The Securities and Exchange Commission has charged the media company TheStreet Inc., which publishes the financial news site TheStreet.com, and three of its executives with accounting fraud, accusing them of artificially inflating company revenues and misstating their operating income to investors.
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The SEC alleges that TheStreet Inc filed false financial reports throughout 2008 by reporting revenue from fraudulent transactions at a subsidiary it had acquired the previous year. The company did not immediately respond to a request for comment.
The co-presidents of the subsidiary – Gregg Alwine and David Barnett – entered into sham transactions with friendly counterparties that had little or no economic substance, according to the SEC. They also allegedly fabricated and backdated contracts and other documents to facilitate the fraudulent accounting. Barnett has also been 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. In addition, the SEC alleges that TheStreet’s former CFO Eric Ashman caused the company to report revenue before it had been earned.
The three executives agreed to pay financial penalties and accept officer-and-director bars to settle the SEC’s charges.
“Alwine and Barnett used crooked tactics, Ashman ignored basic accounting rules, and TheStreet failed to put controls in place to spot the wrongdoing,” said Andrew M. Calamari, director of the SEC’s New York Regional Office, in a statement. “The SEC will continue to root out accounting fraud and punish the executives responsible.”
According to the SEC’s complaints filed in federal court in Manhattan, 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, and 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. The SEC also accused the company of prematurely recognized revenue when the subsidiary had not performed actual work and therefore had not really earned the revenue.
According to the SEC’s complaint, when the subsidiary’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 fiscal year 2008. On Feb. 8, 2010, 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.
Ashman agreed to pay a $125,000 penalty and reimburse TheStreet $34,240.40 under the clawback provision (Section 304) of the Sarbanes-Oxley Act, and he will be barred from acting as a director or officer of a public company for three years.
Barnett and Alwine agreed to pay penalties of $130,000 and $120,000 respectively, and to be barred from serving as officers or directors of a public company for 10 years. Without admitting or denying the allegations, the three executives and TheStreet agreed to be permanently enjoined from future violations of the federal securities laws.