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SEC Charges Quantum with Internal Accounting Controls Failures

Dec. 20, 2019

File No. 3-19626

December 20, 2019

The Securities and Exchange Commission today charged Silicon Valley-based data storage company Quantum Corporation with internal accounting controls violations that resulted in repeated revenue recognition errors from 2015 to 2017. Quantum has agreed to pay a $1 million penalty to settle the charges.

According to the SEC's order, Quantum recognized revenue from dozens of transactions with third parties, known as channel partners, without meeting the necessary revenue recognition criteria under GAAP. Quantum's business involves selling its hardware to channel partners, who then resell the products to end users or other channel partners. The SEC's order finds that in 2015, Quantum decided to rely more heavily on sales practices that allowed channel partners to build up stock of Quantum products. However, unbeknownst to management, Quantum's sales personnel began regularly adding terms to channel partner deals that undermined the company's ability to recognize revenue under GAAP. Accounting personnel responsible for revenue recognition determinations were either unaware of these extra terms or lacked sufficient expertise to analyze them under GAAP. According to the order, Quantum's revenue recognition errors continued unchecked for almost three years.

The SEC's order finds that these errors resulted from internal accounting control failures. Specifically, Quantum did not devise or maintain sufficient controls to provide reasonable assurance that its accounting personnel had sufficient expertise and knowledge regarding channel partner transactions to make revenue recognition determinations. Further, the order finds that sales personnel did not communicate material deal terms to accounting personnel. In the absence of sufficient controls, Quantum overstated or understated up to approximately 7% of its total quarterly revenue in incorrect periods and had to restate its previously issued financial statements.

The SEC's order finds that Quantum violated the reporting, books and records, and internal accounting controls provisions of Sections 13(a), 13(b)(2)(A) and 13(b)(2)(B) of the Securities Exchange Act of 1934 and Rules 13a-1 and 13a-13 thereunder.  Without admitting or denying the allegations, the company agreed to pay a penalty of $1 million and to cease and desist from future violations of these provisions.

The SEC's investigation was conducted by Walker Newell and Ellen Chen. The case was supervised by Jennifer J. Lee, Monique Winkler, and Erin E. Schneider.

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