SEC Charges Energy Storage Company and Former Sales Executive in Fraudulent Scheme to Inflate Financial Results
On March 27, 2018, the Securities and Exchange Commission announced that it charged a California-based energy storage and power delivery product manufacturer, Maxwell Technologies, Inc. (“Maxwell”), and one of its former sales executives, Van Andrews (“Andrews”), in a fraudulent revenue recognition scheme designed to inflate the company’s reported financial results.
Premature Revenue Recognition from the Sale of Ultracapacitors to Meet Analyst Expectations
According to the SEC’s order, Maxwell Technologies, Inc. (NASDAQGS: MXWL) prematurely recognized revenue from the sale of ultracapacitors – small energy storage and power delivery products – in order to better meet analyst expectations. Andrews, a former Maxwell sales executive and corporate officer, allegedly inflated the company’s revenues by entering into secret side deals with customers and by falsifying records in order to conceal the scheme from Maxwell’s finance and accounting personnel and external auditors. Maxwell’s former CEO, David Schramm (“Schramm”), and former controller, James DeWitt (“DeWitt”), also were charged for failing adequately to respond to red flags that should have alerted them to the misconduct.
Maxwell Technologies Engaged in An Accounting Fraud Scheme that Improperly Recognized Over $19 Million in Revenue from Future Quarters
The SEC’s order stated:
From December 2011 through January 2013, Maxwell . . . engaged in an accounting fraud scheme that improperly recognized over $19 million in revenue from future quarters in violation of U.S. Generally Accepted Accounting Principles (“GAAP”). Maxwell, an SEC recidivist, issued materially false and misleading statements about its revenue, revenue growth, and gross margins, and inflated its reported financial results to better meet analysts’ expectations. Maxwell did not have sufficient internal accounting controls to identify and properly account for its revenue throughout the relevant period.
Maxwell’s primary source of revenue growth during the relevant period was expected to come from ultracapacitors, essentially small energy storage and power delivery products used in automotive, heavy transportation, renewable energy, backup power, wireless communications and industrial and consumer electronics applications. Maxwell’s ultracapacitor revenue growth was material to analysts and investors and was highlighted in all press releases and earnings calls.
Former Maxwell Executive Prematurely Recorded Ultracapacitor Revenue
The SEC’s order stated:
Maxwell, through Andrews, a former Senior Vice President of Sales and Maxwell officer, prematurely recorded ultracapacitor revenue as a result of his conduct and the failures of the company’s finance and accounting department controls. Maxwell, through Andrews, used several improper tactics to prematurely record revenue, including: customer side deals with contingent payment terms and full right of return; channel stuffing; extending payment terms; falsifying purchase orders (“POs”) and third-party confirmations; and by instructing certain distributors to order product they neither wanted nor needed at quarter-end. The fraud created the misperception that Maxwell’s ultracapacitor growth was far more successful than reality.
Maxwell’s Finance and Accounting Department, Including Its Former Controller, Repeatedly Overrode and Ignored Automated Controls and Missed Red Flags
The SEC’s order stated:
Maxwell’s finance and accounting department, including then-controller DeWitt, repeatedly overrode and ignored automated controls and missed red flags that should have alerted them to material revenue recognition departures. Although Andrews and his sales department took steps to hide the side deals from Maxwell’s senior financial personnel, the repeated override of automated controls allowed the sales to continue each quarter. Then-Chief Executive Officer (“CEO”) Schramm and Maxwell’s senior financial personnel knew that the sales took place the last days of each quarter, that certain sales were beyond approved credit limits and contained extended payment terms for up to 180 days, and that certain prior sales receivables were significantly past due. Maxwell ultimately recorded the revenue despite the fact that it should have known the sales terms were not fixed and determinable as required by GAAP for revenue recognition. Schramm also overrode automated credit limit controls to authorize large sales to distributors at quarter-end that he should have known those distributors neither wanted nor needed.
Internal Investigation Initiated After Maxwell’s Audit Committee Received Whistleblower Letter Describing the Revenue Recognition Fraud
The SEC’s order stated:
On or about January 9, 2013, Maxwell initiated an internal investigation after its audit committee received a detailed internal whistleblower letter describing the revenue recognition fraud. As a result of that investigation, on March 7, 2013, Maxwell announced that its previously issued financial statements on Form 10-K for 2011 and all quarterly reports on Forms 10-Q in 2011 and 2012 could not be relied upon. Maxwell also disclosed material weaknesses in its internal control over financial reporting due to “errors” it discovered in the “timing of recognition of revenue from sales to certain distributors.” Maxwell’s stock price declined 11.09%, closing at $8.10 per share on March 8, 2013. Soon thereafter, on March 18, 2013, Maxwell’s external auditor resigned after concluding it could not rely on representations made by senior financial personnel. After the external auditor’s resignation, Maxwell’s stock price declined an additional 20.57%, closing at $5.91 per share on the news.
Maxwell Files Restatement Which Reduced Revenue and Turned Net Income Gains Into Net Losses
The SEC’s order stated:
On August 1, 2013, Maxwell filed a restatement of the 2011 Form 10-K and Forms 10-Q for the first three quarters of 2012 that reduced revenue by 6.4% and 7.5% respectively. The restatement also turned net income gains into net losses for fiscal year-end 2011 and certain quarters in 2012.
Maxwell’s Securities Violations
The SEC’s order stated:
As a result of the conduct described herein, Maxwell violated the antifraud provisions of Exchange Act Section 10(b) and Rules 10b-5(a) and 10b-5(c) thereunder, and Securities Act Section 17(a), the reporting provisions of Exchange Act Section 13(a) and Rules 12b-20, 13a-1, 13a-11, and 13a-13 thereunder, the books and records provisions of Exchange Act Section 13(b)(2)(A), and the internal accounting control provisions of Section 13(b)(2)(B).
As a result of the conduct described herein, Andrews violated the antifraud provisions of Securities Exchange Act Section 10(b) and Rules 10b-5(a) and 10b-5(c) thereunder, and Securities Act Section 17(a) and caused Maxwell to violate Securities Act Section 17(a) and Exchange Act Sections 10(b), 13(a), 13(b)(2)(A) and 13(b)(2)(B) and Rules 10b-5(a), 10b-5(c), 12b-20, 13a-1, 13a-11, and 13a-13 thereunder. Andrews also violated Exchange Act Section 13(b)(5) and Exchange Act Rules 13b2-1 and 13b2-2.
As a result of the conduct described herein, Schramm and DeWitt caused Maxwell to violate Exchange Act Sections 13(a), 13(b)(2)(A) and 13(b)(2)(B) and Rules 12b-20, 13a-1, 13a-11, and 13a-13 thereunder.
Penalties Imposed and Fair Fund Established for the Benefit of Harmed Investors
Both Maxwell and Andrews consented to the SEC’s order without admitting or denying the allegations and agreed to pay penalties of $2.8 million and $50,000, respectively. Andrews also agreed to be barred from serving as an officer or director of a public company for five years. Without admitting or denying the findings that they caused certain violations by Maxwell, Schramm agreed to pay a total of nearly $80,000 in disgorgement, prejudgment interest, and penalty and DeWitt agreed to pay a $20,000 penalty.
The money collected in this proceeding will be used to establish a Fair Fund for the benefit of investors harmed by the accounting fraud. Maxwell’s former CFO Kevin Royal, who was not charged with wrongdoing, has reimbursed the company $135,800 for incentive-based compensation he received during the period when the company was found to have committed accounting violations.
Source: SEC.gov