Penthouse International, Inc., Charles Samel and Jason Galanis
U.S. SECURITIES AND EXCHANGE COMMISSION
Litigation Release No. 19048 / January 24, 2005
Accounting and Auditing Enforcement
Release No. 2173 / January 24, 2005
Securities and Exchange Commission v. Penthouse International, Inc., Charles Samel and Jason Galanis, 05 CV 0780 (RWS) (S.D.N.Y.)
SEC CHARGES PENTHOUSE INTERNATIONAL, INC., A FORMER OFFICER, AND A SHAREHOLDER WITH ACCOUNTING FRAUD, REPORTING VIOLATIONS, AND VIOLATIONS OF THE SARBANES-OXLEY CERTIFICATION RULES
SEC SIMULTANEOUSLY INSTITUTES AND SETTLES A RELATED CEASE-AND-DESIST PROCEEDING AGAINST ROBERT C. GUCCIONE, FORMERLY PENTHOUSE'S PRINCIPAL EXECUTIVE OFFICER AND PRINCIPAL FINANCIAL OFFICER
The Securities and Exchange Commission announced today that it filed a civil injunctive action against Penthouse International, Inc., now known as PHSL Worldwide, Inc., a former officer of Penthouse, Charles Samel, and a Penthouse shareholder, Jason Galanis, charging them with accounting fraud, reporting violations and violations of the Sarbanes-Oxley certification rules. The Commission also announced today that it instituted a separate settled cease-and-desist proceeding against Penthouse's former Chief Executive Officer, Robert C. Guccione. The Commission's complaint, which was filed in the United States District Court for the Southern District of New York, alleges that Penthouse, Samel and Galanis engaged in accounting fraud and financial reporting violations at Penthouse in connection with the company's Form 10-Q for the quarter ended March 31, 2003.According to the complaint:
- Penthouse improperly included as revenue on the financial statements for that quarter $1 million received as an up-front payment in connection with a five-year website management agreement. That payment should not have been recognized in that quarter because (1) the agreement was not actually signed until the following quarter, and (2) under generally accepted accounting principles (GAAP), the $1 million payment should have been recognized as deferred revenue and amortized into income over the five-year life of the agreement. The inclusion of the $1 million payment under the agreement increased Penthouse's reported revenue by approximately 9%, from $11,072,000 to $12,072,000 and changed a quarterly net loss of $167,000 to a purported net profit of $828,000.
- Penthouse's Form 10-Q was materially misleading in several other respects. For example, it bore an unauthorized electronic signature of Robert C. Guccione, Penthouse's principal executive officer and principal financial officer, and thus represented that Guccione had reviewed and signed it, and the accompanying Sarbanes-Oxley certification. This representation was false: In fact, Guccione had not seen or approved the filing of the Form 10-Q or the Sarbanes-Oxley certification. Penthouse's auditors and outside counsel also had not reviewed the filing, a fact that also was not disclosed in the filing.
- Samel and Galanis prepared and filed the false Form 10-Q, and they did so knowing or recklessly disregarding that Guccione had not seen or approved it, that Penthouse's auditor had not performed its required review of the Form 10-Q, and that it would be improper to include the $1 million payment as revenue for the quarter ended March 31, 2003.
- Penthouse then made two subsequent filings on Form 8-K that purported to correct misstatements in the 10-Q, but continued to make material misrepresentations and omissions. In both of these filings, Penthouse failed to disclose that Guccione had not reviewed, approved or signed the 10-Q or the attached Sarbanes-Oxley certification. In one of these filings, moreover, Penthouse misrepresented that Penthouse's disclosure controls and procedures were adequate.
The complaint alleges that Penthouse and Samel violated, and Galanis aided and abetted violations of, Section 10(b) of the Exchange Act, and Rule 10b-5 thereunder. Further, the complaint alleges that Penthouse violated Section 15(d) of the Exchange Act and Rules 12b-20, 15d-11, 15d-13 and 15d-14 thereunder, that Samel and Galanis aided and abetted violations of Section 15(d) of the Exchange Act and Rules 12b-20 and 15d-13 thereunder, and that Samel also aided and abetted violations of Rule 15d-14. In its complaint, the Commission seeks permanent injunctions and civil penalties as to all of the defendants; and officer and director bars against Samel and Galanis. The litigation is pending.
