Thursday, February 23, 2023

Post-IPO SPAC fined for lax internal controls

By Mark S. Nelson, J.D.

The SEC brought a settled administrative enforcement case against African Gold Acquisition Corp., a special purpose acquisition vehicle or SPAC, for the company’s failure to adhere to federal securities law requirements pertaining to internal controls. The company’s CFO allegedly misappropriated over $1 million from an account that was to be used to fund the company’s search for a suitable acquisition target. The company resolved the SEC’s charges for more than $100,000 and without admitting or denying the SEC’s findings (In the Matter of African Gold Acquisition Corp., Release No. 34-96960, February 22, 2023).

According to the SEC’s order, African Gold Acquisition Corp. was a publicly-traded post-IPO SPAC that failed to maintain adequate internal accounting controls, internal control over financial reporting, and disclosure controls and procedures. Following its IPO, the company had $1.5 million in an operating bank account that was to be used to fund the search for an acquisition target.

However, the company also had broadly delegated most financial matters to its CFO, who had, among other things, the authority to approve cash payments up to $50,000, an authority that the SEC alleged the CFO used to pay himself $1.2 million. The SEC also alleged the CFO managed vendor payments in order to hide his withdrawals from the company’s operating bank account (the CFO, however, did not have access to the trust account that held the funds raised by the company’s IPO). Significantly, the company generally did not have expenses above $50,000, except for the expenses incurred for its IPO. The CFO also gave false information to the company’s accountants and its outside auditor.

As a result of improper payments made by African Gold Acquisition Corp.’s CFO, the SEC alleged that the company’s Forms 10-K for three quarters spanning the second half of 2022 and early 2023 materially misstated the amount of cash the company had available to fund its search for an acquisition target.

The SEC charged that the company violated numerous Exchange Act provisions and related rules that require public companies to maintain adequate internal accounting controls, ICFR, and DCP. The company, without admitting or denying the SEC’s findings, agreed to cease and desist from further similar violations and to pay a civil money penalty of $103,591.

John T. Dugan, Associate Director for Enforcement in the SEC’s Boston Regional Office, commented via press release on the need for SPACs to follow the same rules that other public companies follow. “This settled order with African Gold demonstrates that SPACs must comply with basic Exchange Act requirements, just like any other publicly traded company,” said Dugan. “The fact that African Gold did not discover the misappropriation of its funds for more than a year, when certain vendors refused to provide further services due to unpaid invoices, clearly indicates that the company neglected to comply with basic internal control requirements.”

Cooper J. Morgenthau, African Gold Acquisition Corp.’s former CFO, was previously charged by the SEC with fraud and with violations of assorted books and records rules. Morgenthau also has pleaded guilty to one count of wire fraud related to a scheme to embezzle more than $5 million from the two SPACs. The criminal case was brought in the federal court in Manhattan.

The release is No. 34-96960.