SEC Trends & Developments - Spring 2013 - Recent SEC Enforcement Actions


The Commission's complaint alleged, among other things, that defendant aided and abetted violations of the periodic reporting, books and records, and internal controls provisions of the federal securities laws by a registrant by signing a materially false audit confirmation letter and sending it to the company's independent auditors. The Commission's complaint alleged that the defendant signed the audit confirmation letter only after a representative of the registrant signed a private side letter that contradicted the audit confirmation letter. The audit confirmation letter was used in connection with the independent auditors' annual audit of the financial statements.

(Litigation Release No. AAER-3449/March 22, 2013)


For a Registrant’s fourth quarter and fiscal year-end, the financial statements reported significant revenue that had not been earned and was not recognizable under U.S. GAAP. The Commission alleges that the CFO participated in this scheme to materially overstate revenue. The improper revenue recognition caused the Registrant’s net income for the fourth quarter and fiscal year-end to be materially overstated. The complaint further alleges that the scheme relied on fabricated paperwork purporting to be a sales contract with a customer, when the CFO knew that any sale was impossible because the Registrant intended to lease the product to the same customer the following year. Nevertheless, the CFO authorized the inclusion of the improper revenue in the company’s consolidated income statement included in Form 10-K and earnings release included in Form 8-K. In addition, the complaint alleges that the CFO misled the external auditors and that the CFO signed one or more certifications required by Section 302 of the Sarbanes Oxley Act that were false and misleading.
(Litigation Release No. AAER-3439/January 11, 2013)


The Commission charged a China-based issuer, formed through a reverse merger, with violations of the anti-fraud, reporting, books and records, and internal control provisions of the federal securities laws. The SEC further charged the former CFO with aiding and abetting the company’s reporting and books and records violations and for failing to implement internal accounting controls. According to the SEC’s complaint, in what was the registrant’s first year as a U.S. public company, the registrant failed to disclose in its SEC filings numerous material related party transactions, as required by U.S. GAAP and Commission rules and regulations. The related parties included the Registrant’s three founding and controlling shareholders, including its current CEO, entities controlled by or affiliated with these persons, and entities controlled by the registrant’s management or their family members. The related party transactions included sales of products, purchases of raw materials, loan guarantees, and short term financing.  In addition, the registrant also operated an off-balance sheet cash account that was kept off the company’s books by the former vice president of accounting. The account was used to pay for various items, including cash bonuses for senior officers and reimbursements to the CEO for business expenses, including travel, entertainment, and rent for an apartment. The account was also used to fund gifts—both cash and non-cash—for Chinese government officials. By failing to properly record these transactions on the company’s books and records, the company misstated its reported balances in its financial statements filed with the Commission.

(Litigation Release No. AAER-3447/February 28, 2013)


The Commission’s complaint alleged, among other things, that the CFO aided and abetted a fraud resulting in the Company filing materially false and misleading financial statements in the company’s annual report on Form 10-K and in the company’s quarterly reports on Form 10-Q for the first three quarters of the fiscal year. The complaint alleged that CFO engaged in a number of improper accounting practices that materially increased the registrant’s operating income, or decreased its operating loss, in a departure from U.S. GAAP. These practices included, among other things: (1) recognizing revenue based on purported contracts for services when the CFO knew or recklessly disregarded that the registrant had not performed the related services and/or had no basis to believe that such services had been performed; and (2) prematurely recognizing revenue based on services contracts. In addition, the complaint alleged that the CFO made a false statement regarding revenue growth at a subsidiary of the registrant when he knew or recklessly disregarded that such revenue only increased as a result of accounting improprieties.

(Accounting and Auditing Enforcement Release No. 3449/January 11, 2013)

SEC Trends & Developments - Spring 2013 - Issue 

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