Dive Brief:

• The former CEO and CFO of bankrupt telecommunications company Pareteum Corporation were arrested Thursday on charges of conspiracy, securities fraud and making false Securities and Exchange Commission filings, among other charges, the Department of Justice said in a press release.
• Victor Bozzo, the company’s former CEO and chief commercial officer, and Edward O’Donnell, its former finance chief,allegedly engaged in a scheme to “improperly and misleadingly recognize revenue,” according to the indictments unsealed Thursday by Damian Williams, United States Attorney for the Southern District of New York and James Smith, assistant director in charge of the New York Field Office of the Federal Bureau of Investigation.
• The two former executives, alongside other company executives, “allegedly schemed to inflate the company’s revenue, thereby making the company appear more profitable than it was and allowing Bozzo and O’Donnell to obtain performance bonuses they had not earned,” Williams said in a statement included in the release.

Dive Insight:

A telecom firm formerly based in New York, Pareteum provided Wifi connectivity services to airports, hotels and planes. In September 2022, the Securities and Exchange Commission accused the company of fraud, charging that it had inaccurate financial information in its corporate filings, the Wall Street Journal reported that May.

The SEC accused the company of materially misstating its revenue from a period between 2018 and 2019, by recognizing revenue from non-binding purchase orders before services had been delivered to customers, the unsealed indictment alleges.

While the company paid a $500,000 fine without admitting or denying liability, it also struggled to deal with a string of shareholder lawsuits which followed the SEC charges, and ultimately filed for Chapter 11 bankruptcy in May 2022 with its assets set to be sold to Circles MVNE Pte Ltd and Channel Ventures Group LLC in exchange for a combined $60 million in senior debt forgiveness, Reuters reported that month.

Both Bozzo, 54, and O’Donnell, 58, are facing charges relating to securities fraud and making false SEC statements for their part in the alleged scheme. Both former executives “understood that purchase orders were not sales contracts because, as they and others at Pareteum well knew, and Paretuem’s customers understood, the purchase orders did not reflect binding commitments. Instead, purchase orders typically reflected anticipated future sales,” the Thursday press release said.

As a result of the revenue recognition scheme, from at least in or about 2018 through the first half of 2010, Pareteum reported more than $40 million in revenue that it should not have, according to the indictment.

As well as allegedly inflating the company’s revenue, Bozzo and O’Donnell also then took steps to “mislead the independent certified public accountants engaged to audit Pareteum’s financial statements,” Williams said in his statement.   

The inflated revenue also gave the perception that the telecom company was “meeting aggressive revenue and growth projections, which served the ultimate goal of increasing Pareteum’s share price,” the indictment alleges.

When the revenue recognition fraud was revealed in 2019, the telecom company issued revised financial statements which reduced its previously reported revenue for the fiscal year by $12 million, or 60% of the ultimately restated revenue, according to the unsealed indictment. It also reduced previously reported revenue for the first and second quarters of that year by $30 million, over 90% of ultimately restated revenue.

In addition to Bozzo and O’Donnell’s indictments, Williams and Smith also announced settled charges against Pareteum’s former controller, Stanley Stefanski. Stefanski, who is cooperating with the government, pled guilty in September to charges relating to his participation in the scheme.

The DOJ did not immediately respond to requests for comment.