Damian Williams, the United States Attorney for the Southern District of New York, and James Smith, the Assistant Director in Charge of the New York Field Office of the Federal Bureau of Investigation (“FBI”), announced today the unsealing of an Indictment charging Victor Bozzo, former Chief Executive Officer and former Chief Commercial Officer of Pareteum Corporation, and EDWARD O’DONNELL, Pareteum’s former Chief Financial Officer, with conspiracy, securities fraud, making false Securities and Exchange Commission (“SEC”) filings, and improperly influencing the conduct of audits for their roles in a scheme to overstate Pareteum’s revenue by tens of millions of dollars. BOZZO and O’DONNELL were arrested earlier today and will be presented this afternoon before U.S. Magistrate Judge Ona T. Wang. The case has been assigned to U.S. District Judge Arun Subramanian.
Also unsealed is the guilty plea of STANLEY STEFANSKI, Pareteum’s former Controller. STEFANSKI pled guilty before U.S. District Judge Andrew L. Carter on September 14, 2023, to charges arising from his participation in the scheme to fraudulently inflate Pareteum’s revenue and related crimes, and he is cooperating with the Government.
U.S. Attorney Damian Williams said: “Victor Bozzo, the former CEO of Pareteum, and Edward O’Donnell, the former CFO, and their co-conspirators allegedly schemed to inflate the company’s revenue, thereby making the company appear more profitable than it was and allowing Bozzo and O’Donnell to obtain performance bonuses they had not earned. To conceal their alleged fraud, Bozzo and O’Donnell then took steps to mislead the independent certified public accountants engaged to audit Pareteum’s financial statements. With today’s Indictment, Bozzo and O’Donnell’s alleged deceit comes to an end.”
FBI Assistant Director in Charge James Smith said: “This indictment reflects the serious harm executives caused by deliberately misleading shareholders, auditors, and the general public about the financial strength of a public company. The FBI remains committed to fighting white-collar crime, protecting investors, and holding fraudsters who degrade the integrity of our markets accountable.”
According to the allegations in the Indictment unsealed today in Manhattan federal court:
The defendants, and other senior executives at the company, engaged in a scheme to improperly and misleadingly recognize revenue at Pareteum, which owned and managed a mobile device network platform. The defendants and their co-conspirators made the revenue appear to have been earned in its records based on aspirational, non-binding purchase orders that did not impose any obligation on customers to pay Pareteum. The defendants, and other senior executives at Pareteum, knew that in many cases Pareteum was recognizing revenue before Pareteum had delivered any products or services to its customers. In order to conceal Pareteum’s fraudulent accounting practices, BOZZO, O’DONNELL, and other senior executives at Pareteum took steps to mislead the independent certified public accountants engaged to audit Pareteum’s financial statements.
Pareteum’s inflated revenue gave the appearance that Pareteum was meeting aggressive revenue and growth projections, which served the ultimate goal of increasing Pareteum’s share price. In press releases accompanying Pareteum’s quarterly filings, Pareteum provided guidance on its expected revenue and revenue growth for the year. During each period, Pareteum touted its quarter-over-quarter revenue and revenue growth. Pareteum publicly identified revenue as the principal metric demonstrating its growth and touted its consistent record of quarter-over-quarter revenue growth and meeting or exceeding revenue guidance, which itself typically increased quarter-over-quarter. However, this ostensible pace of revenue growth was only possible because of the fraud orchestrated by the defendants.
In order to carry out the fraud, the defendants and their co-conspirators improperly recognized revenue from customers based on non-binding contracts. Specifically, Pareteum’s customers were cellular providers that paid to use Pareteum’s platform to monitor, meter, and bill their own individual customers, who were individual cellphone or connected device end users. Typically, before a customer could use Pareteum’s platform, the customer and Pareteum would sign a Master Services Agreement, which set forth Pareteum’s obligations to provide the customer with SIM cards that provided cellphone users, who obtained cellphone service through Pareteum’s customer, access to Pareteum’s mobile network. At this stage, the customer did not owe Pareteum any money and no revenue had been earned by Pareteum; instead, Pareteum had first to develop and implement a platform for the customer and ensure that it functioned such that the customer could go “live” on the Pareteum network. Once the Pareteum customer was live on the network and sold a SIM card to an actual cellphone user, that user could put the SIM card into his or her phone and begin making calls or consuming mobile data. It was only at that point that Pareteum’s customer would be required to pay Pareteum for the data usage.
BOZZO and O’DONNELL understood that purchase orders were not sales contracts because, as they and others at Pareteum well knew, and Paretuem’s customers understood, the purchase orders did not reflect binding commitments. Instead, purchase orders typically reflected anticipated future sales. Purchase orders typically set forth the customer’s intention to purchase SIM cards from Pareteum and to generate usage fees if and when the customer was able to sell the SIMs to end users who then activated the SIM cards and used Pareteum’s platform.
However, in violation of Generally Accepted Accounting Principles, Pareteum executives, including VICTOR BOZZO and EDWARD O’DONNELL, caused Pareteum at times to recognize revenue at the time a purchase order was signed for the full projected value of the purchase order, even though they were aware that typically the relevant counterparties were obligated to pay that amount only if and when in the future all SIM cards in the purchase order had been shipped, were activated by Pareteum’s customers, and were used for one month on Pareteum’s network. As BOZZO and O’DONNELL were also aware, in many cases, pervasive technical and operational issues meant that Pareteum was actually incapable of satisfying its performance obligations under the terms of its agreements with customers.
As a result of this fraudulent revenue recognition practice, from at least in or about 2018 through the first half of 2019, Pareteum improperly recognized and reported to the investing public more than $40 million of revenue that it should not have.
As to one customer, referred to in the Indictment as Customer-4, Pareteum recognized revenue totaling $4.4 million based on an unsigned, draft purchase order for €6.3 million, which Customer-4 had not accepted. Instead, Customer-4 had signed a purchase order, which itself did not reflect a binding commitment but merely reflected anticipated future sales, for only €630,000 – in other words, one tenth of the draft €6.3 million purchase order and far less than the revenue Pareteum recognized. Pareteum nonetheless recognized $4.4 million in revenue for Customer-4 in three tranches, and at the time it recognized each of those tranches, Customer-4’s platform was not yet live and so it could not yet use Pareteum’s services.
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BOZZO, 54, of Ringoes, New Jersey, and O’DONNELL, 58, of East Atlantic Beach, New York, are each charged with one count of conspiracy to commit securities fraud, make false SEC filings, and improperly influence the conduct of audits, which carries a maximum penalty of five years in prison; one count of securities fraud under Title 15, which carries a maximum penalty of 20 years in prison; one count of false SEC filings, which carries a maximum sentence of 20 years in prison; and one count of improperly influencing the conduct of audits, which carries a maximum penalty of 20 years in prison.
The maximum potential sentences in this case are prescribed by Congress and are provided here for informational purposes only, as any sentencing of the defendants will be determined by a judge.
Mr. Williams praised the outstanding work of the FBI. Mr. Williams further thanked the SEC, which today filed a parallel civil action against BOZZO and O’DONNELL and also announced settled charges against STEFANSKI.
This case is being handled by the Office’s Securities and Commodities Fraud Task Force. Assistant U.S. Attorneys Kiersten A. Fletcher, Margaret Graham, and Allison Nichols are in charge of the prosecution.
The charges contained in the Indictment are merely accusations, and the defendants are presumed innocent unless and until proven guilty.
 As the introductory phrase signifies, the entirety of the text of the Indictment and the description of the Indictment set forth in this release constitute only allegations, and every fact described should be treated as an allegation.