News from Pohlmann & Company


Prime Example from the U.S.: Remediation Pays Out

Proactive remediation measures enable technology companies to settle with the SEC without penalty

On January 28, 2022, the United States Securities and Exchange Commission (“SEC”) announced it was settling its fraud case against a Silicon Valley-based technology company without imposing a penalty.

The SEC had charged the technology company with falsely inflating the company’s revenue over a period of at least two years until 2020, thereby fraudulently increasing the company’s market value. According to the lawsuit, the CEO used his control over the company’s financial and sales activities to fake invoices and this way simulate increased contract values and revenue streams. Ultimately, this led to investments by shareholders of USD 80 million and increased the value of the company to over USD 1 billion.

After an internal investigation initiated by the company’s Board, the fraudulent practices were uncovered, whereafter the company responded with comprehensive and extensive remedial measures: In addition to the immediate dismissal of the CEO, a devaluation of the company to USD 300 million and significant compensation payments to investors, a new management team was put in place, the Board was expanded and internal processes were introduced to guarantee transparency and accuracy of the annual reports in the future.

In its press release, the SEC emphasized that the company’s prompt remedial action and full cooperation provided a “prime example” for others who are questioning the appropriate course of action after discovering corporate misconduct. In the present case, the decisive factors for the SEC to waive any punishment had been the combination of the conducting of a thorough internal investigation, the revision of the company’s valuation, the proactive compensation of investors and the sustainable improvement of the company’s corporate for the future.

At a time when U.S. law enforcement agencies have announced a tougher approach to delinquent companies and a determined focus on companies’ sustainable integrity culture (see our blog post of November 11, 2021), the case highlights the relevance of swift and comprehensive response to suspected misconduct. It clearly illustrates the benefits of corporate internal investigations and immediate remedial action.

The SEC’s decision on a penalty-free settlement should further encourage corporate bodies to immediately do what is necessary to clarify and remedy any indications of corporate misconduct as quickly as possible. Effective governance and reporting structures as well as functioning corporate and investigative processes are prerequisites for this. Building on an effectively functioning governance and compliance management system, companies can be protected from major economic and reputational damage – and this certainly is true not only for companies that are listed on the USA stock exchange!