SEC Charges Executives of Network Infrastructure Company with Accounting Fraud

Litigation Release No. 25141 / July 15, 2021

Securities and Exchange Commission v. Michael Palleschi and David Lethem, Case No. 2:21-cv-00530 (M.D. Fla. filed July 15, 2021)

The Securities and Exchange Commission charged the former CEO and CFO of FTE Networks, Inc., a network infrastructure company formerly based in Naples, Florida, with conducting a multi-year accounting fraud. This alleged scheme involved inflating the company's revenues for certain periods by as much as 108 percent, the misappropriation of millions of dollars of company funds for personal use, and concealing the then NYSE listed publicly-traded company's issuance of almost $23 million in convertible notes.

According to the SEC's complaint, Michael Palleschi and David Lethem, the former CEO and CFO, respectively, of FTE, directed the company to issue approximately $22.7 million in convertible notes with short-term maturities, steep interest rates, and market-price-based formulas for conversion into shares. As alleged, Palleschi and Lethem misled in-house accounting personnel and FTE's outside auditor about certain material terms of the notes, which were not properly accounted for or disclosed in FTE's financial statements. The complaint also alleges that Palleschi and Lethem inflated FTE's revenue by directing FTE to improperly recognize revenue and related accounts receivable for nonexistent construction projects. According to the complaint, Palleschi and Lethem misappropriated millions of dollars of company funds to pay for personal expenses, including luxury car leases, private jet services, and unauthorized salary increases.

The SEC's complaint charges Palleschi and Lethem with violating the antifraud provisions of Section 17(a) of the Securities Act of 1933 and Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder and the reporting provisions of Section 13(b)(5) of the Exchange Act and Rules 13a-14, 13b2-1, and 13b2-2 thereunder, and with aiding and abetting FTE's violations of the reporting provisions of Exchange Act Section 13(a) and Rules 12b-20, 13a-1, 13a-11 and 13a-13 thereunder, and of the books and records and internal controls provisions of Exchange Act Sections 13(b)(2)(A) and 13(b)(2)(B). Palleschi is also charged with violating Section 304 of the Sarbanes Oxley Act of 2002 and the proxy solicitation provisions of Section 14(a) of the Exchange Act and Ruiles 14a-3 and 14a-9 thereunder.

Separately, the U.S. Attorney's Office for the Southern District of New York announced criminal charges against Palleschi and Lethem for related misconduct.

The SEC's continuing investigation is being conducted by Sagiv Edelman and Kathleen E. Strandell in the Miami Regional Office and supervised by Jessica M. Weissman and Glenn S. Gordon. The SEC's litigation is being led by Robert K. Levenson and supervised by Andrew O. Schiff. The SEC appreciates the assistance of the U.S. Attorney's Office for the Southern District of New York and the Federal Bureau of Investigation.