U.S. Securities and Exchange Commission
Litigation Release No. 18100 /April 23, 2003
SEC v. John C. Bohan et al., CV 03-2834 R (RNBx) (C.D. Cal.)
SEC AND U.S. ATTORNEY'S OFFICE BRING CIVIL AND CRIMINAL FINANCIAL FRAUD ACTIONS AGAINST FORMER OFFICERS OF INTERNET ADVERTISING COMPANY
SEC files settled civil case against four former officers of company that overstated revenues to meet analyst expectations and orders the company to cease and desist; three former officers to plead guilty to criminal charges
The United States Securities and Exchange Commission, the United States Attorney's Office for the Central District of California and the Federal Bureau of Investigation today announced the filing of civil and criminal charges against former senior officers of L90, Inc. (currently known as MaxWorldwide, Inc. and headquartered in New York, NY), an Internet advertising firm that was located in Marina Del Rey, California. The civil and criminal actions allege that the officers engaged in fraudulent conduct that resulted in the overstatement of L90's revenues to the public in 2000 and 2001. Each of the defendants settled the Commission's action without admitting or denying the allegations in the complaint.
The Commission's civil complaint, filed today in United States District Court in Los Angeles, alleges that John C. Bohan, L90's former CEO, president, and member of L90's board of directors; Lucrezia Bickerton, L90's former vice president of finance; Mark D. Roah, L90's former senior vice president of business development and member of L90's board of directors; and Chantel J. Loo, L90's former controller and director of finance, engaged in a scheme to generate false revenues through fraudulent barter transactions with other Internet companies in order to meet stock analysts' revenue estimates. To generate revenue from these barter transactions, L90 swapped checks with the other companies or "round-tripped" cash through more than one third party. The essence of the round-trip transactions was a circular flow of money by which L90 improperly recognized revenue.
The Justice Department's criminal action, also filed this morning in federal court in Los Angeles, charges Bohan with criminal securities fraud. Bickerton and Roah are charged with being part of a conspiracy to commit securities fraud in connection with L90's fraudulent scheme. Roah also is charged in a separate conspiracy to fraudulently inflate the revenues of Homestore.com, Inc. As a participant in that conspiracy, Roah is charged with orchestrating "round-trip" transactions involving Homestore, L90 and other companies, which enabled Homestore fraudulently to recognize its own cash as revenue. In the process, a company controlled by Roah received over $650,000 cash.
Bohan, Bickerton, and Roah have agreed to settle the Commission's lawsuit, to plead guilty to the criminal charges, and to cooperate with the government in the ongoing investigation. Loo, who was not charged in the criminal case, has agreed to settle the Commission's lawsuit.
The Commission's complaint alleges that the primary scheme to inflate revenues involved ten barter transactions that L90 fraudulently recorded on its books. In five of these transactions, L90 agreed to exchange Internet advertising on its proprietary website, webMillion.com, with one other company, swapped checks of identical or similar amounts with the same company, and improperly recognized revenue on the money received in the exchange. In five other transactions, L90 agreed to exchange advertising on webMillion.com with at least one other company, engaged in the round-tripping of money through at least two other companies, and improperly recognized revenue on money received from the round-tripping. These transactions included two round-trip transactions with Homestore in which L90 recognized $500,000 in revenue. In a second revenue-generating scheme, L90 improperly booked revenue for a large advertising campaign despite the fact that Bohan and Bickerton knew that L90 would never receive payment for the campaign. Through these fraudulent practices, L90 overstated its revenues from Q3 2000 through Q3 2001 by at least $4.9 million, or 9.2%, and by as much as 29% in one quarter. L90 was thereby able to meet analysts' revenue estimates in all but one quarter.
The Commission's complaint charges Bohan, Bickerton, Roah, and Loo with securities fraud, lying to the auditors, falsifying L90's books and records, circumventing L90's system of internal accounting controls, and aiding and abetting L90's reporting violations. The Commission also charged Roah with aiding and abetting the fraudulent reporting of inflated Homestore revenues by certain of Homestore's employees.
The individuals charged, their alleged violative conduct, and terms of their plea agreements and settlements are:
In a related matter, the Commission today also announced that it ordered MaxWorldwide, Inc., formerly L90, Inc., to cease and desist from violating the reporting, record keeping, and internal control provisions of the federal securities laws. The Commission found that L90 materially overstated its revenues in 2000 and 2001 as a result of the improper barter transactions and advertising campaign and that L90 misclassified approximately $26 million of its research and development expenses in 2000 and 2001. L90 consented to the entry of the order without admitting or denying the Commission's findings.
The civil case is the product of an ongoing investigation by the Commission. The criminal case was investigated by the Federal Bureau of Investigation.