SEC Charges Former Healthcare Executive in Fraudulent Scheme to Inflate Financial Results
Sept. 5, 2019
File No. 3-19422
September 5, 2019 - The Securities and Exchange Commission today announced that Daniel Khesin, former president, chief executive officer, chief financial officer, and chairman of the board of DS Healthcare Group, Inc., agreed to settle charges for orchestrating a fraudulent scheme to inflate DS Healthcare's revenues.
According to the SEC's order, during the first three quarters of 2015, Khesin, a resident of Boca Raton, Florida, acted to overstate DS Healthcare's reported revenues. In particular, Khesin caused DS Healthcare to recognize fictitious revenue for products it never sold. The order also alleges that Khesin caused DC Healthcare to significantly overbill a customer, which it later credited back to the customer in order to improperly recognize revenue. Khesin also authorized improper sales practices, including shipping products at the end of quarters with no reasonable expectation of payment, consignment sales that recognized revenue at the time of shipment even though collectability was not assured, and issuing DS Healthcare stock and discounts as incentives for customers to place orders without disclosing those incentives to DS Healthcare's finance department. The SEC's order also found that Khesin selectively disclosed material non-public information relating to DS Healthcare's earnings, sales and revenue forecasts, and pending and future acquisitions to a broker-dealer and to certain DS Healthcare shareholders. According to the SEC's order, Khesin also misled DS Healthcare's auditor about the accuracy of the company's financial statements. When some of the above conduct was discovered in early 2016, DS Healthcare's board of directors terminated Khesin's employment and removed him from the board. In reaction to those efforts, Khesin improperly solicited shareholders for voting proxies or consents, and used those consents to fire senior management and appoint new directors to regain control of the company.
The SEC's order finds that Khesin willfully violated the antifraud provisions of Sections 17(a)(1) and 17(a)(3) of the Securities Act of 1933 ("Securities Act") and Section 10(b) of the Securities Exchange Act of 1934 ("Exchange Act") and Rule 10b-5 thereunder, the internal controls and books and records provisions of Section 13(b)(5) of the Exchange Act and Rule 13b2-1 thereunder, the lying to auditors provision of Rule 13b2-2 of the Exchange Act, the Sarbanes-Oxley certification provision of Rule 13a-14 of the Exchange Act, the proxy statutory provisions of Section 14(a) of the Exchange Act and Rules 14a-3 and 14a-9 thereunder, and the beneficial ownership reporting provisions of Section 16(a) of the Exchange Act and Rules 16a-3 and 16a-8 thereunder. The order also finds that Khesin willfully aided and abetted and caused DS Healthcare's violations of the periodic reporting provisions of Exchange Act Section 13(a) and Rules 12b-20 and 13a-13 thereunder, the internal controls and books and records provisions of Exchange Act Sections 13(b)(2)(A) and 13(b)(2)(B), and Regulation FD. The order also finds that Khesin engaged in conduct subject to Section 4C of the Exchange Act and Rule 102(e)(1)(iii) of the Commission's Rules of Practice. Without admitting or denying the SEC's findings, Khesin consented to a cease-and-desist order and agreed to an eight year officer and director bar, an $130,000 civil penalty, and the issuance of an order suspending him from appearing or practicing before the SEC as an accountant. The SEC's order permits Khesin to apply for reinstatement as an accountant after eight years.
The investigation was conducted by John Houchin, Kathleen Strandell, and Shelly-Ann Springer-Charles, and supervised by Eric Busto and Glenn Gordon. Russell Koonin provided litigation counsel.