Four week days remain in the SEC’s fiscal year and time will tell whether historical end of September Foreign Corrupt Practices Act enforcement actions will be forthcoming.
In the meantime, we can nibble on a non-FCPA, FCPA enforcement action released by the SEC yesterday (among a flurry of actions announced in recent days).
Non-FCPA, FCPA enforcement actions are a term long used by this site to describe enforcement actions that charge or find violations of the FCPA’s books and records and internal controls provisions that have nothing to do with foreign bribery.
The latest example involves GTT Communications (a Virginia based company with shares listed on the NYSE until 2021 which thereafter filed for bankruptcy and emerged as a private company in 2022).
In summary fashion, this administrative order finds:
“GTT made materially misleading statements and omissions relating to Cost-of-Revenue (“COR”) in certain 2019 and 2020 Exchange Act annual, quarterly, and current reports. COR, referred to by GTT in public filings as Cost of Telecommunications Services, represents direct costs incurred by GTT in providing telecommunications services to its customers and is GTT’s largest operating expense.
GTT grew rapidly through a series of acquisitions in 2017 and 2018, but struggled to integrate the newly-acquired companies into GTT’s systems. As a result, two key operational systems – GTT’s Client Management Database (“CMD”) and its third-party bill processing system (the “BPS”) – started to show a persistent and growing discrepancy between actual invoices received through the BPS that related to COR and GTT’s expectation of what COR should be based on underlying supplier contracts in CMD. This discrepancy, which was widely known within GTT, was a clear sign that GTT’s COR accounting methodology was not working properly and that GTT had data integrity issues.
GTT’s accountants and operations staff investigated the cause of the discrepancy, but there was no effective way to compare the data in the two systems. Further, given the volume of transactions following the acquisitions, GTT did not have the resources to review its COR invoices manually for proper classification and validity. By at least mid-2018, GTT knew that it did not have sufficient information systems or resources to record and report COR accurately and fairly following the 2017 and 2018 acquisitions. Despite that knowledge, GTT failed to implement and maintain policies and procedures designed to provide reasonable assurance that the COR reflected in GTT’s financial statements was based on reasonable support. There also was a knowledge disconnect between GTT’s operations employees, who managed the company’s COR related data, and the accounting employees, who used that data to record and report COR. Both groups were confused as to the other’s role: operations did not fully appreciate how accounting used the data they provided, and accounting did not fully understand what the data reflected and its limitations. Consequently, GTT’s conduct fell below the standard of care of a reasonable, similarly situated company.
As a result, GTT failed to disclose material facts concerning certain unsupported adjustments to COR, which caused the statements that GTT made concerning COR to be misleading in light of the circumstances. These adjustments concerned COR-In-Advance (i.e., prepaid expense) and COR vendor disputes and were reported in GTT’s Forms 10-Q for the quarters ended September 30, 2019, and March 31, 2020, and in GTT’s Form 10-K for the fiscal year ended December 31, 2019, and in related earnings releases on Forms 8-K. GTT also made material omissions in its 2019 Form 10-K concerning uncertainties involving certain receivables from vendors subject to disputes that were recorded in its financial statements that rendered statements it made misleading.”
Based on the above, the order finds that GTT violated, among other things, the FCPA’s books and records and internal controls provisions.
Without admitting or denying the SEC’s findings, GTT agreed to cease and desist from further violations of the securities laws. This is probably going to be rather easy given that GTT is no longer a public company.
There is no monetary component to the resolution.
