Lovesac to Pay SEC $1.5 Million to Settle Claims of Hidden Expenses

By Paul Schott
The Middletown Press, Conn.
(TNS)

Nov. 4—Furniture retailer Lovesac has agreed to pay $1.5 million to settle a Securities and Exchange Commission lawsuit that alleges that two former executives committed accounting fraud at the Stamford-based company.

The two former executives, then-chief financial officer Donna Dellomo and then-controller Yoon Um, attempted last year to conceal more than $2 million in shipping expenses, after the discovery that those expenditures had been belatedly recorded, according to SEC officials.

“Dellomo and Um, both experienced financial professionals and certified public accountants, knew, or were reckless in not knowing, that the fraudulent accounting treatment they devised was not compliant with generally accepted accounting principles in the United States and rendered certain of Lovesac’s financial statements materially false and misleading,” the SEC said in the lawsuit, which was filed last week in federal court in Connecticut.

The accounting problems came to light in April 2023, when Lovesac’s finance team found that approximately $2.2 million in invoices for products shipped during the 2023 fiscal year had not been recorded in Lovesac’s books and records until the first quarter of the 2024 fiscal year, according to the complaint.

“Um, in concert with Dellomo, engaged in a scheme to hide those expenses from investors and the commission,” the lawsuit said. “They did this to avoid missing Lovesac’s projected gross margin—an important financial metric that the company disclosed in its SEC filings and on conference calls that are open to investors where the company discusses financial and other issues … and to avoid restating the company’s prior financial filings for the affected periods.”

The scheme included Dellomo’s submission of a “false and misleading” management representation letter to Lovesac’s outside auditor, according to the lawsuit.

In addition, Dellomo falsely certified a company filing to the SEC for the first quarter of 2024, “while knowing that the filing omitted information necessary to make the filing not false and misleading,” the lawsuit said.

“Further, Lovesac and Dellomo failed to implement sufficient internal controls over financial reporting—that is, processes, policies and procedures put in place by a company to provide reasonable assurances as to the accuracy, reliability and integrity of its financial reporting—that may have prevented or detected Dellomo and Um’s fraudulent accounting,” the lawsuit said.

In mid-June 2023, a Lovesac employee reported to Lovesac’s outside auditor a fraudulent entry in the company’s general ledger that Um had made in late April 2023, with Dellomo’s approval, according to the lawsuit. The employee’s report triggered an internal investigation, the lawsuit said. In mid-August 2023, Lovesac submitted a filing to the SEC that disclosed that its previously filed financial statements for the 2023 fiscal year and first quarter of 2024 were no longer reliable, according to the lawsuit. The company then restated those statements.

Dellomo retired from Lovesac in June 2023 and then worked as a strategic consultant for the company until June 2024, while Um agreed to resign in July 2023, according to the complaint.

In a written statement, Lovesac officials said the company had, “voluntarily self-reported and cooperated fully with the SEC in its investigation.” They added that, “in connection with the investigation that led to the restatement, the company has taken significant remedial steps to improve its internal controls and ensure the accuracy of its financial statements.”

Meanwhile, Lovesac continues to expand its reach. It finished the quarter ending Aug. 4 with 254 showrooms, compared with 223 in the same period in 2023.

Most of Lovesac’s sales come from its signature line of couches, which are known as Sactionals. Other popular products include beanbag seats called Sacs.

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