The Securities and Exchange Commission has charged a Seattle-area skin care retailer and its former CFO with fraudulently boosting earnings by reporting sales of anti-aging products promoted through Home Shopping Network infomercials while the products still sat unsold in the company's warehouse.
The SEC alleges that Karl Redekopp, the former CFO of International Commercial Television Inc., turned millions of dollars of quarterly losses into profits by falsely accounting for ICTV's sales of the Derma Wand, a skin care appliance that purports to reduce wrinkles and improve skin appearance. Redekopp fraudulently recognized revenue before the Home Shopping Network had actually sold or delivered the product to viewers.
He also improperly recognized revenue before a free trial period offered by the company had expired, and failed to reverse revenue from products that had been returned. Redekopp's misconduct caused the company to falsely report millions of dollars in excess revenue in 2007 and 2008.
The SEC's complaint against Redekopp, filed in federal district court in Tacoma, Wash., alleges that Redekopp recorded "sales" of products that had not been shipped or that the customer was not obligated to pay for. Redekopp's fraudulent accounting resulted in ICTV adjusting net sales by more than $3.7 million over a five-quarter period in 2007 and 2008, negating all originally reported net income for those periods to restated net losses. For example, for year-end 2007 alone, ICTV restated its originally reported net income of $1.5 million to a net loss of $1.1 million after correcting the fraudulent reporting.
The SEC's complaint charges Redekopp, who lives in Vancouver, B.C., with violating various securities laws. The SEC is seeking a permanent injunction, a financial penalty, and an order barring him from serving as an officer or director of a public company.
In a separate complaint, the SEC charged ICTV for its misleading financial statements. Without admitting or denying the allegations, ICTV agreed to settle the charges by consenting to a final judgment permanently enjoining the company from future violations of the securities laws.
In addition, the SEC issued an order instituting public administrative proceedings against ICTV's Miami-based auditing firm, Dohan + Company CPAs, its managing director Steven H. Dohan, CPA, who was the concurring partner on the ICTV audits and quarterly reviews for 2004-2007; and former director Nancy L. Brown, CPA, who was the engagement partner on the ICTV audits and quarterly reviews during the relevant period. Also named was Erez Bahar, CA, a principal at Davidson & Company LLP, who managed the field work for Dohan + Company during the relevant period.
