InfoBytes Blog
SEC: Taking remedial actions may help companies avoid penalties
On January 28, the SEC announced a settlement subject to court approval with a private technology company to resolve allegations that the company, through its former CEO, falsely inflated key financial metrics and doctored internal sales records. The complaint, which alleged violations of the antifraud provisions of the Securities Act of 1933 and the Securities Exchange Act of 1934, claimed that the CEO significantly inflated the value of numerous customer deals, and then masked the inflation by creating fake invoices and altering real invoices to make it seem as if customers had been billed higher amounts. The company’s board of directors conducted an internal investigation, which led to the removal of the CEO, a revised company valuation, and remedial efforts including repaying investors. The company also hired new senior management, expanded its board, and implemented processes and procedures to ensure transparency and accuracy of deal reporting and associated revenues. While the company neither admitted nor denied the allegations, it agreed to be permanently enjoined from violations of the antifraud provisions. The SEC highlighted that the lack of a penalty in the settlement is significant, and demonstrates the Commission’s position that a company may receive credit if it makes significant remedial efforts in the wake of an internal investigation. “For companies wondering what types of remedial actions and cooperation might be credited by the Commission after a company uncovers fraud, this case offers an excellent example,” stated Gurbir S. Grewal, Director of the SEC’s Division of Enforcement. “[The company’s] remediation and cooperation included not just its internal investigation and revised valuation, but also repaying harmed investors and improving its governance—all of which were factors that counseled against the imposition of a penalty in this case.”