Over two years ago, while scouring through TheStreet.com's filing we stumbled upon something interesting : "As a result of the need for the Company and its independent registered public accounting firm to focus attention on matters related to the Company's previously-announced review of the accounting in its former Promotions.com subsidiary, which subsidiary the Company sold in December 2009 -- including matters related to the preparation and filing by the Company in February 2010 of a Form 10-K/A for the year ended December 31, 2008, a Form 10-Q/A for the quarter ended March 31, 2009 and Forms 10-Q for the quarters ended June 30, 2009 and September 30, 2009, respectively, and matters related to an investigation commenced by Securities and Exchange Commission in March 2010 -- the Company requires additional time to prepare its financial statements, assess its internal controls and file its Form 10-K for the year ended December 31, 2009 ("2009 Form 10-K")." Oops. We can't wait to see how Mr. Cramer will explain to the Mad Money faithful this particular twist on the hangover of the show's five year birthday bash. Also, we wonder if CNBC will finally cancel the ludicrous Jim "truth" Cramer campaign once this news breaks. We doubt it- in the quest for evaporating eyeballs, all is fair." This was in April 2010. Today, we got resolution on the matter, as the SEC finally has put the matter to close.
From the SEC :
SEC Charges Financial Media Company and Executives Involved in Accounting Fraud
Washington, D.C., Dec. 18, 2012 — The Securities and Exchange Commission today charged a digital financial media company and three executives for their roles in an accounting fraud that artificially inflated company revenues and misstated operating income to investors.
The SEC alleges that TheStreet Inc., which operates the website TheStreet.com, filed false financial reports throughout 2008 by reporting revenue from fraudulent transactions at a subsidiary it had acquired the previous year. 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. 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. The SEC also alleges that TheStreet’s former chief financial officer 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. “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.
- 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.
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.
The SEC’s investigation was conducted by Senior Counsel Maureen P. King and Staff Accountant Nandy Celamy of the New York Regional Office. Aaron Arnzen served as Senior Trial Counsel in the matter.
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How totally shocking...