The SEC announced charges against a Newport Beach, Calif.-based telecommunications equipment company and two former executives accused of improperly recognizing as revenue more than a million dollars’ worth of inventory that was shipped to a Florida warehouse but not actually sold.
They’re also accused of defrauding an investor from whom they secured a $2 million loan for the company based on misstatements and omissions associated with the inventory shipments.
The SEC’s Enforcement Division alleges that AirTouch Communications Inc., the former president and CEO, and former CFO orchestrated a fraudulent revenue recognition scheme that violated Generally Accepted Accounting Principles (GAAP), which establish that revenue cannot be recognized unless it is “realized or realizable” and “earned.” When AirTouch reported net revenues of a little more than $1.03 million in its quarterly report for the third quarter of 2012, it included approximately $1.24 million in inventory that had been shipped to a company in Florida that agreed to warehouse AirTouch’s products in anticipation of future sales. AirTouch’s revenue recognition was improper because the Florida company had not purchased the inventory, and AirTouch had not sold the inventory to any of its customers. AirTouch would have had zero revenue to report for the quarter if it had not recorded the shipments as purported revenue from the Florida company.
“[The two individuals] created a facade of sales activity in AirTouch’s quarterly report to falsely depict a healthy and growing company when in fact it was struggling without any positive revenue,” said Michele Layne, director of the SEC’s Los Angeles Regional Office. “They also deceptively obtained financing from an investor based on a similar false portrayal of the company’s sales activity.”
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