Actions brought by the Commission typically focus on issuers – firm’s whose shares are registered for trading and listed on exchanges. The agency also brings actions against privately held companies, however, a point that is often overlooked. See, e.g., SEC v. Holmes, Civil Action No. 5:18-cv-01602 (N.D. Cal. March 14, 2018)(action against the founder of Theranos, a private company); SEC v. Balwani, Civil Action No. 5:18-cv-01603 (N.D. Calif. Filed March 14, 2018)(executive at Theranos); In the Matter of Mergenet Medical, Inc., Adm. Proc. File No. 3-1853 (October 10, 2017)(privately held development stage firm).
The Commission’s most recent action involving a private firm centers on the founder of a Silicon Valley start-up who defrauded investors when selling his shares in the firm. SEC v. Mattes, Civil Action No. 5:19-cv-01689 (N.D. Cal. Filed April 2, 2019). Defendant Daniel Mattes is the founder of Junio, Inc., a private mobile payments company in Palo Alto, California. Mr. Mattes, a citizen and resident of Wels, Austria, is the founder and former CEO of Jumio. Prior to founding Jumio he started Jajah, another California based technology start-up in 2005. He sold that firm in 2009 for hundreds of millions of dollars. Currently Mr. Mattes is the CEO of another start-up he created which focuses on artificial intelligence.
Jumio had two main revenue streams, the Process Business and the Payment Processor. The former was based on licensing Jimio’s ID and credit card verification technology. The latter generated revenue by introducing third-party merchants to a payment Processor. The firm would be paid a commission.
In 2013 and 2014 Mr. Mattes, who prepared the financial statements for the company, inflated the revenue for both streams. For the Payment Processor stream, he caused the firm to record the total amount of processing fees collected rather than the 10% the company earned. He also omitted certain expenses.
The Process Business revenue stream was inflated by having the company recognize revenue from a deal that had no economic substance. Indeed, almost half of the revenue recognized in each year for this revenue stream came from a round-trip transaction Mr. Mattes set up with a third party software development company. Under the terms of the deal the development company was to pay a fixed sum to Jumio each quarter for certain services. The developer paid the specified sum for the first quarter, but then halted all payments. Nevertheless, Mr. Mattes continued to recognize the contract specified amount in each quarter for two years. He described the transactions as one that was “”more a deal to get our numbers straight for the upcoming round’ of investor financing,” according to the complaint.
He also had the firm recognize the entire amount of money to be paid under certain contracts. Yet it was unclear that the money was likely to ever be paid. Recognition of the revenue under such circumstances is contrary to GAAP.
The two approaches significantly inflated Jumio’s revenue. In 2013 the firm reported gross revenue of $101 million when in fact it was $9.5 million. The next year the firm reported gross revenue of $150 million when in fact it was $7.7 million.
From April 2014 through February 2015 Mr. Mattes used a stock sale program he had created for employees to sell his personal shares, despite a prohibition on the sale of his shares imposed by the Board of Directors absent specific consent. Not only was the board deceived, but one purchaser was told by Mr. Mattes that he would never sell his personal shares because of what was coming up for the company. Overall, he sold $14,617,922 worth of stock.
Following the resignation of a new CFO who was on the job for only a few days, an investigation was conducted. The firm was required to restate its financial statements for 2013 and 2014. Mr. Mattes resigned in 2015 after the investigation. The next year the firm filed for Chapter 11 bankruptcy. The shares Mr. Mattes sold investors were worthless.
The complaint alleges violations of Exchange Act Section 10(b) and each subsection of Securities Act Section 17(a). To resolve the matter Mr. Mattes consented to the entry of a permanent injunction based on the sections cited in the complaint. In addition, he agreed to pay over $16 million in disgorgement and prejudgment interest along with a $640,000 penalty. The settlement is subject to court approval. See also In the Matter of Chad Starkey, Adm. Proc. File No. 3-19129 (April 2, 2019)(action against former CFO and general counsel of Jumio for negligence in connection with the conduct of Mr. Mattes detailed above; resolved with consent to a cease and desist order based on Securities Act Sections 17(a)(2) and (3) and the payment of disgorgement in the amount of $364,000 and prejudgment interest of $56,894.97; Mr. Starkey cooperated with the staff investigation and undertook remedial acts).