The U.S. Securities and Exchange Commission (SEC) has reached an $8 million settlement in the Constant Contact Subscriber Scheme where two marketing firms were accused of inflating subscriber numbers used to measure financial performance and hiding the information from investors.
In an administrative proceeding, Endurance International Group Holdings Inc. and Constant Contact Inc., have agreed to pay an $8 million civil penalty in a cease-and-desist order with the SEC. Without admitting or denying the allegations, the two companies also agreed to provide all requested documents, information, and testimony in the agency’s investigation.
Constant Contact Subscriber Scheme Uses Subscriber Numbers to Increase Financial Numbers
Constant Contact, an email marketing company that provides online marketing tools for small businesses, was purchased by Endurance International in 2016 for $1.1 billion. The SEC alleges that prior to the merger, the two companies lied to investors in public filings using inaccurate customer subscriber numbers.
The SEC alleges that Constant Contact included canceled subscribers using a free one-month offer known as the Save Program in their quarterly reports to inflate subscriber numbers, a key metric that the company uses to measure its businesses and performance.
The Save Program was instituted in 2014 by Constant Contact’s management company after discovering that the company was missing its subscription goals. The program offered customers who were canceling their subscription a free month of service. Staff, however, did not process their cancellations until the next quarter, bolstering the numbers for that reported quarter and subsequent quarters.
The program was used in the latter half of 2014 and the beginning of 2015, allowing the company to falsify its total customer count by numbers in the thousands. By using these inflated numbers, the company was able to hide the difficulties the company was experiencing in hitting their growth targets from investors.
Endurance Also Falsified Subscriber Totals
The SEC says that in addition to Constant Contact’s error, Endurance also discovered and subsequently masked an error in how its subscribers were counted in 2014. The error caused the company to overstate their subscriber numbers by 424,000 – a number that was later covered up in the public filings with a modified definition of total subscribers.
By modifying the definition of subscribers, a reduction of 424,000 subscribers was concealed from investors. The difference in subscriber count would have had a substantial impact on total subscriptions and the subsequent financial metrics linked to the subscriber number.
The SEC order states that Endurance also materially overstated average revenue per subscriber, affecting its customer count throughout 2013 and 2014. Endurance provides cloud-based platform services, such as web hosting and domain registration to small businesses and individuals.
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