.p. of finance and CFO at the firm, and Jennifer Wolf, formerly a director of finance, are defendants in the civil injunctive action.

Logitech is a Swiss corporation with substantial operations in the United States. Its shares are listed on Nasdaqu Global Select Market. The firm manufactures peripherals for computer and electronic devices. In late 2010 Logitech launched a new product called “Revue.” It was a television set-top device that provided for internet usage and video streaming. While the firm had high hopes for the device, projecting sales of over 350,000 unites in the third and fourth quarters, they were not realized. By the end of the fourth quarter Logitech had only managed to sell about half of the projected units. When the firm lowered its projected sales for the product its share price dropped 16%.

With a substantial inventory of unsold units, the firm stopped production. Consideration was given to halting the product. To avoid this result the firm calculated its inventory valuation by falsely assuming that the component parts in the manufacturing process would be built into completed units, a misrepresentation made to the auditors. Logitech also misrepresented the amount of write-down to be taken on finished goods in inventory – a key problem with the product was its high price compared to competitors. Mr. Bardman, a participant in these actions, then certified the 2011 financial statements furnished to the auditors and the public.

The Order alleges violations of Exchange Act Sections 10(b), 13(a), 13(b)(2)(A), 13(b)(2)(B) and 13(b)(5). To resolve the proceeding the company consented to the entry of a cease and desist order based on each of the Sections cited in the Order except Section 13(b)(5). The company also agreed to pay a $7.5 million fine. Mr. Doktorczyk consented to the entry of a cease and desist order based on each Section cited in the Order except Section 10(b). He also agreed to pay a civil penalty of $50,000. Ms. Bolles consented to the entry of a cease and desist order based on the same sections as Mr. Doktorczyk, excluding Section 13(b)(5). She agreed to pay a penalty of $25,000.

The complaint against Mr. Bardman and Ms. Wolf alleges violations of Securities Act Section 17(a) and Exchange Act Sections 10(b), 13(a), 13(b)(2)(A), 13(b)(2)(B) and 13(b)(5) and for reimbursement under SOX Section 304(a). The case is pending.

The second action centered on Ener1, Inc., a firm whose shares at one time were listed on the NASDAQ Stock Market, LLC. It designed, manufactured and developed lithium ion batteries for transportation, grid energy, and consumer products. In the Matter of Ener1, Inc., Adm. Proc. File No. 3-17213 (April 19, 2016). The Order names as Respondents, in addition to the firm, three executives: Charles L. Gassenheimer, CEO; Jeffrey A. Seidel, CFO; and Robert R. Kamischke, CAO.

In 2010 one of Ener1’s largest customers was Think, a manufacturer of electric cars. Ener1 held the voting rights to almost 50% of Think’s equity. Indeed, its Form 10K for the year ended December 31, 2010 the firm reported an investment in Think of $58.6 million. That represented about 15% of Ener1’s total assets. The investment was carried at cost on the balance sheet. It was not impaired despite the fact that Think could not pay its creditors and after year end, but before the issuance of the Form 10-K, the company which manufactured cars for Think halted production.

Ener1 also failed to conduct an impairment analysis of loans and accounts receivable from Think. In its Form 10-K for 2010 Ener1 reported that its loans receivable from Think were $14 million. That represented 3.5% of the firm’s assets. The loans were not impaired. In fact the firm did not conduct any meaningful analysis of the question.

The same Form 10-K also reported that Ener1 had receivables from Think of $13.6 million of which about $8.5 million were past due. This represented 3.4% of Ener1’s assets. Again the asset was not impaired.

Finally, in the 2010 Form 10-K Ener1 recognized $18.8 million in revenue from Think. The revenue was from the shipment of batteries to the company. While Ener1 did not have any formal written revenue recognition policy, no analysis for sufficient reasonable assurance of collectability was made. This resulted in the overstatement by 14% of its revenue. Overall, the firm had numerous deficiencies in its system of internal accounting controls. The Order alleges violations of Securities Act Section 17(a)(2) and (3) and Exchange Act Sections 13(a), 13(b)(2)(A) and 13(b)(2)(B).

To resolve the proceeding each Respondent consented to the entry of a cease and desist order based on the Sections cited in the Order. In addition, each individual Respondent agreed to pay a penalty of: Mr. Gassenheimer, $100,000; M r. Seidel, $50,000; and Mr. Kamischke, $30,000. See also In the Matter of Robert D. Hesselgesser, CPA, Adm. Proc. File No. 3-17214 (April 19, 2016)(proceeding against PWC audit engagement partner for the firm alleging violations of Rule 102(e)(1)(iv); resolved by denying Respondent the privilege of appearing and practicing before the Commission with the right to apply for readmission after two years).

