Synchronoss to pay $12.5M over alleged accounting misconduct by former execs

Seven Synchronoss senior employees, including the former chief financial officer, controller, and general counsel, were charged in connection with the alleged misconduct, the SEC stated in a press release.

According to the SEC’s order, from at least 2013 through 2017, Synchronoss engaged in “improper accounting,” with certain instances attributed to the actions of its senior executives. As a result, the company filed “materially misstated financial statements in its annual, quarterly, and current reports” during the relevant period.

“The impact of the improper accounting was material and in many instances allowed the company to meet earnings targets,” the SEC stated.

The agency filed a complaint in U.S. District Court for the Southern District of New York against former Synchronoss CFO Karen Rosenberger and former Controller Joanna Lanni. Rosenberger is accused of aiding and abetting the public filing of materially false financial statements and engaging in fraud with respect to three transactions, while Lanni is accused of aiding and abetting the company’s “improper revenue recognition” and circumventing accounting controls in connection with one transaction by providing a materially misleading memorandum to the auditor.

Rosenberger allegedly tried to cover up her misconduct by lying to an auditor, falsifying the company’s books, and failing to implement or maintain the company’s system of accounting controls, according to the complaint.

In May 2017, Synchronoss announced it would not be able to file its Form 10-Q on time. Over the next few months, its audit committee announced financial statements for fiscal years 2014-16 and respective quarterly periods could not be relied on.

The company in 2018 announced a restatement for FY2015-16 and restated selected financial data for FY2013-14 totaling approximately $190 million in cumulative revenues for the four-year period, according to the SEC.

The restatement primarily related to three categories of transactions, for which Synchronoss improperly recognized revenue, the SEC stated:

1. Transactions for which there was not persuasive evidence of an arrangement;
2. Acquisitions/divestitures in which it recognized revenue on license agreement(s) instead of combining those purported amounts with the purchase or sales prices; and
3. License/hosting transactions, in which it converted prior multiterm software-as-a-service agreements into perpetual license agreements and improperly recognized the revenue upfront, instead of recognizing it ratably over the term of the arrangements.

Without admitting or denying the SEC’s findings, Synchronoss agreed to cease and desist from securities law violations and pay a civil penalty of $12.5 million.

Ronald Prague, the company’s former general counsel and chief legal officer, settled charges stemming from his involvement in misleading auditors regarding two transactions and was ordered to pay a civil penalty of $25,000 and be suspended from appearing and practicing before the SEC as an attorney for 18 months.

The company’s founder and former chief executive, Stephen Waldis, agreed to reimburse more the $1.3 million in stock sale profits and bonuses without being charged and return previously granted shares of company stock pursuant to the Sarbanes-Oxley Act.

The action comes eight months after the Public Company Accounting Oversight Board penalized two EY auditors for “failing to perform adequate procedures and obtain sufficient evidence concerning certain significant unusual transactions” in connection with the Big Four firm’s audit of Synchronoss.

Accounting deficiencies: Synchronoss acknowledged “pervasive material weaknesses” in its internal control over financial reporting for the restatement period, according to the SEC’s order, including:

• Failure to ensure the basic elements of revenue recognition were always met and accounted for appropriately;
• Failure to maintain adequate oversight to guide individuals in applying internal control over financial reporting in preventing or detecting material accounting errors due to inadequate information;
• Failure to design and maintain adequate review and approval controls when recording complex or nonroutine transactions;
• Failure to maintain sufficient personnel with an appropriate level of accounting knowledge, experience, and training in the application of Generally Accepted Accounting Principles (GAAP) commensurate with the size of the entity and nature and complexity of financial reporting requirements; and
• Failure to consistently maintain a corporate culture that prevented the occurrence of certain deviations from the company’s policy.

Synchronoss response: In a statement, the company acknowledged the settlement with the SEC and noted the $12.5 million fine would be paid “in equal quarterly installments over two years.”

“We are pleased to have entered into this settlement with the SEC regarding this legacy matter and look forward to continuing to place our focus on the company’s strategic growth initiatives,” said Jeff Miller, president and CEO of Synchronoss. “This matter relates to historical transactions that the company restated almost four years ago, and Synchronoss believes that reaching this resolution now is the right outcome for our shareholders, customers, and key stakeholders.”