The Securities & Exchange Commission today filed a settled complaint charging Las Vegas-based nutritional supplement company MusclePharm Corp.’s former Executive Vice President of Sales & Operations, Brian H. Casutto, former Vice President of Sales, Matthew J. Zucco, & former contract Chief Financial Officer, Kevin R. Harris, for engaging in improper revenue recognition practices to achieve revenue growth demanded by its former Chief Executive Officer, Ryan C. Drexler. The SEC also separately charged Drexler with fraud in a litigated complaint for disclosure violations & control failures.
The SEC’s settled complaint alleges that Casutto, with the assistance of Zucco, engaged in a fraudulent scheme to prematurely recognize revenue for orders that remained in MusclePharm’s control. The complaint further alleges that Harris should have known that MusclePharm prematurely recognized certain revenue & that MusclePharm overstated other revenue by misclassifying customer credits as advertising expenses rather than as reductions to revenue. The defendants’ misconduct allegedly inflated the company’s publicly reported quarterly revenues by as much as 25 percent & gross profits by as much as 49 percent.
The SEC’s complaint against Drexler alleges that, while CEO, he misled investors about the catastrophic impact of the company’s default with institutional noteholders & that he falsely certified that he evaluated the company’s internal controls.
“Honest & transparent financial disclosures are the bedrock of our markets, but as alleged in our complaint, MusclePharm’s executives disregarded these fundamental rules by continuously inflating reported revenue,” said Jason J. Burt, Regional Director of the SEC’s Denver Office. “These actions highlight that the SEC will not hesitate to bring enforcement actions against individuals who threaten the integrity of our markets.”
Without admitting or denying the SEC’s allegations, Casutto, Zucco, & Harris have each consented to the entry of judgments, subject to court approval, permanently enjoining them from violating the antifraud provisions & other provisions of the federal securities laws; requiring Casutto & Zucco to pay disgorgement with prejudgment interest of $79,760.01 & $15,033.06, respectively; requiring Casutto & Harris to pay a civil penalty of $207,183 & $50,000, respectively, & reserving the issue of Zucco’s civil penalty for further determination by the court; & barring Casutto from serving as an officer or director of a public company for five years.
The SEC charged Drexler with violating &/or aiding & abetting violations of the antifraud provisions & other provisions of the federal securities laws & seeks injunctive relief, civil penalties, reimbursement to MusclePharm under SOX 304(a), & an officer & director bar.
Both complaints were filed in the U.S. District Court for the Central District of California.
The SEC’s investigation was conducted by Jennifer Turner & Michael D’Angelo & supervised by Mary Brady, Nicholas Heinke, & Jason Burt. The litigation is being led by Zachary Carlyle & Sharan Lieberman & supervised by Mr. Burt, Mr. Heinke, & Gregory Kasper.