A Texas-based IT firm and its former chief financial officer settled charges brought by the Securities and Exchange Commission (SEC) alleging failure to properly account for and record liabilities related to a shareholder lawsuit.
Exela Technologies and former CFO James Reynolds agreed to pay $175,000 and $10,000, respectively, to settle claims they violated reporting, controls, and recordkeeping provisions of federal securities law, the SEC said Monday.
According to the agency’s order, Exela failed to properly account for and report liabilities when it was sued by minority shareholders who dissented from a 2017 merger. From 2017-19, the company failed to accrue for any payment it would have to make to those shareholders, despite disclosing the shareholders’ claim in SEC filings.
“The order finds that Exela also failed to properly identify; account for; and in one quarter, disclose certain related party transactions with an entity that was controlled by company leadership,” the SEC said in an administrative proceeding. Reynolds caused Exela’s failure to identify and disclose two of those transactions in one 2019 quarterly filing, the agency said.
Without admitting or denying the agency’s findings, Exela and Reynolds agreed to cease-and-desist orders, as well as paying the fines.
The merger that created Exela was formed when SourceHOV Holdings and another private company were purchased by a special purpose acquisition company (SPAC). SourceHOV became a subsidiary of Exela because of the SPAC merger, an arrangement certain SourceHOV shareholders objected to, according to the SEC’s order. Those shareholders sought a court determination for the fair value of their shares.
A Delaware court awarded the shareholders more than $57 million for their shares. Exela disclosed the verdict “but did not accrue for any potential resultant loss, stating that it was unable to predict the outcome of the appraisal action or estimate any loss that might arise from it,” the order said. The company and its auditor would later determine that failure to accrue for the potential liability was in error.
Exela did not respond to a request for comment.