U.S. Securities and Exchange Commission
Litigation Release No. 18364 / September 26, 2003
Accounting and Auditing Enforcement
SEC v. Thomas A. Sebastian, LACV 03-6909 SVW (FMOx) (C.D. Cal.)
SEC AND JUSTICE DEPARTMENT BRING CIVIL AND CRIMINAL ACTIONS CHARGING FORMER CFO OF COMPANY THAT ENGAGED IN FRAUDULENT BARTER DEALS WITH HOMESTORE
Defendant charged with scheme to overstate revenues to meet analyst expectations
The Commission, the United States Attorney's Office in Los Angeles, and the Federal Bureau of Investigation jointly announced the filing of civil and criminal complaints against Thomas A. Sebastian, the former chief financial officer of L90, Inc., a former internet advertising firm now known as MaxWorldwide, Inc. The civil and criminal actions allege that Sebastian participated in a scheme to generate fraudulent revenues through advertising barter transactions with other Internet companies in order to meet securities analysts' revenue estimates.
At the time of the offenses, L90 was based in Santa Monica and Marina del Rey, California, and its stock was traded on the NASDAQ National Market System.
According to the allegations in the Commission's complaint and the criminal complaint, L90, through its subsidiary webMillion.com, engaged in a series of advertising barter transactions with other Internet companies, swapped checks with those companies for the purported "value" of the bartered advertising, and fraudulently recorded those amounts as revenue without disclosing that they resulted from barter transactions. Frequently, L90 inserted a sham third party into the check swap in order to hide the true nature of the barter transaction from its auditors and the investing public. Sebastian concealed the use of the third party from L90's auditor and made false representations to the auditor about L90's financial statements. He also signed L90's Form 10-K and Forms 10-Q that were filed with the Commission containing false and misleading financial information. Furthermore, Sebastian made false and misleading statements concerning L90's revenue numbers on quarterly conference calls with analysts and investors.
Through the fraudulent barter transactions, L90 overstated its revenues in the third quarter of 2000 through the third quarter of 2001 by at least $4.3 million, or 7.9 percent overall, and by as much as 29 percent in one quarter. As a result, L90 was able to meet analysts' revenue estimates in all but one of these quarters.
Sebastian, a 39-year-old resident of Virginia, was L90's CFO from July 1999 until he was placed on administrative leave on March 10, 2002. He resigned on March 19, 2002.
The criminal complaint, which was filed September 24, 2003, in United States District Court in Los Angeles, charges Sebastian with conspiring to commit securities fraud, a charge that carries a maximum of five years imprisonment. Sebastian will be summoned to appear in federal court in Los Angeles on October 21.
The Commission's complaint, which was filed September 25, 2003, in United States District Court in Los Angeles, alleges that Sebastian violated or aided and abetted violations of numerous provisions of the federal securities laws, including 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; the reporting provisions of Section 13(a) of the Exchange Act and Rules 12b-20, 13a-1, and 13a-13 thereunder; the record-keeping provisions of Exchange Act Rule 13b2-1; the internal control provisions of Section 13(b)(5) of the Exchange Act; and the lying to the auditors provisions of Exchange Act Rule 13b2-2. The Commission is seeking a permanent injunction, disgorgement of all ill-gotten gains, a civil penalty, and an order barring Sebastian from serving as an officer or director of a public company.
The Commission and the United States Attorney's Office previously charged three former L90 officers for their involvement in the fraudulent barter scheme. John C. Bohan, L90's former CEO, president, and board member; Mark D. Roah, L90's former senior vice president of business development and board member; and Lucrezia Bickerton, L90's former vice president of finance, all pleaded guilty to criminal charges and settled with the Commission without admitting or denying the Commission's allegations. Bohan is scheduled to be sentenced in late January by United States District Judge Percy Anderson; Roah and Bickerton are scheduled to be sentenced in February.
Two of L90's fraudulent round-trip transactions involved Homestore.com, Inc. In previous actions, the Commission has charged a total of 11 individuals for their roles in a scheme to inflate Homestore's on-line advertising revenues. Seven of those individuals have also been criminally charged by the United States Attorney's Office in Los Angeles. That investigation remains ongoing.
The Commission also previously ordered MaxWorldwide, Inc., formerly known as L90, Inc., to cease and desist from violating the reporting, record keeping, and internal control provisions of the federal securities laws. The Commission found, among other things, that L90 materially overstated its revenues in 2000 and 2001 as a result of the improper barter transactions. MaxWorldwide consented to the entry of the order without admitting or denying the Commission's findings.
See the Complaint in this matter. For further information, see LR-18100 (Apr. 23, 2003).