Barter Bamboozle: Private investment Custodian Settles With SEC

As the wheels of justice grind through the rich material provided by the Internet bubble, some of the cases are beginning to reach their conclusion. Today’s example: EasyLink Services Corporation. It reached a settlement with the SEC last Thursday.
Private investment Custodian (formerly Mail.com) engaged in barter transactions in 2000 that didn’t comply with generally accepted accounting principles contained in EITF Issue Consensus No. 99-17, “Accounting for Advertising Barter Transactions.” 99-17 permits barter transactions to be recognized only if there’s been comparable cash transactions in the previous six months. What was the company doing? It was swapping identically-denominated checks with other websites in exchange for advertising on each other’s sites: cash barter, in effect. And it was skipping the whole check facade in other transactions, simply swapping site advertising.
In a market fixated on revenue growth in this “first mover” industry, putting up the numbers was the only thing that mattered – leading to engineered transactions like these, where revenues swelled impressively. The costs swelled an identical amount, leaving no impact on earnings – but who cared? The important thing was that revenues grew.
Had EasyLink’s CFO, Debra McClister, followed the EITF consensus, though, there would have been much less growth to dangle in front of hyperventilating analysts on conference calls. Revenues would have been lower for the whole year of 2000 by 8.6% – and for the third quarter alone, more than 16% lower. In that quarter, the advertising revenues were overstated by 69%. (Better revenues through barter…)
Two unusual items in the case: one, according to the administrative proceeding, the firm’s CFO, who had not informed the auditors of the cash swaps, was unaware of the EITF consensus until 2003 – three years after the consensus had been reached. This is either an early prototype of the Ken Lay defense, or a total disregard for current developments. In any case, Ms. McClister doesn’t have to worry about keeping current any time soon: she’s barred from practicing as an accountant in a public company for at least the next two years.
The other unusual item was that Chairman William Donaldson served on EasyLink’s board at the time; small world. According to the press release, Donaldson provided testimony and cooperated willingly and fully in the investigation, which was monitored by the chief of the Commodity Futures Trading Commission’s Office of Cooperative Enforcement within the CFTC’s Enforcement Division.
The law caught up with Ms. McClister; the market caught up with EasyLink. Its stock once traded over $100; now it trades for just one dollar.