Three former executives of the firm that operates the financial news site TheStreet.com agreed Tuesday to pay a total of $375,000 in penalties for allegedly inflating a subsidiary’s revenues to cover up the unit’s lackluster performance in 2008.
The Securities and Exchange Commission alleged that the subsidiary’s co-presidents, Gregg Alwine and David Barnett, manipulated financial results by entering into “sham transactions.” It also accused TheStreet’s former chief financial officer, Eric Ashman, of ordering his staff to book revenue before it had been earned.
None of the accused admitted or denied wrongdoing.
The SEC did not disclose the name of the subsidiary, but TheStreet confirmed that the unit at issue is Promotions.com, which specialized in online promotions such as sweepstakes. TheStreet purchased the firm in August 2007 and sold it in December 2009.
Elisabeth DeMarse, chief executive of the TheStreet, said Tuesday that her company brought the accounting irregularities to the SEC’s attention.
It also publicly disclosed the SEC investigation in a public filing and voluntarily restated its 2008 earnings, she said.
“We’ve self-reported to the SEC and we’ve cooperated,” DeMarse said.
TheStreet is not required to pay any monetary penalties under the terms of the settlement it negotiated with the SEC. The government alleged that TheStreet failed to put in place sufficient internal controls to assure the accuracy of the subsidiary’s financial statements, which was a privately held company when TheStreet bought it.
As a result, TheStreet failed to catch the accounting fraud at its subsidiary and ended up overstating its operating income by $1.7 million in 2008, the SEC said.
The complaints against the former executives detail their panicked reaction when they realized that the subsidiary’s revenue would total $2.2 million in the first quarter of 2008.
Ashman, the chief financial officer, had told analysts that he expected the unit would generate $3 million in revenue and act as a “springboard” to TheStreet’s advertising business, the court filing said. But the unit’s financial performance kept deteriorating.
“To address the gap between expectations and reality, Ashman substantially assisted TheStreet in improperly accounting for several 2008 transactions,” the filing said.
Ashman agreed to pay a $125,00 penalty and reimburse TheStreet $34,240.
Rather than acknowledge the disappointing results, Alwine and Barnett structured transactions that created “inflated or entirely fake revenue, altered documents, back-dated at least one contract, and obtained a false audit confirmation” to further the fraud, the government alleged in its complaint against the duo.
Barnett and Alwine agreed to pay penalties of $130,000 and $120,000, respectively.
None of the former officials could be reached for comment, and their lawyers did not respond to calls for comment.
The settlements await the approval of a federal district court in Manhattan.