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From Securities Regulation Daily, September 8, 2015

Bankrate, former execs charged with artificially inflating company’s revenue

By Amanda Maine, J.D.

The SEC has charged Bankrate, Inc. and three former financial executives with using improper accounting methods to artificially inflate the company’s revenue in order to meet analyst expectations. Bankrate agreed to pay a $15 million penalty to settle the SEC’s administrative proceedings against it. One of the former executives also settled the SEC’s administrative proceedings, agreeing to pay a $150,000 penalty and disgorgement of $30,000. The SEC filed a civil complaint in federal court against the other two executives (SEC v. DiMaria, September, 8 2015).

Allegations. Bankrate, Inc. owns and operates an Internet-based consumer banking and personal finance network, including its website. According to the SEC, three former executives, Edward DiMaria (then-CFO), Matthew Gamsey (then-director of accounting), and Hyunjin Lerner (then-vice president of finance), used improper accounting methods to artificially inflate the company’s revenues and to understate its expenses to meet financial targets.

The SEC alleged that as part of a “corporate culture that condoned using improper accounting techniques,” DiMaria, through Lerner, improperly directed Bankrate’s Insurance division and Credit Cards division to book additional revenue of $300,000 and $500,000 without support or analysis for the second quarter of 2012. The Insurance division complied and booked $300,000 to a dormant customer account and sent a generic explanation approved by DiMaria and Gamsey to Bankrate’s auditor.

After Bankrate’s Credit Cards division resisted recording the full $500,000 of additional revenue, DiMaria directed that the $305,000 difference be recorded as revenue on the books of the company’s mortgage business. DiMaria also attempted to hide this fraud by retroactively attributing the revenue to a contractual dispute that had been resolved several months earlier, the SEC alleged.

DiMaria also directed an accountant in Bankrate’s Core division to reduce accrual for marketing expenses by $400,000 without support or analysis, according to the SEC. In addition, Bankrate failed to book nearly $100,000 in accounting expenses that had been incurred in the second quarter.

The SEC alleged that when Gamsey learned of DiMaria’s instructions to the Insurance and Credit Card divisions, he “immediately reacted with expletives,” stating in an email that “all this does is put us in a hole to start [the third quarter of 2012].” But instead of resisting or stopping DiMaria’s fraudulent activities, he affirmatively assisted it by misleading Bankrate’s auditor, according to the SEC.

Lerner assisted the fraud by providing Bankrate’s auditor with the generic and misleading explanation for the improperly booked Insurance division revenue, the SEC alleged. He also signed a management representation letter for the second quarter of 2012 that was misleading because it stated that the company’s financial statements were in compliance with GAAP, that there were no improperly recorded transactions, and that he had no knowledge of any fraud affecting the company.

2012 Q2 and restatement. Bankrate’s second quarter 2012 earnings release exceeded analyst estimates, and its stock price rose from $15.95 to $17.57 per share following the announcement. In June 2015, the accounting entries were reversed in a restatement of Bankrate’s financial results for that quarter. Lerner sold $30,045 in Bankrate shares following the rise in the stock price while possessing material, nonpublic information that the company’s revenues had been artificially inflated due to the accounting scheme, according to the SEC.

Charges. The SEC instituted administrative proceedings against Bankrate and Lerner, alleging violations of the antifraud, reporting, books and records, and internal control provisions of the federal securities laws. To settle the proceedings, Bankrate agreed to pay a civil monetary penalty of $15 million and to cease and desist from further violations. Lerner agreed to pay a $150,000 penalty and to disgorge $30,045 in ill-gotten gains he procured when he sold his shares following the announcement of the 2012 second quarter results. He also agreed to cease and desist from further violations and to five-year officer-and-director and associational bars. Bankrate and Lerner neither admitted nor denied the SEC’s findings.

The SEC also filed a complaint in federal court against DiMaria and Gamsey. That litigation is continuing. The complaint charges DiMaria and Gamsey with violating or aiding and abetting the violation of the antifraud, lying to auditors, books and records, and reporting provisions of the federal securities laws.

The case is No. 15-cv-07035.

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