SEC Charges Grocery Chain, CEO with Accounting Fraud
The Commission has long focused on cases involving corporate and financial fraud. While other cases, such as insider trading or large market manipulations, are often sensational and can garner significant attention., accounting fraud cases typically are not. Yet the failure to have proper internal controls, the failure to properly follow accounting standards, can cause significant harm to investors and disruption in the market. That is the situation with a case recently filed by the Commission, SEC v. iFresh, Inc., Civil Action No. 1:22-cv-3200 (E.D.N.Y. Filed May 31, 2022).
Named as defendants in this case are: iFresh, Inc., an Asian grocer operating stores in four states and had shares listed on the NASDAQ until late 2021 when they were delisted; now the stock is quoted on the OTC Expert Market. Long Deng, also a defendant, was the Chairman of iFresh’s board of directors until April 2022. He was also the firm’s CEO and COO through at least April 2022.
The complaint is built on self-dealing which shrouded the true financial condition of the firm from August 2016, when the firm’s initial registration statement was file, through the fiscal year ending March 31, 2020. From inception Defendant Deng was responsible for the firm’s operations and financial information. He also controlled a the firm’s financial transactions.
No transactions involving iFresh and as affiliate were properly disclosed in the firm’s financial statements. Yet in 2016, 2017, 2018, 2019 and 2020 transactions involving iFresh and an affiliate represented from 18% to 54% of the grocery firm’s accounts receivables. All of those transactions were related party transactions. All of those transactions should have been fully disclosed under the accounting standards. None were disclosed.
During the period 2016 through 2020 investors were not told that iFresh’s finances were heavily dependent Mr. Deng’s brother. Thus investors were not told that over $12 million in payments were owed to a company by Mr. Deng’s brother.
During the period not only did Mr. Deng control the financial records, the firm did not have adequate internal controls and those which relate to the identification of related party transactions. As a result, the Defendants violated Securities Act Section 17(a) and Exchange Act Sections 10(b), 13(a), 13(b)(2)(A) and 13(b)(2)(B). The case is pending. See Lit. Rel. No. 23404 (June 1, 2022)