SEC Alleges Accounting Fraud That Artificially Inflated P&L.

[ by Howard Haykin ]

The SEC on Tuesday charged TheStreet, Inc., a digital financial media company, and 3 of its executives for their roles in an accounting fraud that artificially inflated company revenues and misstated operating income to investors.  Briefly stated, the SEC alleges that:

TheStreet Inc., which operates TheStreet.com Web site, filed false financial reports throughout 2008 by reporting revenue from fraudulent transactions at a subsidiary it had acquired in 2007.  Co-presidents of the subsidiary – Gregg Alwine and David Barnett - entered into sham transactions with friendly counterparties that had little or no economic substance. 

They also fabricated and backdated contracts and other documents to facilitate the fraudulent accounting.  Barnett is additionally charged with misleading TheStreet’s auditor to believe that the subsidiary had performed services to earn revenue on a specific transaction when in fact it did not perform the services.  TheStreet’s former CFO Eric Ashman was also named in the complaint, having allegedly caused the company to report revenue before it had been earned.  

NYRO Director Andrew Calamari expressed these comments:  “Alwine and Barnett used crooked tactics, Ashman ignored basic accounting rules, and TheStreet failed to put controls in place to spot the wrongdoing.” 
 

SEC Findings and Allegations.   The subsidiary acquired by TheStreet specializes in online promotions, such as sweepstakes.  After the acquisition, TheStreet failed to implement a system of internal controls at the subsidiary, which enabled the accounting fraud.

The SEC alleges that through the actions of Ashman, Alwine, and Barnett, TheStreet:

• Improperly recognized revenue based on sham transactions.
• Used the percentage-of-completion method of revenue recognition without meeting fundamental prerequisites to do so, including reliably estimating and documenting progress toward the completion of relevant contracts.
• Prematurely recognized revenue when the subsidiary had not performed actual work and therefore had not really earned the revenue.

When the sub's financial results were consolidated with TheStreet’s financial results for financial reporting purposes, the improper revenue on the subsidiary’s books resulted in material misstatements in the company’s quarterly and annual reports for F/Y 2008.  On 2/8/10, TheStreet restated its 2008 Form 10-K and disclosed a number of improprieties related to revenue recognition at its subsidiary, including transactions that lacked economic substance, internal control deficiencies, and improper accounting for certain contracts.

SEC Sanctions.   The 3 executives agreed to pay $$-penalties and accept officer-and-director bars to settle the SEC’s charges.

• Ashman agreed to pay a $125K penalty, to reimburse TheStreet $34K under the clawback provision (Section 304) of the Sarbanes-Oxley, and will be barred from acting as a director or officer of a public company for 3 years. 
• Barnett and Alwine agreed to pay penalties of $130K and $120K, respectively, and each will be barred from serving as officers or directors of a public company for 10 years. 

In the settlement between the SEC and TheStreet, Inc. no monetary penalty was issued to the company. 

SEC Staff Credits.   Investigation by:  Senior Counsel Maureen King, Staff Accountant Nandy Celamy of the NY Regional Office.  Aaron Arnzen served as Senior Trial Counsel.

For further details, go to:  [SEC PR 12-270, 12/18/12], [SEC Complaint v. TheStreet], [SEC Complaint v. Ashman] and [SEC Complaint v. Alwine and Barnett].