July 3, 2023
Three former executives of bankrupt supplement company MusclePharm Corp. have agreed to settle complaints filed by the Securities and Exchange Commission that they acted improperly to inflate quarterly revenues and gross profits by as much as 25% and 49%, respectively.
Meanwhile, the former CEO of MusclePharm, Ryan C. Drexler, who demanded the revenue growth, has been charged with fraud in a litigated complaint for disclosure violations and control failures, the SEC announced in a June 27 press release.
Former executive vice president of sales and operations, Brian H. Casutto, former vice president of sales, Matthew J. Zucco, and former contract chief financial officer, Kevin R. Harris, stipulated to judgments against them without admitting or denying wrongdoing. The stipulations require final court approval in the U.S. District Court for the Central District of California.
According to the SEC complaint against Casutto, Zucco and Harris, after the defendants engaged in improper conduct beginning in 2017 that inflated the company's quarterly revenues and gross profits, MusclePharm in March 2019 announced its previously reported financial results were unreliable. In August 2020, the complaint said, MusclePharm restated its financial statements for 2017 and the first three quarters of 2018.
The SEC announced the stipulations:
- Permanently enjoin Casutto, Zucco and Harris from violating the antifraud provisions and other provisions of the federal securities laws.
- Require Casutto and Zucco to pay disgorgement with prejudgment interest of $79,760.01 and $15,033.06, respectively; and
- Require Casutto and Harris to pay a civil penalty of $207,183 and $50,000, respectively.
- Reserve the issue of Zucco’s civil penalty for further determination by the court.
- Prohibit Casutto from serving as an officer or director of a public company for five years.
“Honest and 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, in the news release. “These actions highlight that the SEC will not hesitate to bring enforcement actions against individuals who threaten the integrity of our markets.”
Drexler is accused of misleading “investors about the catastrophic impact of the company’s default with institutional noteholders and that he falsely certified that he evaluated the company’s internal controls,” according to the SEC release.
The SEC has charged him with violating and/or aiding and abetting violations of the antifraud provisions and other provisions of federal securities laws. The complaint against Drexler seeks injunctive relief, civil penalties, reimbursement to MusclePharm, and a bar against him serving as an officer and director.
Specific allegations, MusclePharm bankruptcy filing
According to the complaint against Casutto, Zucco and Harris, “MusclePharm prematurely recognized $9.2 million in revenue during the restatement period by booking sales at quarter end even though it did not ship the ‘sold’ product to customers but instead placed the product in storage trailers and third-party warehouses at the company’s expense.”
The SEC also alleged the company “prematurely recognized $12.8 million in revenue during the restatement period by recognizing revenue at the time of shipment and before delivery despite MusclePharm’s most significant customer contracts requiring delivery before revenue could be recognized, as Harris should have known.”
“Third, MusclePharm overstated revenues during the restatement period by $15.5 million by classifying credits that MusclePharm granted to certain customers, which allowed the customers to pay a reduced price for MusclePharm products based on the customers’ marketing of the products, as expenses rather than reductions to revenue,” the complaint alleged. “As Harris should have known, generally accepted accounting principles (‘GAAP’) require such credits to be accounted for as reductions to revenue.”
No attorney was listed for Drexler in court filings, and attorneys for Casutto, Zucco and Harris did not immediately return emails seeking comment. MusclePharm also did not immediately respond to a request for comment.
MusclePharm in December filed for Chapter 11 bankruptcy protection, listing estimated liabilities of $10 million to $50 million. A plan of reorganization was proposed in June to resolve the claims against MusclePharm in the U.S. Bankruptcy Court for the District of Nevada.
In response to a motion from the Official Committee of Unsecured Creditors, U.S. Bankruptcy Judge Natalie M. Cox has scheduled a status conference for July 10 to discuss MusclePharm’s Chapter 11 case.
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