The SEC seldom charges audit committee members in cases alleging company accounting or disclosure violations. However, SEC v. Joshua A. Weiss and Grainne M. Coen, is the exception that proves the rule. In that action, filed in the Southern District of New York on September 16, the SEC alleges that Grainne M. Coen, former chair of the audit committee of Kubient, Inc., engaged in fraud, made false statements to the company’s auditor, and aided and abetted false SEC filings in connection with the overstatement of the company’s revenue. The Commission is seeking an injunction against future violations, civil money penalties, and a bar against Ms. Coen’s serving as an officer or director of a public company. The complaint also charges Joshua Weiss, Kubient’s former Chief Financial Officer, with participating in the scheme to misstate revenue. The Commission filed a separate action against Paul D. Roberts, Kubient’s former Chair, CEO, and president. Roberts pled guilty to securities fraud in a related criminal case.
The complaint alleges that, before Kubient’s initial public offering in August 2020, Roberts caused Kubient to fraudulently inflate its revenue to demonstrate that Kubient Artificial Intelligence (“KAI”), a product that Kubient marketed as able to detect fraud during digital advertising auctions, was commercially successful. According to the complaint, KAI had in fact not generated any meaningful revenue and Roberts “fabricated fraud analyses that he claimed were prepared by KAI for two customers as part of beta tests despite Kubient not obtaining the customers’ data to analyze.” Further, “Kubient claimed it received over $1.3 million in ‘revenue’ for analyzing the customers’ data when, in fact, Kubient never performed the analyses to generate revenue.” The $1.3 million represented about 94 percent of Kubient’s reported revenue at the time of the IPO and over 74 percent of its total 2020 revenue.
Later in 2020, Kubient made a secondary public offering. On the day of that offering, Mr. Weiss and Ms. Coen allegedly learned that the beta tests had not been performed. The SEC claims that, despite discovering this fact, “neither [Weiss nor Coen] investigated the circumstances of Kubient recording the $1.3 million in revenue, and instead both continued the CEO-initiated scheme. They did not correct the public statements to investors about the tests and the associated revenue, and indeed made additional false statements in Kubient’s later public filings.”
Some of the specific acts that Ms. Coen, the audit committee chair, is alleged to have taken in furtherance of the fraud include:
An employee (“Employee 3) had informed Ms. Coen that the data scanned as part of the KAI beta test had not come from the customers represented as its source. Nonetheless, “Coen did not take meaningful steps to understand the circumstances underlying Employee 3’s discovery, did not confirm or try to understand whether the Customers provided any data to Kubient, how Kubient could have analyzed the wrong data, or whether Kubient ever provided a KAI fraud analysis to the Customers.”
Ms. Coen did not inform Kubient’s independent auditor of, and the auditor did not attend, the audit committee meeting at which the committee discussed Employee 3’s concerns even although Ms. Coen invited the auditor to attend other committee meetings during the relevant period. No minutes were prepared for that meeting, although minutes were prepared for other audit committee meetings.
During the independent auditor’s 2020 year-end audit interview, Ms. Coen orally advised the auditor, in response to questions, that she was not aware of any tips or complaints regarding the company’s financial reporting, that she and the audit committee did not have knowledge of any fraud or suspected fraud affecting the company, and that she was not aware of any other matters relevant to the audit. In light of Employee 3’s concerns about the source of the customer information used in the beta testing, the Commission alleges that these statements were false and misleading.
Coen signed various SEC filings that contained false and misleading statements about the $1.3 million in KAI revenue and about the success of the KAI beta test.
Audit Committee Takeaways
This case is unlike most SEC enforcement actions that involve reporting violations in that, according to the Commission’s allegations, the audit committee chair was aware of information that, at minimum, raised serious questions about the accuracy of the company’s disclosures. Moreover, Ms. Coen was not merely passive in the face of information that called the company’s revenue into question. She took affirmative steps to prevent the company’s auditor from learning that an employee – in effect, a whistleblower – had brought to her attention facts that, if true, undermined the company’s accounting. Further, she continued to sign SEC filings that reflected the revenue. In short, based on the Commission’s allegations, Ms. Coen appears to have made herself a participant in the fraud.
In the press release announcing the filing of its actions, Jason J. Burt, Director of the SEC’s Denver Regional Office said: “This case should send an important signal to gatekeepers like CFOs and audit committee members that the SEC and the investing public expect responsible behavior when critical issues are brought to their attention.” Audit committees should of course follow this advice. While cases against audit committee members are likely to remain rare, the SEC can be expected to act aggressively when an audit committee member ignores obvious red flags and takes steps to conceal them from the company’s auditor.
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