Former CEO Of Public Telecommunications Company Sentenced To 12 Years In Prison For Accounting Fraud

United States Attorney for the Southern District of New York, Jay Clayton, announced that MICHAEL PALLESCHI, the former chairman and Chief Executive Officer of FTE Networks, Inc. ("FTE"), was sentenced today to 12 years in prison by U.S. District Judge Colleen McMahon for leading a years-long scheme to inflate FTE's revenue, conceal liabilities and expenses, and embezzle company funds. PALLESCHI previously pled guilty in August 2023 to conspiring to commit securities and wire fraud, making false statements in SEC filings and improperly influencing the conduct of audits, securities fraud, wire fraud, and aggravated identity theft.

"FTE's financial statements were fraudulent, harming FTE's investors and undermining confidence in our markets," said U.S. Attorney Jay Clayton. "Our Office is committed to personal accountability in white-collar crime and Michael Palleschi's sentence reflects that commitment."

As alleged in the Superseding Indictment and statements made in public filings and public court proceedings:

FTE was a telecommunications company based in Naples, Florida, and Manhattan. As of December 2017, its stock traded on the New York Stock Exchange. From 2014 to 2019, PALLESCHI was the chairman of FTE's Board of Directors and its Chief Executive Officer.

From 2016 to early 2019, PALLESCHI and others at FTE caused FTE to issue approximately 70 convertible notes with a total principal balance of more than $22 million to private lenders. The lenders could convert the notes to FTE's common stock, either upon demand or upon default. Issuers of such convertible notes must recognize on their financial statements liabilities and expenses that arise from the notes' conversion features. PALLESCHI and others caused FTE to recognize only the principal amounts and resulting interest expense on the company's books, but not the substantial liabilities and expenses arising from the notes' conversion features. He and others also took steps to conceal the notes' conversion features, including by providing FTE's accountants with fake notes, creating fake board resolutions with forged directors' signatures that purportedly authorized the issuance of the convertible notes, forging the signature of FTE's transfer agent on letters provided to lenders and repeatedly lying to FTE's auditors by falsely denying that the company had issued convertible debt. As a result of this fraud with respect to convertible notes, PALLESCHI and others caused FTE to understate its debt derivative liabilities and warrant derivative liabilities and to fail to recognize losses on conversion derivative liabilities and losses on issuance of notes in 2017 and 2018.

As part of a second fraudulent scheme, PALLESCHI and others caused FTE to recognize more than $13 million in fraudulent revenue. This fraudulent revenue included more than $10 million in "unbilled" revenue that the conspirators represented FTE had earned from services it had supposedly provided to a large customer that had not yet accepted bills for those services. FTE never provided any such services. In addition, PALLESCHI and others caused FTE to recognize approximately $2.6 million as an account receivable for which there was no support. When FTE's auditors said that the account receivable should be written off, PALLESCHI and others created a fake email from a representative of the customer saying that the customer would "expedite payments" for more than $1.5 million for projects completed by FTE in 2016 and 2017. The conspirators caused this fake email to be sent to FTE's auditors so that FTE could continue to recognize the receivable. As a result of this fraudulent recognition of revenue, FTE's financial statements overstated the company's accounts receivable by between 18% and 120% for each of the quarters in 2017 and 2018 and by approximately 477% for 2016.

PALLESCHI also embezzled corporate funds by taking personal trips on the company's private jet and unauthorized stock issuances.

At the sentencing, Judge McMahon said "this was a fraudulently run operation from the beginning."

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In addition to the prison term, PALLESCHI, 50, of Naples, Florida, was sentenced to three years of supervised release and ordered to pay $13,541,707 in restitution and $546,846.75 in forfeiture.

Mr. Clayton praised the outstanding work of the Federal Bureau of Investigation. Mr. Clayton also thanked the Securities & Exchange Commission for their assistance with the case.

This case is being handled by the Office's Securities and Commodities Fraud Task Force. Assistant U.S. Attorneys Peter Davis and James McMahon are in charge of the prosecution.