The Securities and Exchange Commission charged four former executives of nutritional supplement company MusclePharm Corp. with improper revenue recognition practices.
In a settled complaint filed with the U.S. District Court for the Central District of California, the SEC says that former executive vice president of sales and operations Brian H. Casutto, with the help of former vice president of sales Matthew J. Zucco, engaged in a scheme to prematurely recognize revenue for orders that remained in the Las Vegas company's control.
Former contract chief financial officer Kevin R. Harris, meanwhile, should have known that the revenue was being prematurely recognized, according to the SEC, and that MusclePharm was misclassifying customer credits as advertising expenses instead of reductions to revenue.
The SEC said the schemes inflated the company's quarterly revenues by as much a 25%, and its gross profits by as much as 49%.
Without admitting or denying the allegations, the three former executives consented to the entry of judgments that require, among other things, that Casutto and Zucco pay disgorgement with prejudgment interest of $79,760.01 and $15,033.06, respectively; that Casutto and Harris pay a civil penalty of $207,183 and $50,000, respectively; and that Casutto not serve as an officer or director of a public company for five years. The issue of Zucco's civil penalty was reserved for further determination by the court.
The SEC said the schemes were put in place to meet the revenue demands of MusclePharm's former CEO, Ryan C. Drexler, who is being charged with disclosure violations and control failures in a separate, litigated complaint. In addition, Drexler is being charged with violating the clawback provision of Section 304(a) of the Sarbanes-Oxley Act of 2002. The complaint seeks injunctive relief, civil penalties, reimbursement to MusclePharm under SOX 304(a), and an officer and director bar.
"Honest and transparent financial disclosures are the bedrock of our markets, but as alleged in our complaint, MusclePharm's executives disregarded these fundamental rules by continuously inflating reported revenue," said Jason Burt, regional director of the SEC's Denver Office, in a statement. "These actions highlight that the SEC will not hesitate to bring enforcement actions against individuals who threaten the integrity of our markets."
