Former KIT Digital CEO and CFO Arrested: Charged With Accounting Fraud

It was only a matter of time. KIT Digital’s former CEO and Chairman Kaleil Isaza Tuzman and former CFO Robin Smyth have been arrested and charged with accounting fraud. Both are being held pending extradition to the U.S. and face up to 20 years in jail if convicted on the most serious charge. In 2013 I published a long blog post with details on accounting irregularities at KIT Digital, with info given to me by former employees. Stories of money missing, lack of accounting control and deliberate intent to change KIT’s numbers. At the time I was only able to say there was a “possible” SEC Fraud Investigation in the works, but I knew it was already well underway internally at the SEC.

The SEC was already investigating Kaleil Isaza Tuzman for insider trades and he landed in their cross hairs even more when several law firms filed securities class action lawsuits against KIT Digital. At the time I investigated the company, insiders told me that KIT Digital simply made up revenue that did not exist and counted revenue from contracts that were cancelled or expired. It sounds like that’s exactly what happened as the SEC is charging Kaleil Isaza Tuzman and Robin Smyth with recognizing improper revenue, overstating company assets, and understating losses between 2010-2012. Kaleil Isaza Tuzman is also being charged with conspiring with a hedge fund operator from 2008 to 2011 to inflate KIT’s share price that allowed Kaleil to conceal purchases of his own company’s stock.

The SEC complaint says that the defendants knowingly or recklessly caused KIT Digital to divert nearly $8M into a slush fund, that resulted, among other things, in a phony reduction of receivables. Falsely recognized approximately $1.5M in revenue for a product that was never delivered, nor ever paid for. They are also charged with hiding the loss of $2M with an offshore money management firm and hid the fact they were aggressively trading KIT Digital stock on the open market. In one instance, they took money they said was being used to buy a competitor and instead, gave that money to their customers, who then paid it back to KIT Digital to make it appear as if it was revenue. Reading through the SEC complaint gives you an insight into just how arrogant these guys were, how many schemes they came up with and contains copies of emails where they are openly discussing what they were doing behind the scenes.

There is so much damming evidence against them that even one of the outside accounting firms they used said there was “material weakness” in the company’s internal controls over financial reporting saying that, “KIT digital and Subsidiaries has not maintained effective internal control over financial reporting.” Two former employees told me that some of KIT’s executives instructed them that they needed to be able to “massage the numbers each quarter” and have “more control over the numbers we show”. And between KIT Digital reporting Q4 results and filing their 2011 10-K, $2.14M in cash disappeared that the company could not account for.

KIT Digital was a bomb waiting to go off. The signs were there. The company misguided their revenue, took good will write-offs, missed or delayed multiple SEC filings, restructured their board and management multiple times, delayed putting out public news for days, fired two accounting firms, defaulted on a debt covenant, had cash disappear and acquired more than ten companies. This company screamed warning for a long time. No one should have ever put any trust in Kaleil Isaza Tuzman. I had a back and forth argument with him in the comments sections of a blog post dating back to 2008, when I accused him of making false statements and lies. He responded by saying the company’s “operating/financial results will tell the true story”. They sure have.

Kaleil Isaza Tuzman was arrested Monday in Colombia and Robin Smyth was arrested Tuesday in Australia. Bloomberg lists more details on the dockets with the criminal case being U.S. v. Tuzman and the SEC case is Securities and Exchange Commission v. Tuzman, 15-cv-07057, U.S. District Court, Southern District of New York (Manhattan).