SEC Charges Former MusclePharm Executives with Accounting and Disclosure Fraud

The Securities and Exchange Commission (SEC) has taken legal action against former executives of MusclePharm Corp., a nutritional supplement company based in Las Vegas. The SEC filed a settled complaint against Brian H. Casutto, the former Executive Vice President of Sales and Operations, Matthew J. Zucco, the former Vice President of Sales, and Kevin R. Harris, the former contract Chief Financial Officer. The charges stem from their involvement in improper revenue recognition practices, driven by the demands of the company’s former Chief Executive Officer, Ryan C. Drexler. Additionally, the SEC separately charged Drexler with fraud due to disclosure violations and control failures.According to the settled complaint, Casutto, with assistance from Zucco, devised a fraudulent scheme to recognize revenue prematurely for orders that were still under the control of MusclePharm. The complaint also alleges that Harris should have been aware of the premature revenue recognition and that MusclePharm inflated other revenue figures by misclassifying customer credits as advertising expenses instead of revenue reductions. The defendants’ misconduct allegedly resulted in an overstatement of the company’s quarterly revenues by up to 25 percent and gross profits by up to 49 percent in publicly reported financial statements.The SEC’s complaint against Drexler asserts that, during his tenure as CEO, he misled investors regarding the significant impact of the company’s default with institutional noteholders. Furthermore, he falsely certified that he had evaluated MusclePharm’s internal controls.Jason J. Burt, Regional Director of the SEC’s Denver Office, emphasized the importance of honest and transparent financial disclosures, stating, “MusclePharm’s executives disregarded these fundamental rules by continuously inflating reported revenue.” He further highlighted the SEC’s commitment to taking enforcement actions against individuals who undermine the integrity of financial markets.Casutto, Zucco, and Harris, without admitting or denying the SEC’s allegations, have consented to the entry of judgments, subject to court approval. The judgments permanently enjoin them from violating antifraud provisions and other federal securities laws. Additionally, the judgments require Casutto and Zucco to pay disgorgement with prejudgment interest in the amounts of $79,760.01 and $15,033.06, respectively. Casutto and Harris are also required to pay civil penalties of $207,183 and $50,000, respectively. The court will determine Zucco’s civil penalty at a later date. Casutto is further barred from serving as an officer or director of a public company for five years.The SEC charged Drexler with violating and/or aiding and abetting violations of antifraud provisions and other federal securities laws. The SEC seeks injunctive relief, civil penalties, reimbursement to MusclePharm under SOX 304(a), and an officer and director bar against Drexler.Both complaints were filed in the U.S. District Court for the Central District of California.The SEC’s investigation was conducted by Jennifer Turner and Michael D’Angelo, supervised by Mary Brady, Nicholas Heinke, and Jason Burt. Zachary Carlyle and Sharan Lieberman are leading the litigation, under the supervision of Mr. Burt, Mr. Heinke, and Gregory Kasper.