A New York-based financial services company will pay $15 million to settle charges that it used fraudulent accounting practices to inflate reported revenues by $1.3 million to meet analyst expectations.
In an administrative proceeding, the U.S. Securities and Exchange Commission alleges that Bankrate Inc. improperly recorded revenue and avoided reporting several expenses for the second quarter of 2012.
As part of the settlement, Bankrate does not admit or deny the allegations.
Hyunjin Lerner, former vice president of finance, will pay a $180,000 fine to settle similar charges. Then-CFO Edward DiMaria and then-director of accounting Matthew Gamsey will continue to fight the charges in the U.S. District Court for the Southern District of New York.
According to the SEC complaint, after learning that the company’s preliminary financial results for the second quarter of 2012 fell short of analyst estimates, DiMaria “arbitrarily” decided to increase the company’s revenue to meet expectations for it’s adjusted earnings before interest, taxes, depreciation and amortization.
With Lerner and Gamsey’s assistance, DiMaria allegedly directed Bankrate’s insurance and credit card divisions to book round-dollar amounts of additional revenue without any support.
Bankrate’s insurance division booked the $300,000 of requested revenue to a dormant customer account with no intention of justifying the revenue until it was flagged by the company’s auditor, according to the complaint. The credit card division allegedly resisted DiMaria’s directive to book an additional $500,000, but still reported some improper revenue.
In response, DiMaria allegedly insisted that the remainder of the revenue that he ordered the credit card division to book be recorded by another business unit within the company, resulting in additional unsupported revenue being recorded to two arbitrary mortgage business customers.
After the SEC began to investigate the improper revenue, DiMaria allegedly attempted to conceal the fraud by attributing the revenue to a previously settled contract dispute.
The SEC also alleges that Bankrate improperly reduced $400,000 in expenses and failed to book almost $100,000 of expenses at all in order to meet analyst estimates. According to the complaint, an expense account and related accrual account was used as a cushion to manipulate the company’s financial results for at least a year.
As a result of the alleged fraud, Bankrate reported revenues of $37.5 million for the second quarter of 2012, beating analyst estimated by approximately $300,000. According to the SEC, if not for the improper accounting entries, the revenue would have only been $36.2 million.
When the company’s stock rose after announcing the inflated financial results, DiMaria allegedly proceeded to sell more than $2 million in shares.
DiMaria, Gamsey and Lerner allegedly lied to Bankrate’s auditor about the improper accounting entities. The commission claims that Lerner knew or was reckless in not knowing that the company’s actions and attempts to conceal the fraud violated Generally Accepted Accounting Principles.
In their settlement, Bankrate and Lerner consented to a cease-and-desist order barring them from future violations of federal antifraud, reporting and bookkeeping laws. In addition to the fine, Lerner has agreed to be barred from serving as an officer or director of a public company and from public company accounting for five years.
In the SEC’s continuing action against DiMaria and Gamsey, the SEC is seeking financial penalties and officer, director and public company accounting bars. In the action against DiMaria, the SEC also seeks recovery of improper profits from the sale of Bankrate stocks.
Bankrate publishes consumer financial services information through an online network that includes Bankrate.com, CreditCards.com, Interest.com, InsuranceQuotes.com, and CD.com, and offers customer leads to financial institutions. The company also provides editorial content and research to publications like AOL, CNBC, USA Today, and The Wall Street Journal.