California Telecommunications Equipment Company Charged In Revenue Recognition Scheme

September 26, 2014 — Investors must be able to trust companies’ publicly filed SEC reports. When instead, companies file phony reports and deliberately deceive investors, the financial fraud whistleblower program established by the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act) of 2010 should be notified. Tipsters who collaborate with the Securities and Exchange Commission (SEC) about companies that deceive the public and their investors may be rewarded. Whistleblowers receive rewards amounting to as much as thirty percent of the amount the government recoups, provided it exceeds $1 million.

AirTouch And Former Executives Allegedly Recognized Unsold Inventory As Revenue And Then Misled Investor To Obtain $2 Million Bridge Loan

A California telecommunications equipment company and two former executives have been charged by the SEC with improperly recognizing more than $1 million in inventory as revenue. In addition, they allegedly defrauded an investor who made a $2 million loan to the company.
In 2012, AirTouch developed the U250 SmartLinx for use by Mexico’s largest provider of land-based telephone services. AirTouch contacted a Florida company about warehousing the units for future sale to the Mexican company or some other entity. During negotiations, the Florida CEO told AirTouch’s former president and CEO Hideyuki Kanakubo that it would warehouse the units, but not buy them. AirTouch shipped over $1 million in inventory to the Florida company to be warehoused until they could be sold to someone.
When it was time to file AirTouch’s Form 10-Q for the third quarter of 2012, the company had zero revenue to report. Rather than file a truthful account of the company’s position, Kanakubo and former CFO Jerome Kaiser allegedly schemed to commit financial fraud by reporting that the inventory warehoused in Florida as more than $1.03 million in revenue on the Form 10-Q. The former executives allegedly falsely attested to the accuracy of AirTouch’s financial results in their signed certifications. Under Generally Accepted Accounting Principles (GAAP), however, a company cannot recognize revenue until it is “realized or realizable” and “earned.” By the alleged violation of this principle, AirTouch and its former executives engaged in a fraudulent revenue recognition scheme.
Kanakubo and Kaiser then allegedly relied on the phony revenue claim made in the Form 10-Q to induce an investor to make a $2 million bridge loan to AirTouch. Kanakubo allegedly falsely assured the investor that a purchase order existed for the Mexican telephone company to buy the units warehoused in Florida. Kaiser reportedly failed to disclose the agreement with the Florida company, which contract made clear that the units were only warehoused there. Two days after AirTouch received the investor’s $2 million loan, Kanakubo approved a $15,000 bonus to Kaiser and a $15,000 payment to himself for unused vacation time.

Whistleblowers Notify SEC About Misleading SEC Filings That Deceive Investors

While Waters & Kraus is not handling this particular case involving phony SEC filings, we are representing whistleblowers in similar matters involving the fraudulent deception of innocent investors. If you have comparable claims against your employer or another business, contact us by email or call our qui tam attorneys at 855.784.0268 to learn more about our practice and how we can collaborate throughout the Dodd-Frank whistleblower process. Our experienced attorneys, such as Michael Armitage and Louisa Kirakosian in the California office, protect and advance tipsters’ interests.

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