Former executives of delisted FTE Networks criminally charged with securities fraud conspiracy, sued by SEC

The former top executives of FTE Networks, a telecommunications company that was delisted last year on the New York Stock Exchange, were indicted on conspiracy to commit securities fraud and other criminal charges in Manhattan federal court.

Separately, the two former executives were sued in a civil complaint by the Securities and Exchange Commission for their alleged conduct.

The SEC, in a news release, said Michael Palleschi, the ex-CEO of FTE Networks, and former chief financial officer David Lethem, “misappropriated millions of dollars of company funds to pay for personal expenses, including luxury car leases, private jet services, and unauthorized salary increases.”

The criminal indictment against accuses them of working with others in “a multifaceted scheme to fraudulently represent to investors, lenders and accountants” that the company’s financial condition was better than it actually was.

The scheme, which allegedly ran from 2016 through 2019, included concealing the convertible and warrant features of company convertible debt, and recognizing more than $12 million of fake revenue, according to the grand jury indictment, which was unsealed Thursday.

The concealment of the debt features ultimately led FTE Networks to restate a net loss of $92 million for 2017, the indictment said.

That charging document says that Palleschi and Lethem, along with others, made those false statements and omitted key facts in financial documents “in order to mask a trend of FTE’s increasing operating losses,” and to avoid company stock dropping in price.

The indictment notes that if FTE’s share price dropped beneath a certain level, it could have triggered debt covenants by the company, forcing it into bankruptcy.

The two men are charged with six criminal counts, which include conspiracy to commit securities fraud, wire fraud, improperly influencing the conduct of audits and aggravated identity theft. The case is being prosecuted by the Manhattan United States Attorney’s Office.

The SEC complaint charges Palleschi and Lethem with directly violating or aiding and abetting violations of antifraud, reporting, and proxy solicitation provisions of the securities laws.

The lawsuit seeks permanent injunctions, penalties, and both men being barred from acting as officers and directors of publicly traded companies, as well as “disgorgement and prejudgment interest, and a clawback of equity-based compensation paid to Palleschi during the alleged fraud,” the SEC said.

Eric Bustillo, director of the SEC’s Miami Regional Office, said, “The defendants engaged in an egregious scheme to fraudulently inflate FTE’s revenues to portray a false picture of the company’s financial condition while misappropriating millions of dollars for their personal use.”

“We are committed to holding accountable executives who provide the public with materially false financial reports and those who loot companies for their own personal gain,” Bustillo said.

FTE, which had been based in New York and Naples, Florida, previously had its shares traded on the over-the-counter OTCQX market, but was trading on the NYSE’s American market by December 2017.

It was suspended from trading on the NYSE two years later and was delisted on May 21, 2020.

A press release in late 2019 said the company was notified of delisting proceedings because the NYSE had determined that FTE or its management “have engaged in operations that, in the opinion of the Exchange, are contrary to the public interest.”

Palleschi had served as chairman of FTE’s board of directors and chairman from 2014 through May 2019, while Lethem was CEO from June 2014 to March 2019.

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