SEC Charges Two Former Officers of a Financial Technology Company with Accounting Fraud
Litigation Release No. 24439 / April 3, 2019
United States Securities and Exchange Commission v. Jeffrey C. Mack and Lawrence C. Blaney, Defendants, Civil Action No. 19-cv-00918 (D. Minn., filed April 3, 2019)
The Securities and Exchange Commission today announced charges against two former senior officers of Digiliti Money Group, Inc., a now-defunct Minneapolis, Minnesota financial technology firm, for their role in a fraudulent accounting scheme to improperly record revenue on sales with its largest customer.
According to the SEC's complaint, between September 2016 and July 2017, Jeffrey C. Mack, Digiliti's then CEO, and Lawrence C. Blaney, Digiliti's then VP of Sales, induced Digiliti's largest customer into signing sales contracts worth more than $1.8 million by covertly entering into a series of undisclosed side letters with favorable terms for the customer. The side letters allegedly gave the customer an unconditional right to cancel the contracts in the future, a contractual term which would preclude revenue recognition under generally accepted accounting principles ("GAAP"). However, according to the complaint, Mack and Blaney concealed the side letters from Digiliti's finance and accounting personnel, Board of Directors, and external auditor and, as a result, Digiliti improperly recognized revenue on the sales in its financial statements for the third and fourth quarters of 2016 and the first quarter of 2017. During this same period, Digiliti raised more than $18 million from investors.
The SEC's complaint, filed in federal court in the District of Minnesota, charges Mack and Blaney with violations of the antifraud provisions of Section 17(a) of the Securities Act and Section 10(b) of the Exchange Act, and Rules 10b-5(a) and (c) thereunder, the books and records provisions of Section 13(b)(5) of the Exchange Act and Rule 13b2-1 thereunder, and with aiding and abetting Digiliti's uncharged violations of the antifraud provisions of Section 17(a) of the Securities Act, Section 10(b) of the Exchange Act and Rule 10b-5 thereunder, and the books and records and reporting provisions of Sections 13(a) and 13(b)(2)(A) of the Exchange Act and Rules 12b-20, 13a-1, 13a-11 and 13a-13 thereunder. The complaint also charges Mack with violations of the antifraud provision of Rule 10b-5(b) of the Exchange Act, and with the books and records and reporting provisions of Rules 13a-14 and 13b2-2 of the Exchange Act. The SEC seeks permanent injunctions, disgorgement with prejudgment interest, a civil penalty and a permanent officer and director bar against Mack and Blaney.
The SEC's investigation was conducted by Kristopher S. Heston and Donald A. Ryba and was supervised by Amy S. Cotter, all of the Chicago Regional Office. The SEC's litigation will be led by Doressia L. Hutton, John E. Birkenheier and Mr. Heston.