The Foreign Corrupt Practices Act has always been a law much broader than its name suggests.
Sure, the FCPA contains anti-bribery provisions which concern foreign bribery.
Sure, the FCPA’s books and records and internal controls provisions can be implicated in foreign bribery schemes.
However, the fact remains that most FCPA enforcement actions (that is enforcement actions that charge or find violations of the FCPA’s books and records and internal controls provisions) have nothing to do with foreign bribery. For lack of a better term, these enforcement actions have longed been called non-FCPA, FCPA enforcement actions by this site.
The latest example concerns Lovesac, a furniture retailer, and two of its former executives.
In summary fashion, this complaint alleges:
This case involves fraudulent accounting treatment of approximately $2.2 million in shipping expenses that led to materially misleading financial statements being filed with the Commission and made available to the investing public. Furniture retailer and publicly traded company Lovesac, its former Chief Financial Officer (“CFO”) and Executive Vice President, Donna Dellomo, and its former Controller and Vice President, Yoon Um, failed to properly account for “last mile” shipping expenses, i.e., the cost of shipping finished products from Lovesac’s distribution centers to its customers. Dellomo and Um instead engaged in a fraudulent scheme to obscure the expenses in the company’s books and records.
In April 2023, Lovesac discovered that $2.2 million in last mile shipping expenses were not properly recorded and reported in its previously published financial results for the periods in which they were incurred. The $2.2 million in last mile shipping expenses had instead been inaccurately recorded in the Company’s books and records for the first quarter of fiscal year 2024. Um, in concert with Dellomo, engaged in a scheme to hide those expenses from investors and the Commission. They did this to avoid missing Lovesac’s projected gross margin—an important financial metric that the Company disclosed in its SEC filings and on conference calls that are open to investors where the Company discusses financial and other issues (often referred to as “earnings calls,” which are frequently attended by financial analysts covering the Company)—and to avoid restating the Company’s prior financial filings for the periods in which the expenses were incurred. To accomplish this scheme, Dellomo and Um improperly accounted for the expenses. Dellomo and Um, both experienced financial professionals and certified public accountants (“CPA”), knew, or were reckless in not knowing, that the fraudulent accounting treatment they devised was not compliant with generally accepted accounting principles in the United States (“GAAP”) and rendered certain of Lovesac’s financial statements materially false and misleading.
As part of the scheme, Dellomo also submitted a false and misleading management representation letter to Lovesac’s outside auditor and otherwise failed to alert Lovesac’s auditors to the fraudulent accounting for the $2.2 million in last mile shipping expenses. Further, Lovesac and Dellomo failed to implement sufficient internal controls over financial reporting—that is, processes, policies and procedures put in place by a company to provide reasonable assurances as to the accuracy, reliability, and integrity of its financial reporting—that may have prevented or detected Dellomo and Um’s fraudulent accounting. In the end, Lovesac was required to restate its financial statements for fiscal year 2023 and the first quarter of fiscal year 2024 to correct Dellomo and Um’s fraud.”
Based on the above allegations, the SEC charged Lovesac with (among other things) violations of the FCPA’s books and records and internal controls provisions and Dellomo and Um were charged with (among other things) aiding and abetting the violations.
Without admitting or denying the SEC’s allegations, Lovesac agreed to the entry of a final judgment ordering it to pay a $1.5 million penalty and imposing a permanent injunction against future violations.