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by T. GormanPosted on Posted in SECActions

Sometimes is does not pay to be the last man standing – particularly in a Commission enforcement action. Such was the fate of former NFL player and Olympic athlete Willie Gault. SEC v. Heart Tronics, Inc., Case No. 11-cv-01962 (C.D. Cal. Filed Dec. 20, 2011).

The case centered on an alleged fraudulent, manipulative scheme. Named as defendants were J. Rowland Perkins, Mark Nevdahl, Willie Gault, Mitchell Stein, Martin Carter and Ryan Rauch. The complaint alleged that Heart Tronics repeatedly announced millions of dollars in sales over a two year period beginning in 2006. Although the firm never had any real sales, defendants Stein and Carter crafted false documents to support their disclosures.

In 2008 Heart Tronics installed co-celebrity CEOs — Mr. Gault, a well-known athlete, and Mr. Perkins, a founder of a well-known talent agency. Mr. Stein continued to execute the scheme. He retained promoters who touted Heart Tronics stock on the internet. Mr. Nevdahl, a former registered representative, served as a trustee for a number of entities to create the façade that the shares were traded by an independent trustee. Tracey Stein, wife of Mitchell, was a major shareholder. She directed the sale of over $5.8 million worth of stock. The complaint alleged violations of Securities Act Sections 5(a), 5(c), 17(a) and Exchange Act Sections 10(b), 13(b)(2)(A), 13(b)(2)(B) and 13(b)(5). A parallel criminal case was filed.

Messrs. Carter and Rauch were the first to settle. Mr. Carter, who previously pleaded guilty to one count of conspiracy, consented to the entry of a permanent injunction prohibiting future violations of Securities Act Sections 5 and 17(a) and Exchange Act Sections 10(b), 13(a), 13(b)(2)(A) and 13(b)(5). He also agreed to the entry of a penny stock bar. Disgorgement and penalties were waived based on Mr. Carter’s financial condition. Mr. Rauch settled, consenting to the entry of a permanent injunction prohibiting future violations of Securities Act Section 17(b). He also agreed to the entry of a three year penny stock bar and to pay disgorgement of $15,000 plus prejudgment interest and a civil penalty of $20,000.

Next Messr. Perkins and Nevdahl settled with the Commission. Mr. Perkins consented to the entry of a permanent injunction prohibiting future violations of Exchange Act Sections 10(b) and 13(b)(5) and from aiding and abetting violations of Exchange Act Section 13(b)(2)(B). He was also barred from serving as an officer or director for three years and directed to pay a civil penalty of $42,500. Mr. Nevdahl consented to the institution and settlement of administrative cease and desist proceedings in which an order was issued finding that he willfully violated Securities Act Section 17(a)(3). He was ordered to cease and desist from aiding or abetting or committing any future violations of Section 17(a)(3). The order also suspended him from participation in any penny stock offering for a period of six months. In the Matter of Mark Crosby Nevdahl, Adm. Proc. File No. 3-16056 (September 5, 2014). See Lit. Rel. No. 23081 (September 10, 2014).

Subsequently, the Court granted partial summary judgment against Mr. Stein and in favor of the SEC based on his criminal conviction on 14 counts of conspiracy to commit mail fraud and wire fraud, mail fraud, wire fraud, securities fraud, money laundering and conspiracy to obstruct justice. The court found violations of Securities Act Section 17(a) and Exchange Act Sections 10(b) and 13(a), 13(b)(2)(A), 13(b)(2)(B) and 13(b)(5). It entered a permanent injunction, officer and director and penny stock bar and ordered the payment of a civil penalty of $5,378,581.61, and disgorgement and prejudgment interest of $6,076,415.52.

Mr. Gault was the sole remaining defendant. He proceeded to trial. A jury found that he was involved in a fraudulent scheme and misappropriated investor funds that were lost as a result of his stock trading. He was also found to have knowingly circumvented, or failed, to implement internal accounting controls at the company and to have filed a Form 10-Q in 2008 that made false SOX certifications. The Court imposed a permanent injunction based on Securities Act Section 17(a)(3) and Exchange Act Section 13(b)(5). The Court’s order bars Mr. Gault from serving as an officer or director of any pubic company until he affirmatively demonstrates that he has become knowledgeable regarding the obligations of those who hold such positions under the securities laws and becomes competent to hold such a position. In addition, he was directed to pay $101,000 in disgorgement, prejudgment interest and $78,000 in penalties. See Lit. Rel. No. 23522 (April 15, 2016).

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