On September 2 and 3, 2021, the Securities and Exchange Commission (“SEC”) announced settlements with Pareteum Corporation (“Pareteum”) and Kraft Heinz Co.[1] (“KHC”) for accounting fraud following years of alleged accounting improprieties and financial restatements at both companies.  The underlying facts differed in significant ways, including with respect to the alleged involvement of senior executives, but both companies apparently received cooperation credit for their prompt and proactive remediation and cooperation with the SEC Division of Enforcement’s investigations.  The messaging in relation to the announcement of these cases and their timing, coming in the early days of new Enforcement Director Gurbir Grewal’s tenure, is instructive.  We expect the SEC to continue to focus on accounting fraud and to credit companies who provide cooperation in these challenging and resource-intensive investigations.  To see a meaningful increase in the frequency and nature of cooperation, the SEC would be well-served to provide even more explicit guidance on how cooperation results in improved settlement terms.  That said, these recent settlements are helpful in understanding the benefits of cooperation at this time.

Kraft Heinz Co.

The SEC alleged that KHC engaged in a multi-year expense management scheme to improperly achieve publicized cost savings, which inflated the Company’s EBITDA performance metric.  The settlement order cited 59 transactions from 2015 to 2018 with allegedly false and misleading documentation negotiated by procurement division personnel.  The scheme included (i) “prebate transactions,” where KHC agreed to future commitments in exchange for future discounts and credits, but stated that the savings were for past or same-year purchases, (ii) “clawback transactions,” where KHC agreed to upfront payments subject to repayment through future price increases or volume commitments, but obscured the repayment obligation in its documentation, and (iii) “price phasing transactions,” where KHC received reduced prices for a certain period in exchange for offsetting price increases in future periods, but failed to communicate the full agreement.  KHC restated its financials in June 2019, correcting approximately $208 million in misstated cost savings arising from 295 total transactions.

The settlement terms included negligence-based antifraud violations of Sections 17(a)(2) and 17(a)(3) of the Securities Act, as well as violations of the books and records provisions of Securities Exchange Act Sections 13(a) and 13(b), and a $62 million civil money penalty.  The settlement order also expressly noted the cooperation and remediation undertaken by KHC, including KHC expanding the scope of its internal investigation, taking disciplinary actions and improving its compliance framework.

Pareteum Corp.

The SEC alleged that Pareteum engaged in accounting and disclosure fraud over an eighteen month period, in which it materially overstated revenues on non-binding purchase orders in violation of GAAP.  In addition, the SEC alleged that senior accounting employees at Pareteum had taken steps to conceal these practices from Pareteum’s external auditor, including by instructing sales staff to lie to customers in order to get them to sign confirmations sent by Pareteum’s auditor when it attempted to confirm the validity of receivable amounts.  Pareteum restated its financials in December 2020, correcting approximately $42 million in overstated revenue for 2018 and 2019.

After determining that a restatement was needed, Pareteum’s Audit Committee began an independent investigation that resulted in Pareteum firing multiple senior executives, including the Chief Executive Officer, Chief Financial Officer, Chief Commercial Officer and Chief Revenue Officer, and replacing its Controller.  The settlement order described extensive remediation and cooperation efforts with the Staff’s investigation.

The settlement terms included scienter-based antifraud violations of Section 10(b) of the Securities Exchange Act and Section 17(a) of the Securities Act, as well as violations of the books and records provisions of Securities Exchange Act Sections 13(a) and 13(b), undertakings to cooperate fully with the Staff’s ongoing investigation and to use its best efforts to cause current and former employees to testify, and a $500,000 civil money penalty.


The SEC often includes references to “cooperation” and “remediation” in settlements orders, similar to the KHC order in which it noted that KHC had cooperated with the SEC and undertaken certain remedial actions.[2]  While the penalty was significant ($62 million), the company was able to avoid scienter-based fraud charges.

The Pareteum settlement order described the company’s cooperation and remediation in more specific and extensive terms, acknowledging numerous cooperation and remedial efforts, including personnel action against senior management.  While Pareteum was charged with scienter-based fraud, it is not surprising given the alleged misconduct involved such senior executives, and the penalty of $500,000 plainly reflects credit for the company’s actions.

Finally, we view as significant that these settlements involved accounting fraud.  The SEC has been signaling an intent to return to bringing these cases, including through leveraging risk-based data analytics such as those used in the SEC’s Earnings Per Share (“EPS”) Initiative,[3] to uncover potential violations.  The Division of Enforcement highlighted in its 2020 Annual Enforcement Report, as well as in recent press releases for enforcement actions,[4] that financial reporting cases will continue to be a focus, as will holding executives responsible for violations accountable.  We believe that accounting fraud will be a central focus of the Enforcement Division under Gurbir Grewal’s leadership.  Similarly, we expect—and hope—that the SEC will continue to provide more tangible and measurable credit for cooperation.  This increased transparency will allow companies to more effectively consider and evaluate the benefit that can be achieved from cooperation and internal investigations, which can be very expensive and disruptive to the business.

[1] The SEC also settled accounting fraud charges against Kraft Heinz Co.’s Chief Operating Officer and Global Head of Operations, for his alleged continued approval of the company’s financial statements, failure to review financial statements as required by his position on relevant management committees and failure to prevent the fraud despite being presented with several warning signs that expenses were being misreported.  The SEC also filed a civil complaint against another senior executive that oversaw the procurement division engaged in negotiating and documenting several of the transactions that were improperly reported.

[2] In a 2001 report issued pursuant to Section 21(a) of the Exchange Act (the “Seaboard Report”), the SEC articulated four broad measures of a company’s cooperation: (i) self-policing prior to the discovery of the misconduct, (ii) self-report of the misconduct when it is discovered, (iii) remediation, including dismissing or appropriately disciplining wrongdoers, and (iv) cooperation with law enforcement authorities.  The Seaboard Report provides a roadmap for what steps to take in order to earn cooperation credit and describes generally the potential benefits to be received, though no report or guidance exists that details exactly what tangible benefits a company will receive in return for such cooperation.

[3] See, e.g., SEC Charges Companies, Former Executives as Part of Risk-Based Initiative, https://www.sec.gov/news/press-release/2020-226 (Sept. 28, 2020).

[4] See, e.g., SEC Charges Healthcare Services Company and CFO for Failing to Accurately Report Loss Contingencies as part of Continuing EPS Initiative, https://www.sec.gov/news/press-release/2021-162 (Aug. 24, 2021); SEC Charges Retailer and Former CEO for Accounting, Reporting, and Control Failures, https://www.sec.gov/news/press-release/2021-133 (July 21, 2021).