By: Alexandra Hughes, Spring 2016 Clinic GRA
Generally, the IAC focuses on claims of misconduct on the part of investment advisers and broker-dealers. Such claims involve the unsuitability of a recommended investment, or misrepresentations or omissions to the investor. However, what happens when the underlying financial information, which is distributed to investors in a prospectus or quarterly reports, ends up being inaccurate? Such financial inaccuracies would not only deeply affect an investor’s understanding of the business he has invested in, but would be almost impossible for the regular or even prudent investor to detect. The SEC recently issued a press release discussing what happens when investors are so deceived.
On April 19, 2016, the SEC released a press release entitled SEC Announces Financial Fraud Cases, discussing “a pair of financial fraud cases against companies and then-executives accused of various accounting failures that left investors without accurate depictions of company finances.” The “pair” of companies are: Logitech, a company manufacturing accessories for computers and tablets, and Ener1, a lithium-ion battery manufacturer. The SEC also released orders detailing cease and desist proceedings and penalties against Logitech and Ener1. SEC’s Division of Enforcement Director, Andrew Ceresney, said “In these two cases, we allege deficiencies in Ener1’s failure to properly impair assets on its balance sheet and Logitech’s failure to write down the value of its inventory to avoid the financial consequences of disappointing sales.”
For such accounting failures, Logitech agreed to pay a $7.5 million penalty. The SEC found that in fiscal year 2011, Logitech inflated its financial results, which subsequently caused investors to have an inaccurate and impaired view of the company’s finances. Logitech’s then-controller, Michael Doktorczyk, and then-director of accounting, Sherralyn Bolles, also agreed to pay penalties of $50,000 and $25,0000, respectively, for their part in the accounting related violations. However, Logitech is not out of the woods yet. On April 18, 2016, the SEC filed a complaint against Logitech’s then-CFO, Erik K. Bardman, and then-Acting Controller, Jennifer F. Wolf, seeking injunctive relief and damages for multiple securities act violations.
As for Ener1, the SEC found the company had “materially overstated revenues and assets for year-end 2010 and overstated assets in the first quarter of 2011.” Former executives of the company: Charles L. Gassenheimer, CEO and chairman of the board, Jeffrey A. Seidel, CFO, and Robert R. Kamischke, chief accounting officer, paid penalties of $100,000, $50,000, and $30,000, respectively for the violations. Further, the SEC found Ener1’s auditor, Robert D. Hesselgesser, violated “professional auditing standards when he failed to perform sufficient procedures to support his audit conclusions that Ener1 management had appropriately accounted for its assets and revenues.” As a result, Hesselgesser has been suspended as an accountant.
For more information, see the SEC press release here.