The SEC frequently resolves administrative actions against issuers and occasionally, in connection with the same core conduct, resolves administrative actions with current executive officers.
But the SEC charging an issuer and its current executive officers in federal court? This is a rare instance indeed.
Yet that is exactly what the SEC did last week in this complaint charging Live Ventures (a Nevada based online marketing services company) and its current CEO John Isaac and CFO Virland Johnson.
There are no allegations of foreign bribery, but the enforcement action once again demonstrates that the FCPA has always been a law much broader than its name suggests as Live Ventures, Isaac, and Johnson were charged with, among other things, FCPA books and records and internal controls violations.
In summary fashion, the complaint alleges:
“Defendant Live Ventures Incorporated (“LIVE”) and its chief executive officer John Isaac a/k/a Jon Isaac (“Jon Isaac”) engaged in three distinct fraudulent schemes, and made materially false and misleading statements that omitted material information.
The first scheme occurred in late 2016, and centered on Jon Isaac’s efforts to boost LIVE’s FY 2016 earnings, and then to profit from the resulting spike in LIVE’s stock when the earnings were announced. As part of the scheme, Jon Isaac engineered a transaction after the close of FY 2016 that falsely created the appearance that negotiations had started during FY 2016. The deal, made between LIVE and Novalk Apps. S.A.S. (“Novalk”), created $915,500 of fraudulent “other income” and increased LIVE’s FY 2016 pre-tax income by 20%. Jon Isaac lied to LIVE’s outside accountants to justify recognition of the “other income” in FY 2016. Next, Jon Isaac used LIVE’s inflated earnings and a fraudulently reduced share count to calculate an earnings per share amount for LIVE’s FY 2016 that was 40% higher than the earnings per share in its audited financial statements. He put these fraudulently inflated earnings per share in a press release that LIVE issued on December 28, 2016. Prior to the press release, Jon Isaac and LIVE hired a stock promoter to hype LIVE’s stock, and made arrangements to access the brokerage account of Defendant Kingston Diversified Holdings LLC (“Kingston”). Jon Isaac, LIVE, and Kingston arranged to sell LIVE stock upon the anticipated rise in LIVE’s stock from the inflated results. If all the orders were executed, these Defendants would have realized gross proceeds of over $1.1 million. On December 29, Jon Isaac and LIVE issued its Form 10-K, which included the fraudulent $915,500 of other income and a disclosure about the circumstances that was false, misleading, and omitted material information, including that the entire transaction arose after the close of LIVE’s FY 2016. Subsequently, Jon Isaac tried to cover up his conduct by filing a Form 8-K and issuing a letter to shareholders in which he fraudulently denied that he or LIVE had hired a stock promoter, and lied to the Financial Industry Regulatory Authority (“FINRA”) about the scheme. Defendant Virland Johnson (“Johnson”), aided and abetted LIVE’s false and misleading statements about recognition of the “other income” from the engineered transaction with Novalk.
In the second scheme, LIVE falsely claimed that it had effectively closed the acquisition of a subsidiary of Defendant JanOne Inc. (“JOI/ARCA”) named “ApplianceSmart,” on December 30, 2017, and recognized a “bargain purchase gain” of over $3.7 million in its first quarter of FY 2018, which enabled LIVE to report positive net income in what would have otherwise been an unprofitable quarter. In fact, as of December 31, 2017, neither LIVE nor JOI/ARCA had transferred consideration to each other, and LIVE did not gain effective control of ApplianceSmart until 2018. LIVE, Jon Isaac, and Johnson made materially false and misleading statements about the ApplianceSmart transaction in LIVE’s Form 10-Q for the quarter ending December 31, 2017. Jon Isaac and Johnson lied to LIVE’s outside accountants to support recognition of December 30, 2017 as the acquisition date for accounting purposes. Defendants LIVE, JOI/ARCA, Jon Isaac, and Johnson engaged in a scheme to create the false appearance that the ApplianceSmart transaction had closed on December 30, 2017, when in fact they knew that the facts and circumstances did not support such a claim.
Third, throughout the period from 2016 to 2018, LIVE failed accurately to disclose Jon Isaac’s total compensation, reporting accruals of $162,000 in temporary housing allowances when $315,000 in additional compensation was actually paid to Jon Isaac over that period. In addition, throughout that same period, LIVE failed to have effective internal accounting controls to ensure that its financial results were accurately reported in its public filings.”
Based on the above, the SEC charged LIVE with among other things, violating the FCPA’s books and records and internal controls provisions and charged Isaac and Johnson with aiding and abetting the violations.
