SEC report on FTE Networks’ management team: Michael Palleschi as CEO and Chairman of the Board of Directors and David Lethem, CFO.
The former top executives of FTE Networks, a former telecommunications company whose shares were delisted from the New York Stock Exchange last year, were separately indicted on Thursday by the federal and Manhattan prosecutors on a number of criminal charges.
The two men, Michael Palleschi and David Lethem, have also been sued by the Securities and Exchange Commission on a civil lawsuit for the same conduct that underlies the criminal charges against them in federal court.
Palleschi, the ex-CEO of FTE Networks, and Lethem, the company’s former chief financial officer, are charged in federal proceedings and SEC complaint of a comprehensive plan to fraudulently conceal FTE Networks’ deteriorating financial condition from 2016 to 2019.
The men are also accused in these cases of embezzling millions of dollars from the company to pay for the use of private jets, luxury cars, personal credit cards, unauthorized transfers, stock issues and unapproved salary increases.
The grand jury’s indictment received from Manhattan DA Cyrus Vance Jr.’s office allegedly stole more than $ 28 million in property trust from Manhattan-based Benchmark Builders as of November 2018.
The men allegedly diverted these assets from the company, which was a wholly owned subsidiary of FTE Networks, to repay millions in loans received from FTE. In this case, you are accused of serious first-degree theft.
Palleschi, a 46-year-old Naples, Florida resident, was arrested Thursday morning in New York state while Lethem, 62, was arrested in Florida.
They are due to appear in separate federal courts later on Thursday.
Palleschi was Chairman of the Board of Directors and CEO of FTE from 2014 to May 2019, while Lethem, of Fort Meyers, Florida, was CFO from June 2014 to March 2019.
The federal indictment accuses them of working with others in “a complex scheme to fraudulently misrepresent investors, lenders and accountants” that the company’s financial condition was better than it actually was.
The program, which allegedly ran from 2016 to 2019, included hiding the convertible and warrant features of the company’s $ 22 million convertible bonds and recognizing more than $ 12 million in fake revenue, the indictment said Grand jury that was unsealed on Thursday.
The obfuscation of the debt features eventually led FTE Networks to re-estimate a net loss of $ 92 million for 2017, the indictment reads.
This indictment states that Palleschi and Lethem, along with others, made these false statements and omitted key facts in financial documents “to mask a trend of rising RTD operating losses” and to avoid a fall in the company’s shares.
The indictment states that if FTE’s share price had fallen below certain levels, it would have resulted in debt clauses on the company and forced it into bankruptcy.
The two men are charged on six counts, including conspiracy to commit securities fraud, wire transfer fraud, improperly influencing the conduct of audits, and aggravated identity theft.
The case is being prosecuted by the US Attorney’s Office for the Southern District of New York, based in Manhattan.
“Palleschi and Lethem have instead chosen to lie about FTE’s finances to make the company appear financially healthier than it was, defrauding FTE’s shareholders and lenders,” said SDNY US attorney Audrey Strauss.
“Rather than being open to their investors, Palleschi and Lethem have chosen the easy way to make money by hiding the real financial health of RTD through fake documents and fake signatures.”
The SEC complaint accuses Palleschi and Lethem of directly violating or aiding and abetting violations of the anti-fraud, reporting, and proxy solicitation provisions of securities laws.
FTE Networks is currently renting out residential properties. The company’s current interim CEO, Michael Beys, is an attorney and former federal attorney in the US Attorney’s Office for the Eastern District of New York, the sister jurisdiction of the SDNY.
Beys said in an interview with CNBC on Thursday, “The company has partnered and will continue to work with SDNY and SEC.”
“We look forward to justice being served,” Beys said.
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“The company continues to move forward and hopefully brings back value for shareholders in the company,” he said. “We are the good guys and will continue to try to recover from the chaos that Palleschi and Lethem have left behind.”
Benchmark Builders, which was acquired by FTE Networks in 2017, said Thursday that executives from that company had alerted the Manhattan prosecutor’s office to the alleged crimes of Palleschi and Lethem.
“Today’s charges are the culmination of a difficult decision we made to protect our subcontractors and customers in late 2018 when we contacted the Manhattan District Attorney about the misuse of trust funds,” Benchmark Builders said in an email to CNBC .
“We invested our own personal resources in the company to protect the subcontractors and their workers and parted ways with RTD almost 2 years ago,” the company said.
“Not a single subcontractor or customer was affected by these events, and not a single worker missed a paycheck. Construction in this city can be tough business, but we’ve always put integrity first and that’s what led to today’s events. We We are pleased to have this behind us and will work with a new focus on customer care.
The SEC lawsuit calls for permanent injunctions, penalties, and a ban on both men from acting as officers and directors of public companies, as well as “skip and prejudice interest and a recovery of the stock-based compensation paid to Palleschi during the alleged fraud.” said the SEC.
Eric Bustillo, director of the SEC’s Miami regional office, said: “The defendants have engaged in an outrageous scheme to fraudulently increase RTD revenues in order to misrepresent the company’s financial position while holding millions of dollars Abusing dollars for their own personal use. “
“We pledge to hold executives accountable who provide materially false financial reports to the public and those who rob companies for their personal gain,” said Bustillo.
FTE, based in New York and Naples, Fla., Had previously traded its shares on the OTCQX over-the-counter market, but was trading on the NYSE US market in December 2017.
It was suspended from trading on the NYSE two years later and delisted on May 21, 2020.
A press release released in late 2019 said the company was notified of delisting because the NYSE found that FTE or its management were engaged in “business that the exchange believed to be contrary to the public interest.”