As discussed in this press release, the SEC has announced Orders settling charges against Ideanomics, Inc., its current CEO and former CFO, as well as its former Chair and CEO, for alleged misleading statements about the company’s financial performance between 2017 and 2019. There were multiple alleged fraudulent acts, but featured most prominently was an allegation that the Company and the former Chair/CEO reported 2017 revenue guidance that ended up being well off the mark, “despite numerous known issues indicating that the company would miss this guidance by a wide margin.” The Company later reported 2017 revenues that were less than half of the amount represented to the public in its guidance. According to the Associate Director of Enforcement, as the SEC alleged, “Ideanomics and its executives defrauded investors, including by misstating its financial statements and failing to disclose material information to investors….The investing public must be able to trust the accuracy of a company’s disclosures, and we will hold accountable executives who abuse that trust by engaging in fraud.”
As described in the Order, Ideanomics, at the time, a Nasdaq-listed Nevada corporation, has been engaged in a variety of business activities, from video-on-demand to petroleum trading products, artificial intelligence, financial technology, and assisting companies and governments in their transitions to electric vehicles. (Note, however, that, as reported by Law360, the Company has disclosed that its shares were being delisted as a result of noncompliance with Nasdaq listing rules.) The Order alleges that, in November 2017, the Company issued a press release reporting its third quarter revenue of $30 million and reiterating its prior fiscal 2017 revenue guidance of $300 million. The guidance included a statement from the former Chair/CEO that Ideanomics was “on track to reach its top-line revenue guidance of $300 million.” In a subsequent November conference call with investors, he again repeated that the Company would meet the $300 million revenue forecast. But for the year to date, revenue was only $107 million, and annual revenue for each of the two prior fiscal years was only $4.6 million. To achieve its guidance, the Company would have needed to record an additional $193 million in revenue in the fourth quarter of 2017.
There were two revenue sources that were projected to be the sources for most of the Company’s 2017 revenue. At the time the guidance was issued, the SEC alleged, the Company and the former Chair/CEO were “aware of material adverse facts” relating to each of those revenue sources that “would potentially prevent—and in fact did prevent—Ideanomics from achieving its revenue guidance.” Specifically, they allegedly knew that the bank accounts of one of the revenue sources had been frozen by governmental authorities and that delays in setting up the other revenue source meant that it had not begun to generate any revenue as of mid-November. Moreover, just prior to issuance of the guidance, the SEC alleged, “senior Ideanomics personnel had concerns about the revenue guidance. During a November 9, 2017, board meeting, senior personnel discussed the Company’s $300 million revenue guidance, and the consensus of the board was to recommend…that the guidance be lowered because of the facts discussed above. Although Ideanomics’s President and Chief Revenue Officer advised [the former Chair/CEO] that he did not believe the Company should issue guidance, [the former Chair/CEO] decided to keep the $300 million guidance in place.” When the guidance was issued, the adverse information about the revenue sources was not disclosed to investors. As a result, the SEC charges, the former Chair/CEO “knew or should have known that Ideanomics’s and [his] November 13, 2017, statements were misleading.” In February 2018, “Ideanomics announced that it expected that it would miss the guidance by a wide margin, resulting in a 39% decrease in the price of Ideanomics’s stock. On March 30, 2018, the Company reported $144 million in revenue for 2017, a shortfall of $156 million.”
The SEC also alleged a veritable potpourri of other charges: generally, it was alleged that the Company overstated the value of an acquired interest in a joint venture; failed to identify in SEC filings a number of transactions as related-person transactions; failed to disclose that a number of transactions substantially benefitted the former Chair/CEO; misstated its financial statements by failing to take impairment charges on certain licensed content, using a fraudulent letter of intent provided by the former Chair/CEO to avoid the write-off and relying on an unsupported valuation report; and improperly recognized $260 million of oil trading revenue on a gross basis as a principal rather than as an agent, when it should have reported $0 since it earned no net revenue on these transactions. In addition, the SEC charged, the Company and its executives made false representations regarding its internal control over financial reporting, and executives provided false management rep letters to auditors. And the list of allegations goes on. There were even allegations of complex manipulation of an agreement related to crypto tokens.
The former CFO and the current CEO were alleged to have played a role in some of this fraudulent activity. For example, shortly after he joined the Company, the former CFO “learned that Ideanomics received little to no revenue from the Licensed Content.” He allegedly failed to test the content for recoverability for two quarters, but finally, for a year-end impairment assessment, the former CFO commissioned a valuation report of the licensed content. The valuation firm relied on a 20-year cash flow forecast provided by Ideanomics, which, the SEC charged, was unsupported by any substantive business plan. According to the SEC, the former CFO “failed to obtain an understanding of how Ideanomics’s cash flow forecasts were prepared, despite knowing that the Company had reported material weaknesses in its ICFR in 2017 and 2018 related to cash flow forecasts for the Licensed Content. The Company then relied upon this valuation report to conclude that there was no impairment to the Licensed Content for year-end 2018.” Similarly, the SEC alleged that, although the current CEO believed that Ideanomics’s record-keeping “was not appropriate for a public company,” he nevertheless “signed Ideanomics’s 2018 Form 10-K which represented that Ideanomics management had evaluated the effectiveness of ICFR,” based solely on his belief that the former CFO and the Company’s audit committee had performed an evaluation of ICFR. “As the Company’s CEO with responsibility over ICFR,” the SEC concluded, the CEO “should have conducted more diligence than relying on [the former CFO] and the audit committee’s representations, especially in light of the known weaknesses in the Company’s accounting and record-keeping.”
The SEC’s order against Ideanomics, the CEO and former CFO found that Ideanomics “violated the antifraud, reporting, internal control, and books and records provisions of the federal securities laws.” (Just so you know, that’s Section 17(a) of the Securities Act and Sections 10(b), 13(a), 14(a), 13(b)(2)(A) and 13(b)(2)(B) of the Exchange Act and Rules 10b-5, 12b-20, 13a-1, 13a-13, 13a-15(a), 13a-15(c), and 14a-9 thereunder.) The CEO and former CFO were found to have violated the antifraud, reporting and books and records provisions and caused certain of the Company’s violations. The SEC’s order against the former Chair/CEO found that he violated the antifraud, reporting, internal control and books and records provisions of the federal securities laws and also caused certain of the Company’s violations.
Ideanomics agreed to pay a “$1.4 million penalty and to retain an independent compliance consultant to review, assess, and make recommendations as to the company’s internal accounting controls.” The former Chair/CEO agreed to pay more than $3.3 million in disgorgement and prejudgment interest and a $200,000 penalty and also agreed to a 10-year officer and director bar. The CEO and former CFO each agreed to pay a $75,000 penalty, and the former CFO “agreed to be suspended from appearing and practicing before the SEC as an accountant for at least two years.”
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