U.S. SECURITIES AND EXCHANGE COMMISSION
Litigation Release No. 20110 / May 10, 2007
Accounting and Auditing Enforcement Release No. 2608 / May 10, 2007
SEC v. Penthouse International, Inc., Charles Samel and Jason Galanis, 05 CV 0780 (RWS) (S.D.N.Y.)
The Securities and Exchange Commission today announced that it has settled its enforcement action against Penthouse International, Inc., Charles Samel, a former Director and Executive Vice-President of Penthouse, and Jason Galanis, a former shareholder. On April 27, 2007, the Honorable Robert W. Sweet of the United States District Court for the Southern District of New York entered final judgments that permanently enjoined Samel and Galanis from violating Section 10(b) of the Securities Exchange Act of 1934 (the "Exchange Act") and Rule 10b-5 thereunder, and from aiding and abetting violations of Section 15(d) of the Exchange Act, and Rules 12b-20, 15d-11, and 15d-13 thereunder, and in the case of Samel, Rule 15d-14 as well. Penthouse was also permanently enjoined from violations of these provisions. In addition, Samel and Galanis were each ordered to pay civil penalties of $60,000 and are barred for a period of five years from serving as officers or directors of public companies. Penthouse, Samel and Galanis, without admitting or denying the allegations in the complaint, consented to the entry of these final judgments.
The Securities and Exchange Commission filed its action against Penthouse, Samel and Galanis on January 24, 2005. The Commission's complaint alleged that Penthouse, Samel and Galanis engaged in accounting fraud and financial reporting violations at Penthouse in connection with the company's Form 10-Q for the quarter ended March 31, 2003. According to the complaint, Penthouse improperly included as revenue on the financial statements for that quarter $1 million received as an up-front payment in connection with a five-year website management agreement. The inclusion of the $1 million payment under the agreement increased Penthouse's reported revenue by approximately 9%, from $11,072,000 to $12,072,000 and changed a quarterly net loss of $167,000 to a purported net profit of $828,000. The Complaint alleged that Penthouse's Form 10-Q was materially misleading in several other respects. For example, the Commission alleged that it bore an unauthorized electronic signature of Robert C. Guccione, Penthouse's principal executive officer and principal financial officer, and thus represented that Guccione had reviewed and signed it, and the accompanying Sarbanes-Oxley certification. According to the complaint, this representation was false, as Guccione had not seen or approved the filing of the Form 10-Q or the Sarbanes-Oxley certification. Further, according to the complaint, Penthouse's auditors and outside counsel also had not reviewed the filing, a fact that also was not disclosed in the filing.
The Comission's complaint alleged that Samel and Galanis prepared and filed the false Form 10-Q, and they did so knowing or recklessly disregarding that Guccione had not seen or approved it, that Penthouse's auditor had not performed its required review of the Form 10-Q, and that it would be improper to include the $1 million payment as revenue for the quarter ended March 31, 2003.