SEC charges TheStreet.com with accounting fraud

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The Securities and Exchange Commission charged digital financial media company TheStreet.com and three executives for their roles in an accounting fraud that artificially inflated company revenues and misstated operating income to investors.

The SEC alleges that TheStreet Inc., which operates the website TheStreet.com, filed false financial reports throughout 2008 by reporting revenue from fraudulent transactions at a subsidiary it had acquired the previous year.  The co-presidents of the subsidiary – Gregg Alwine and David Barnett – entered into sham transactions with friendly counterparties that had little or no economic substance.

They also fabricated and backdated contracts and other documents to facilitate the fraudulent accounting, the government agency alleges.  Barnett is additionally charged with misleading TheStreet’s auditor to believe that the subsidiary had performed services to earn revenue on a specific transaction when in fact it did not perform the services.  The SEC also alleges that TheStreet’s former chief financial officer Eric Ashman caused the company to report revenue before it had been earned.

The three executives agreed to pay financial penalties and accept officer-and-director bars to settle the SEC’s charges.

“Alwine and Barnett used crooked tactics, Ashman ignored basic accounting rules, and TheStreet failed to put controls in place to spot the wrongdoing,” said Andrew M. Calamari, director of the SEC’s New York Regional Office, in a statement.  “The SEC will continue to root out accounting fraud and punish the executives responsible.”

According to the SEC’s complaints filed in federal court in Manhattan, the subsidiary acquired by TheStreet specializes in online promotions such as sweepstakes.  After the acquisition, TheStreet failed to implement a system of internal controls at the subsidiary, which enabled the accounting fraud.

Ashman agreed to pay a $125,000 penalty and reimburse TheStreet $34,240.40 under the clawback provision (Section 304) of the Sarbanes-Oxley Act, and he will be barred from acting as a director or officer of a public company for three years.  Barnett and Alwine agreed to pay penalties of $130,000 and $120,000 respectively, and to be barred from serving as officers or directors of a public company for 10 years.  Without admitting or denying the allegations, the three executives and TheStreet agreed to be permanently enjoined from future violations of the federal securities laws.

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