Aggressive SEC and DOJ Parallel Charges for Accounting Fraud
The number of public company and accounting fraud cases filed under SEC Chair Jay Clayton has declined. The SEC, however, continues to selectively pursue these types of cases. In the latest example, in aggressive parallel actions, on October 8, 2020, the SEC filed charges against SAExploration Holdings, Inc. (“SAE”) and four of its former executives – CEO and Chairman Jeffrey Hastings, CFO and General Counsel Brent Whiteley, CEO and COO Brian Beatty, and VP of Operations Michael Scott – with an accounting fraud that inflated company revenues and concealed the true nature of the relationship between SAE and one of its large customers.
In February 2020, SAE issued restated financial statements reaching as far back as 2014 which, among other things, corrected a $100 million overstatement of revenue and resulted in a $35 million reduction in the value of the company’s assets. Perhaps unsurprisingly, in August 2002, SAE filed a voluntary Chapter 11 bankruptcy petition in the Southern District of Texas.
At the heart of the alleged fraud was a seismic data library company that was secretly set up and run by the four SAE executives. The executives concocted this data library company to appear to be a legitimate, unrelated customer of SAE, who would purchase seismic data from SAE. Because this data library company was purportedly unrelated to SAE, SAE could recognize revenue from those sales at the time they were made. Had it been known that the data library company was a “related’ entity for revenue recognition purposes, SAE would not have been able to classify any of these sales as legitimate revenue under the circumstances.
To make matters worse, the executives allegedly misappropriated $12 million from SAE, about half of which was used to fund the data library company. When it became apparent that the $6 million was not sufficient to allow the data library company to secure the business financing it sought, the executives funneled the money back to SAE by paying off a portion of the company’s outstanding balance with SAE. The executives pocketed the other approximately $6 million for themselves. Finally, Whiteley allegedly stole an additional $4 million by submitting an approval payment on invoices to a fictitious entity he created for professional services that were never provided. In addition to the host of substantive and aiding and abetting charges levied against the company and the four former executives, the SEC also charged Hastings’ and Whiteley’s spouses, in an effort to recover from them allegedly ill-gotten gains and prejudgment interest.
It is noteworthy that this case also resulted in criminal charges against Hastings, the former Chairman and CEO, including securities fraud, wire fraud, and related conspiracy counts. Interestingly, while Whiteley, Beatty, and Scott are all quite plainly mentioned in the indictment as co-conspirators, they appear to have avoided criminal repercussion for the time being. This is particularly interesting in light of the above-mentioned allegation in the SEC action that Whiteley separately stole $4 million from the company.
As mentioned at the start, though we have seen fewer parallel SEC and DOJ accounting cases filed under SEC Chair Clayton, these recent actions serve as an important reminder that the SEC and DOJ continue to pursue parallel actions against public companies and their officers when the conditions are right.