Two former executives of telecommunications company FTE Networks were arrested Thursday and charged with accounting fraud among a series of other alleged crimes.
Michael Palleschi and David Lethem, the former chief executive officer and chief financial officer of FTE, respectively, are alleged to have carried out an almost $23 million convertible notes fraud, in addition to recognizing more than $13 million in fraudulent revenue. Charges against the two were handed down by both the Securities and Exchange Commission (SEC) and the U.S. Attorney’s Office for the Southern District of New York (SDNY).
FTE was publicly traded on the New York Stock Exchange from December 2017 until it was delisted in December 2019. The company was formerly headquartered in Naples, Fla., before moving to New York.
Palleschi served as FTE’s CEO and chairman of the board from 2014 until he was placed on unpaid leave in January 2019. He resigned in May 2019. Lethem served as CFO from 2014 until he resigned in March 2019.
During their tenure at the company, the two sought to raise money through high-risk convertible notes with short-term maturities and steep interest rates that they allegedly concealed from the board of directors, other accounting personnel, FTE’s auditing firm, and shareholders. This included Lethem allegedly lying to accountants about the nature of the notes, which he was duplicating for the purposes of making them appear as if they weren’t convertible. From mid-2017 through late 2018, Palleschi and Lethem signed letters attesting FTE’s financials were in accordance with GAAP despite not properly accounting for the notes, according to the SEC’s complaint.
The total value of the notes issued was approximately $22.7 million, the agency stated.
Further, Palleschi and Lethem allegedly recognized approximately $12.5 million of revenue from purportedly completed construction projects the company had not worked on nor billed for. This was recognized in the company’s 2016 financial statement, resulting in a 108 percent overstatement of revenue, the SEC stated. Additional fictitious payments for unbilled work were booked in 2017 and 2018, and Palleschi and Lethem provided auditors with false documents justifying the fraud, the agency continued.
The SEC and SDNY also alleged Palleschi and Lethem misappropriated millions of dollars from FTE for personal expenses, including private jet use, luxury automobiles, personal credit cards, unauthorized wire transfers, and stock issuances. “All told, Palleschi misappropriated at least $4.3 million from FTE, and Lethem misappropriated approximately $1.1 million,” the SEC concluded.
Following an internal investigation, FTE restated its financial statements for the yearly and quarterly periods for 2016, 2017, and 2018.
The SEC’s complaint seeks permanent injunctions and monetary penalties against Palleschi and Lethem, including a clawback of equity-based compensation paid to Palleschi during the alleged fraud. SDNY’s charges of conspiracy, securities fraud, wire fraud, improperly influencing the conduct of an audit, and aggravated identity theft include the potential for significant prison time.
“Concealing a company’s true financials from investors is not only an unscrupulous business practice, but in the case of Palleschi and Lethem, as we allege today, it amounted to a federal crime,” said FBI Assistant Director William Sweeney Jr. in a press release. “Financial fraud schemes are all too common, and in order to maintain investor confidence, we need to hold accountable those who perpetrate them.”
Benchmark Builders, acquired by FTE in 2017, said in a statement in response to Thursday’s announcements that it blew the whistle to New York prosecutors regarding Palleschi and Lethem’s alleged misconduct.
“Today’s indictments are the culmination of the difficult decision we made late in 2018 to protect our subcontractors and clients when we contacted the Manhattan District Attorney about the improper use of trust fund money,” the construction company said. “We invested our own personal resources into the business to protect the subcontractors and their workers and separated ourselves from FTE almost 2 years ago. … We are happy to have this behind us and will work with renewed focus on servicing our customers.”
Editor’s note: This story was updated July 16 to add a statement from Benchmark Builders.