The Securities and Exchange Commission is probing the books of EasyLink Services Corp., a New Jersey firm where SEC Chairman William H. Donaldson served on the board until shortly before he became the agency's chairman, according to sources familiar with the investigation.
The status of the investigation, which involves how the company recorded its revenue, could not be determined yesterday.
Donaldson declined to comment yesterday, as did SEC spokesman Matthew C. Well.
Donaldson, 73, took the helm of the SEC last year after financial scandals and political missteps had damaged the agency's reputation. He has been trying in recent months to push through a slate of controversial proposals to clean up the mutual fund industry, regulate the risky investment pools known as hedge funds and give dissatisfied shareholders more power to nominate corporate board members.
The investigation into EasyLink, which was reported by Dow Jones yesterday, echoes a similar controversy in the SEC's recent history.
Donaldson's predecessor as SEC chairman, Harvey L. Pitt, resigned on election night in November 2002 in a firestorm over his choice of former CIA director William H. Webster to head the new accounting industry oversight board.
It was later disclosed that Webster had headed the audit committee at U.S. Technologies Inc., a D.C. company whose accounting practices were under SEC scrutiny and whose chief executive would later be convicted of fraud. Pitt allegedly failed to tell his fellow commissioners about Webster's role at U.S. Technologies before they voted to approve him to head the accounting oversight board.
Donaldson, who was on the EasyLink board from 1998 to late 2002 and served on the audit and compensation committees, has recused himself from voting on the EasyLink enforcement action, the sources said. One of the sources said board members, even those on audit committees, don't necessarily delve into methods of revenue recognition.
EasyLink converts paper documents into e-mail messages. The company, then known as Mail.com, went public during the height of the dot-com boom in 1999 and its shares rose to a high, adjusted for splits, of $271 that year. Its shares now trade for $1.63.
Its founder and chairman, Gerald Gorman, worked for a dozen years at the Wall Street investment bank Donaldson, Lufkin & Jenrette, which Donaldson co-founded. Gorman did not return phone calls yesterday.
While on the board, Donaldson voted to forgive a $200,000 loan to the company's chief executive at a time the company was struggling financially, an issue that critics raised before his 2003 confirmation hearings for the role of SEC chairman. BusinessWeek magazine last year reported that the company paid a promoter for ostensibly independent stock research while Donaldson was on the board.
SEC enforcement chief Stephen M. Cutler did not return calls yesterday evening.