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LongFin Craters on SEC Investigation

By Timothy Green – Apr 3, 2018 at 1:28PM

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The controversial company disclosed an SEC probe and severe problems with its financial reporting.

What happened

Shares of LongFin Corp. (LFIN 0.00%) tumbled on Tuesday after the company disclosed an SEC investigation in its annual 10-K filing. LongFin also disclosed that it had identified several material weaknesses in its internal control over financial reporting. The stock was down about 28% at 12:40 p.m. EDT.

So what

LongFin disclosed that the SEC's division of enforcement informed it on March 5 of an investigation. Documents related to the company's IPO, other financings, and the acquisition of blockchain company were requested. LongFin is in the process of responding to this request.

A man with his head slumped on a table with a stock chart in the background.

Image source: Getty Images.

On top of this investigation, LongFin has found some serious problems with its financial reporting. These include:

  • A lack of qualified personnel who fully understand GAAP reporting requirements.
  • Insufficient personnel with adequate technical knowledge for complex transactions and financial reporting functions.
  • An overall lack of sufficient knowledge, organized and sufficient audit support, documented positions and assessments, and policies and procedures related to accounting treatment for all types of transactions.
  • Segregation of duties issues.
  • Lack of formal or documented accounting policies and procedures.
  • No formal review process around recorded journal entries.

Given this laundry list of issues, it should be no surprise that the SEC is investigating.

Now what

Shares of LongFin exploded when the company announced the acquisition of soon after its own IPO. The company's market capitalization peaked at around $7 billion, despite just $75 million of revenue and a net loss of $26 million in 2017. Almost all of this revenue came from the sale of physical commodities.

If LongFin's ludicrous valuation weren't enough to drive you away, an SEC investigation and the apparent lack of basic accounting knowledge should do it.

Timothy Green has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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