Former Tech Firm Officials Charged With Conspiracy to Obstruct Probe
In a recent case, a federal grand jury in Chicago indicted two former executives of a Tampa, Florida, technology company for conspiring to obstruct a Securities and Exchange Commission (SEC) investigation into the sale of their company to a publicly traded Illinois company.
The two men — the Florida company's former president and former CEO — have been charged with conspiring with two officials of the Illinois company to obstruct an SEC investigation into the sale, in exchange for payments of tens of thousands of dollars in cash. The ex-CEO also faces a charge of making false statements to the FBI.
In a parallel action, the SEC charged two former officials of the Illinois firm with multiple violations relating to accounting fraud, alleging they did most of the “dirty work.”
Those two men, who have been fired, allegedly submitted fraudulent financial reports that concealed their theft of more than $4 million, caused the company to understate its liabilities and inflate its revenues and assets. They also have been charged with fraud, lying to the SEC under oath and paying the Florida men to lie to the SEC in the course of its investigation.
The actions that led to these indictments include:
1. In 2015, the SEC launched an investigation of the Illinois firm, based on indications that it may have violated federal securities laws (as a public company, it is required to provide the SEC with detailed and accurate reports of its financial condition).
2. The FBI followed up with its own criminal investigation in 2016, and found that the two men misrepresented information related to acquisitions. That included the 2013 purchase of the Florida company, which it bought for $100,000 in cash, 250,000 shares of its stock and the assumption of approximately $165,000 in liabilities.
3. Federal authorities later discovered that the two Illinois executives concealed the true terms of that acquisition by furnishing an auditor with a bogus acquisition document that inflated the purchase price and omitted the fact that liabilities were being assumed.
4. In 2016, the SEC questioned the officials of the Florida company, who were unaware of the fictitious acquisition agreement.
5. Those two men then told the officials of the Illinois company about this and struck a deal to receive cash payments of $102,900 and $60,000 in exchange for their agreement to send an e-mail falsely stating that they had previously authorized the terms of the fictitious agreement.
6. The Illinois firm's two executives hid those payments as “consulting fees.”
The conspiracy, obstruction and wire fraud charges are each punishable by up to 20 years in prison. In addition, making false statements to the FBI is punishable by up to five years in prison. Arraignments haven't been scheduled.
The SEC's involvement stems from its federal mandate to maintain oversight of public companies. That mandate is detailed in two pieces of legislation:
1. The Securities Act of 1933. This law is intended to prevent fraud in the sale of securities. It requires initial disclosures about common stock that will be sold to the public. Most securities of public companies must be registered with the SEC. The registration documents indicate the securities that are being sold, provide financial statements and describe the company's management structure.
2. The Securities Exchange Act. This legislation enforces the 1933 Act and adds more reporting requirements for securities sold on a secondary market, such as a stock exchange. It also sets the size of companies that must follow the reporting requirements. Currently, the law applies to public companies with more than 500 shareholders and $10 million in assets.
It also requires companies to submit annual and quarterly reports, called 10-Ks and 10-Qs, which are available to the public online on the SEC's Electronic Data Gathering, Analysis and Retrieval (EDGAR) system. The SEC also may require some businesses to file additional reports.
A 10-K is a lengthy annual report with a wealth of information about the filing company. Management must provide a statement on what did and didn't work for their company in the previous year and what actions they expect to take that might affect its performance.
Companies also must provide a balance sheet showing the bottom line, liabilities, and disclose any pending litigation and related information.
Keep Your Eyes Open
It is critical to adhere to the strict SEC reporting requirements, especially if your company is involved in buying or selling a business. Be on the lookout for fraudulent practices that may skew the results. If you have any doubts, consult with your legal and financial advisors.