Penthouse International Inc., one of its former officers and a shareholder are facing civil charges by the Securities and Exchange Commission related to allegations that the former Penthouse magazine publisher violated federal securities laws and improperly booked $1 million in revenue.
The SEC's complaint, filed in a New York District Court, alleges that Penthouse, now known as PHSL Worldwide Inc., former officer Charles Samel and shareholder Jason Galanis engaged in accounting fraud and financial reporting violations in connection with the company's Form 10-Q for the quarter ended March 31, 2003.
The SEC says that Penthouse inflated its reported revenue by 9 percent for that quarter and changed a quarterly net loss to a net profit of $828,000 by improperly including as revenue $1 million received as an up-front payment in connection with a five-year Web site management agreement, even though the agreement wasn't actually signed until the following quarter. Under generally accepted accounting principles, the SEC said that the payment should've been recognized as deferred revenue and amortized into income over the five-year life of the agreement.
According to the commission, the 10-Q bore an unauthorized electronic signature of Penthouse founder and former chief executive Robert C. Guccione, when Guccione hadn't seen or approved the filing or the Sarbanes-Oxley certification. In addition, the SEC said that Penthouse's auditors and outside counsel hadn't reviewed the filing.
The SEC alleges that Samel and Galanis prepared and filed the false Form 10-Q, "knowing or recklessly disregarding" that Guccione hadn't seen or approved it, that Penthouse's auditor hadn't reviewed it, and that it would be improper to include the $1 million payment as revenue for the quarter.
The SEC said that Penthouse made two subsequent filings on Form 8-K that purported to correct misstatements, but still failed to disclose that Guccione hadn't reviewed, approved or signed the 10-Q or the SOX certification, and that one of the filings misrepresented that Penthouse's disclosure controls and procedures were adequate.
The commission is seeking permanent injunctions and civil penalties against all of the defendants, and officer and director bars against Samel and Galanis.
Meanwhile, without admitting or denying wrongdoing, Guccione settled SEC allegations that he violated the Sarbanes-Oxley Act, which requires executives to certify the accuracy of financial statements. Guccione, who left the company in 2003, agreed to cease and desist from future violations.
