SEC Probing Retailers' Use of Misleading Alternative Accounting Measures

Retailers’ ‘Borderline Misleading’ Accounting Targeted by SEC

Public companies that tout overly rosy earnings numbers that don’t comply with US accounting rules, watch out.

The Securities and Exchange Commission is blitzing businesses with questions about alternative accounting measures and asking them to justify their use. In some cases they’re telling them to quit showcasing earnings that strip out normal, recurring expenses. Retailers and consumer-facing companies face especially pointed questions, recently released comment letters show.

Academy Sports & Outdoors Inc., Dave & Buster’s Entertainment Inc., and Petco Health & Wellness Company Inc. have all drawn the SEC’s attention for excluding expenses to open new stores or close old ones from supplemental earnings metrics that don’t follow US generally accepted accounting principles, or GAAP. The missives follow new SEC guidance from December about which unofficial accounting adjustments are acceptable and which are out of bounds.

SEC Files Charges in Fine Wine Investment Fraud Scheme

According to the SEC’s complaint, between January 2018 and September 2021, Charles Winn, through Scott-Britten, Stewart, and Alexander, its sales representatives, and marketing materials, represented to investors that Charles Winn would buy investment-grade wines for the investors, later sell the wine at a profit, and would share in a portion of the profits with investors. As alleged in the complaint, using sales scripts provided by Scott-Britten and Stewart, Charles Winn’s sales representatives, including Alexander, falsely represented to investors that their money would solely be used to purchase and store wine, the wine could be expected to achieve a return ranging between 10% to 45%, and the company would not receive any compensation or profit until the wine was sold. The complaint further alleges that these statements were false because Charles Winn, through Scott-Britten, Stewart, and Smith, used no more than 43% of the investors’ money for the purchase and storage of wine, made minimal payments to investors, and misused investor funds by spending them on a variety of non-wine uses, including at least $1.7 million for payments to individuals, including up-front commissions to Charles Winn sales representatives, payments to back office staff, and payments to Scott-Britten, Stewart, and their family members or affiliated entities, and Smith. As alleged in the complaint, Scott-Britten and Stewart orchestrated the fraudulent scheme, and Alexander and Smith participated in it.

In NFT insider trading case, judge says secret website plans can be basis for wire fraud

A onetime product manager for digital art marketplace OpenSea got some bad news this week from a Manhattan federal judge, days ahead of trial in a novel insider trading case against him.

A Manhattan federal judge has rebuffed defense arguments from Nathaniel Chastain that the prosecution is doomed because OpenSea’s confidential plans to feature new non-fungible tokens, or NFTs, on its website every few days were not inherently valuable and therefore cannot be the basis of wire fraud charges.

The European Parliament Has Voted for the EU’s Landmark MiCA Regulation and Anti-Money Laundering Transfer of Funds RulesLawmakers in the European Union on Thursday voted 517-38 in favor of a new crypto licensing regime, Markets in Crypto-Assets (MiCA), with 18 absentions, making it the first major jurisdiction in the world to introduce a comprehensive crypto law.

The European Parliament also voted 529-29 in favor of a separate law known as the Transfer of Funds regulation, which requires crypto operators to identify their customers in a bid to halt money laundering, with 14 abstentions.

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In a tweet, the European Commission’s Mairead McGuinness described the vote as a “world first” for crypto rules.

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“The European crypto-asset industry has regulatory clarity that does not exist in countries like the U.S.,” Berger said. “The sector that was damaged by the FTX collapse can regain trust.”

Hypothetical Scenario Disclosures by Companies Risk SEC Scrutiny

The SEC sued Commonwealth in 2019, alleging the company didn’t provide enough information to clients about conflicts of interest that could drive the firm to choose more expensive investments.

Commonwealth disclosed certain fees received from National Financial Services LLC, which maintained custody of Commonwealth’s clients’ assets. But Commonwealth described the conflict merely as “potential” and said it “may” have incentives to select costlier investments, the SEC said.

Commonwealth actually had a conflict and those incentives actually existed, the agency said in its complaint. The SEC won a court ruling against Commonwealth on April 7 in the US District Court for the District of Massachusetts, when Judge Indira Talwani agreed the disclosures weren’t good enough.

“Commonwealth presents the payments it receives from the revenue sharing arrangement as a hypothetical rather than disclosing it as a matter of fact,” Talwani wrote.

A Leg To Stand On

Securities class actions involving Special Purpose Acquisition Companies (SPACs) can raise interesting issues. A SPAC is a publicly traded shell company created to merge with an existing privately held business so as to allow the target company to go public without the time, expense, and regulatory scrutiny of an initial public offering. If the privately held business makes material misstatements that affect the SPAC’s stock price prior to the merger, can that company and its officers be liable for securities fraud?

The U.S. District Court for the Northern District of California recently considered that question in In re CCIV/Lucid Motors Sec. Litig., 2023 WL 325252 (N.D. Cal. Jan. 11, 2023)….

The Chainsmokers Use Mantis VC Fund to Invest in Crypto, AI

More recently, the Chainsmokers have given their haters something else to hold against them: They’ve become venture capitalists, starting Mantis VC, a firm that raised a total of $110 million in the boom years of 2020 and 2021 from investors like TPG Inc. co-founder Jim Coulter and billionaire Mark Cuban. Cuban, in fact, can be seen in one of the duo’s TikTok videos, in which Pall rips the T-shirt off Taggart’s back during a performance and hands it to their benefactor to use as a napkin. “I’ve known them for a while,” Cuban said in an email. “Like them.”