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 and these provisions are among the most generic legal provisions one can possibly find.
Case in point is this recent SEC enforcement action against the former CEO and CFO of FTE Networks Inc. In the complaint, the SEC charges Michael Palleschi and David Lethem with engaging in a multi-year accounting fraud.
In summary fashion, the complaint alleges:
“This case concerns a multi-year, multi-faceted accounting fraud orchestrated by senior executives of FTE Networks, Inc. (“FTE” or “the Company”), a Naples-based, publicly traded company that provided network infrastructure to the technology and telecommunications industries. From early 2016 until January 2019, Defendants Michael Palleschi, FTE’s Chief Executive Officer, and David Lethem, FTE’s Chief Financial Officer, engaged in two schemes to fraudulently inflate FTE’s revenues and paint a false picture of the Company’s finances. Additionally, Palleschi and Lethem misappropriated millions of dollars.
The Defendants’ conduct caused FTE’s public filings with the Commission to contain numerous false and misleading statements, and also caused FTE’s financial statements to be materially false. After the Company uncovered the fraud in 2019, it had to file restated financial statements that showed FTE had overstated its revenues in some quarterly and annual periods in 2017 and 2018 by as much as 108 percent.
In the first scheme from January 2017 through January 2019, in a desperate attempt to raise cash for FTE, Palleschi and Lethem secretly caused FTE to issue approximately $22.7 million in Convertible Notes – i.e., notes that allowed the holder to convert repayment into shares of Company stock. Each Convertible Note contained varying terms and features that Palleschi and Lethem knew required FTE to perform extensive and complex analyses under Generally Accepted Accounting Principles (“GAAP”) to determine the proper accounting treatment and financial statement disclosure. But instead of doing that, Palleschi and Lethem masked the Convertible Notes as conventional promissory notes that involved a less cumbersome accounting treatment by, among other things, creating fake copies of the Notes and forging board of director signatures on purported resolutions approving the Notes.
Second, from early 2016 through November 2018, the Defendants fraudulently inflated FTE’s revenues by essentially inventing approximately $12.5 million of revenue and related accounts receivable from purportedly completed construction projects that had not yet been billed and from contracts for projects that purportedly had been completed and billed but not yet paid. In fact, FTE had not performed the underlying work, and the revenue was fictitious.
Third, Palleschi and Lethem misappropriated approximately $5.4 million from FTE for personal use, including, among other things, unauthorized and undisclosed salary increases, luxury car leases, private jet services, and unauthorized cash payments.
As part of these schemes, the Defendants doctored and forged numerous documents and signatures to mislead FTE’s auditor, certain FTE board members and employees, and FTE’s shareholders. For example, Lethem created fake copies of the Notes that stripped any information that would identify the Notes as Convertible Notes. He provided the fake copies to FTE’s accounting personnel, who, in turn, improperly accounted for the Notes as conventional promissory notes. Additionally, for the second scheme, the Defendants jointly drafted and provided a memorandum to FTE’s auditor that explained that the unbilled revenues and receivables were real work but could not be billed due to contractual terms with FTE’s customer. The memorandum was entirely false.
By late 2018, the Convertible Note scheme and other onerous loans that FTE had entered into to attempt to cover the debt created by the Convertible Notes came to light when an FTE employee provided information to FTE’s only independent director about the true nature of FTE’s finances. FTE placed Palleschi on unpaid leave on January 19, 2019, and launched an internal investigation in March 2019. The investigation ultimately led to the unraveling of all three schemes, and in May 2020 FTE restated various quarterly and annual financial statements for 2016, 2017, and 2018.”
Based on the above, the SEC charged Palleschi and Lethem with, among other things, aiding and abetting FTE’s violations of the FCPA’s books and records and internal controls provisions.
Based on the same core conduct, the DOJ also criminally charged Palleschi and Lethem with various offenses. (See here for the indictment)