SEC raps Amazon in accounting case
Under a settlement, Seattle-based Amazon neither admitted nor denied wrongdoing, but agreed not to cause or contribute to the same violation in the future.
The SEC also ordered Kenneth Kurtzman, Ashford's former chief executive officer, and Brian Bergeron, its vice president of finance, to pay civil penalties of $60,000 and $25,000, respectively.
Amazon spokeswoman Patty Smith said the settlement relates solely to the accounting and financial disclosure of Ashford, not Amazon. "We're just pleased to have resolved the matter."
In separate matter, the SEC wrapped up an informal inquiry into Amazon's accounting practices related to partners in its Amazon Commerce Network. The SEC found no wrongdoing.
Meanwhile, Mark Britto, Amazon's senior vice president of worldwide services, sales and business development, stepped down to become CEO of San Francisco-based Keen.com, which connects users with advisers on various topics for a fee.
He was replaced by Mark Stabingas, former Amazon vice president of business development and finance. Stabingas joined Amazon in 2000 from PepsiCo.
According to the SEC's cease-and-desist order, Amazon and Ashford entered into a business relationship in November 1999.
Under the initial agreement, Ashford said it would pay Amazon $6 million for promotional placements and marketing services targeted at Amazon's customer base. Ashford agreed to pay an extra $2 million if Amazon could deliver 45,000 customers before Dec. 31.
Amazon also purchased a 16.6 percent stake in Ashford, the SEC order said.
Under their first joint promotion, for Valentine's Day, Amazon issued discount coupons from Ashford to Amazon's customers. The coupons, however, did not have unique serial numbers, making it easy for non-Amazon customers to redeem them.
The companies disputed which was responsible for the error. When the promotion ended, Ashford estimated it had lost $600,000 in revenue through unintended coupon use, the SEC order said.
In March 2000, the companies reached a settlement under which Amazon agreed to pay Ashford $600,000. In return, Ashford would credit Amazon with 11,500 new customers, which could be applied to the 45,000 customers under the original agreement.
To avoid recording a substantial expense related to the 11,500, Kurtzman, the former Ashford CEO, asked Amazon to change the way terms of the settlement would be documented.
Kurtzman consulted with Bergeron, who proposed that documentation for the settlement be split into two letters, the order said.
Amazon complied. The first letter, on Amazon letterhead and dated March 27, 2000, stated Amazon would pay Ashford a $600,000 settlement for the Valentine's Day promotion, and Ashford would credit Amazon with 3,000 customers.
The second letter, on Ashford letterhead and dated March 28, 2000, credited Amazon with 8,500 customers in three chunks — in April, July and October of 2000. The second letter made no mention of the Valentine's Day promotion settlement and allowed Ashford to record its expense over time.
Ashford's deferral of marketing expenses during the quarter ended March 31, 2000, helped it record a pro forma loss of 30 cents per share, beating analysts' estimate by a penny. Had it recorded the full cost of the 11,500 customers, the loss would have been 32 cents.
In total, Ashford's deferral understated the company's marketing expenses for 2000 "by 4.2 percent, its net loss for the year by 2.1 percent and its net loss for the quarter by 3.5 percent."
Steve Klein, a securities lawyer with Graham and Dunn in Seattle, said it's rare for one public company to be sanctioned for aiding another, except in the case of mergers.
"You could argue that (Amazon) got off lightly," he said. "They didn't get any penalties, but clearly the SEC at least slapped their wrist.
"(The SEC) slapped Ashford in the face and they slapped Amazon's wrist."
Monica Soto can be reached at 206-515-5632 or msoto@seattletimes.com.