Failure to Act: SEC Brings Individual Charges Against CFO and Audit Committee Chair in Corporate AI Fraud Case

Kubient, an advertisement software company, claimed that its flagship product, Kubient Artificial Intelligence (“KAI”), could detect real-time fraud during digital advertising auctions. As alleged in the SEC’s complaint against the former CFO and the former audit committee chair, Roberts fabricated fraud analyses that he claimed were prepared by KAI for Kubient customers as part of beta tests even though Kubient did not receive the data from customers necessary to complete the analyses.² As a result, Kubient wrongfully recognized $1.3 million in revenue and announced the beta tests had been successful. Kubient relied on these purportedly successful tests and the recorded revenue for its August 2020 Initial Public Offering (“IPO”) materials.³

Kubient’s former CFO and former audit committee chair were unaware that Roberts had fabricated the fraud analyses; however, the SEC alleges that they both learned of the fraud on the same day that Kubient launched its secondary public offering in December 2020.⁴ Instead of correcting or investigating the misrepresentations, Kubient’s former CFO and former audit committee chair “engaged in deceptive acts and practices that perpetuated the CEO-initiated scheme.”⁵ In particular, although the former CFO and former audit committee chair had already signed the secondary public offering materials when they learned of Roberts’ fraud, they “did not take meaningful steps” to investigate the improperly recognized revenue and the circumstances surrounding the purportedly successful KAI beta tests.⁶ What’s more, Kubient’s former CFO and former audit committee chair did not correct any of the statements made to Kubient’s independent auditor regarding the same.⁷ According to the complaint, this failure to correct false statements then led them to make false and misleading representations to company auditors.⁸

The SEC’s complaint also alleges that the former audit committee chair “excluded the independent auditor from the audit committee meeting” where the fabricated KAI fraud analysis reports were discussed and that she did not draft minutes for the meeting, so that “the independent auditor would not learn of the information [discussed].”⁹ Finally, the SEC also held Kubient’s former CFO and former audit committee chair accountable for not correcting the company’s statements about the KAI reports and the revenue allegedly generated from them in offering materials and SEC filings.¹⁰

In its joint complaint against the former CFO and former audit committee chair, the Commission levies a total of sixteen charges against the two individuals.¹¹ Both defendants are charged with fraud under Securities Act Section 17(a); fraud under Exchange Act Section 10(b) and Rule 10b-5 thereunder; making material false statements or omissions to an accountant; and aiding and abetting the company’s acts of making false SEC filings. In addition to the above, the former CFO is charged with nine additional claims, including false SEC filings, failures of internal books and records and internal controls, giving false certifications of annual reports, and failing to reimburse the company’s bonuses paid to him during the relevant period.

Takeaways From This Latest Enforcement Action

The SEC’s charges against Kubient’s former audit committee chair show that the SEC will not shy away from charging Board members, and particularly audit committee members, for failing to act on red flags and potentially perpetuating company or officer misconduct. Similarly, CFO’s must be aware that misdeeds done by their CEO could lead to personal liability even if they did not participate in the bad acts themselves. The Commission’s stance on gatekeeper inaction is clear: persons in a position of authority and involved in the financial reporting and disclosure process must take affirmative steps to protect the integrity of the company’s public disclosures when they become aware of potential concerns. As the SEC stated in their press release, “[t]his case should send an important signal to gatekeepers like CFOs and audit committee members that the SEC and the investing public expect responsible behavior when critical issues are brought to their attention.”¹²

¹See SEC v. Roberts, 24-CV-6990 (S.D.N.Y. Sept. 16, 2024). Roberts has already pleaded guilty to the parallel criminal proceedings brought against him by the Department of Justice on the basis of the same conduct. See Press Release, Department of Justice, Former CEO of Kubient, Inc. Charged and Pleads Guilty in Connection with Accounting Fraud Scheme (Sept. 16, 2024), https://www.justice.gov/usao-sdny/pr/former-ceo-kubient-inc-charged-and-pleads-guilty-connection-accounting-fraud-scheme.

²SEC v. Weiss and Coen, 24-CV-06988, ¶ 3 (S.D.N.Y. Sept. 16, 2024).

³Id. ¶ 17.

⁴Id. ¶ 4.

⁵Id. ¶ 36.

⁶Id. ¶ 49.

⁷Id. ¶ 54.

⁸Id. ¶ 67.

⁹Id. ¶¶ 58-65

¹⁰Id. ¶¶ 74-75

¹¹Id. ¶¶ 144-194.

¹²Press Release, Securities and Exchange Commission, SEC Charges Former Chairman and CEO of Tech Co. Kubient With Fraud and Lying to Auditors (Sept. 16, 2024), https://www.justice.gov/usao-sdny/pr/former-ceo-kubient-inc-charged-and-pleads-guilty-connection-accounting-fraud-scheme.