The SEC has filed proposed final judgments against Live Ventures CEO John "Jon" Isaac and former CFO Virland Johnson. The regulator alleged that Isaac engineered $915,500 in improper other income, increasing fiscal 2016 pre-tax income by 20%, and later published earnings per share that were 40% above the audited figure. Johnson allegedly made false statements to Live Ventures' outside accountants. The proposed settlements include combined civil penalties of $293,225.
U.S. Securities and Exchange Commission (SEC)
Official Release:
https://www.sec.gov/enforcement-litigation/litigation-releases/lr-26613
NEWS:
The SEC's amended complaint alleged that Live Ventures and Jon Isaac improperly recognized $915,500 of "other income" in the company's fiscal 2016 financial statements. The amount arose from an amendment to a software agreement with Colombian company Novalk Apps. According to the complaint, the original agreement required Live Ventures to pay $1.5 million, but Isaac later negotiated an amendment that reduced the obligation to stock valued at approximately $584,500. The difference was recorded as other income. The SEC alleged that negotiations did not begin until approximately two months after Live Ventures' fiscal year had closed, even though the amendment identified an effective date before the year-end. Under the subsequent-events accounting guidance cited in the complaint, a transaction based on conditions arising after the balance-sheet date could not properly be recognized in the earlier reporting period. The $915,500 entry was material because it allegedly increased Live Ventures' reported pre-tax income by 20%. The SEC further alleged that management representations to the company's outside accountants did not disclose when the negotiations actually began, preventing the accountants from accurately evaluating whether the income belonged in fiscal 2016.
The alleged disclosure problem extended from the audited financial statements into Live Ventures' public earnings announcement. Isaac allegedly calculated fiscal 2016 earnings per share using approximately two million shares as the denominator, even though the weighted-average share count in the company's audited Form 10-K was approximately 2.8 million. That lower denominator produced announced earnings per share of $8.92, compared with audited earnings per share of $6.33—a difference of approximately 40%. According to the complaint, the press release did not explain that it used a different share count or prominently reconcile the figure with the audited result filed the following day. The SEC alleged that the lower denominator depended on a planned exchange of common shares for preferred shares that had not been completed when the results were released. The complaint also described promotional activity surrounding the announcement and alleged arrangements to sell Live Ventures shares if the market reacted favorably. In a separate accounting issue, the SEC alleged that Live Ventures prematurely treated its acquisition of ApplianceSmart as completed in late 2017, allowing it to record a bargain-purchase gain exceeding $3.7 million in a quarter that otherwise would have reported a loss. Johnson, then Live Ventures' CFO, allegedly made false statements to outside accountants in a February 2018 management representation letter concerning that transaction.
Without admitting the allegations, Isaac and Johnson consented to proposed final judgments that remain subject to court approval. Isaac would be permanently enjoined from violating Sections 17(a)(2) and 17(a)(3) of the Securities Act and would pay a $175,000 civil penalty. Johnson would be permanently enjoined from violating Exchange Act Rule 13b2-2, which addresses materially false or misleading statements and omissions made to accountants in connection with audits and required filings, and would pay a $118,225 civil penalty. The case illustrates why an earnings press release should pass through the same accounting and disclosure controls applied to an SEC filing. Even when net income is taken from audited statements, changing the weighted-average share denominator can materially alter earnings per share and the market's perception of performance. Effective controls should require finance, legal and audit personnel to reconcile every headline metric with the corresponding Form 10-K or Form 10-Q, document the basis for post-balance-sheet adjustments, confirm that equity transactions are legally completed before using them in share calculations and escalate unexplained differences to the audit committee. Investors can perform a similar check by comparing earnings releases with the financial statements filed shortly afterward, particularly when reported EPS, acquisition gains or other income materially affect whether the company appears profitable.
KEY POINTS:
- The SEC alleged that a post-year-end software agreement generated $915,500 in improperly recognized other income and increased Live Ventures' fiscal 2016 pre-tax income by 20%.
- Isaac allegedly used a share count of approximately two million instead of the audited weighted-average count of roughly 2.8 million.
- The resulting $8.92 earnings-per-share figure was approximately 40% higher than the $6.33 reported in Live Ventures' audited Form 10-K.
- Johnson allegedly made false statements to outside accountants in connection with a management representation letter involving the ApplianceSmart acquisition.
- The proposed judgments would require Isaac to pay $175,000 and Johnson to pay $118,225, with both settlements remaining subject to court approval.