Lovesac agrees to $1.5M settlement to resolve SEC accounting claims

The Stamford-based bean-bag retailer Lovesac Co. has agreed to settle to resolve claims made against it by the Securities and Exchange Commission. It has agreed to pay a $1.5 million civil penalty related to accounting violations incurred shipping its furniture to customers.

The SEC announced Oct. 29 that it filed charges against the publicly traded furniture retailer, Donna Dellomo, Lovesac’s former CFO; and Yoon Um, Lovesac’s former controller, for accounting violations in connection with expenses Lovesac incurred shipping its furniture to customers.

Without admitting or denying the SEC’s allegations, Lovesac has agreed to the entry of a final judgment ordering it to pay a $1.5 million penalty and imposing a permanent injunction against future violations to settle the charges.

Executives at Lovesac could not be reached for comment.

The SEC’s complaint, filed in the U.S. District Court for the District of Connecticut, alleges that Lovesac failed to properly record the cost of shipping finished products from the company’s distribution center to its end customers.

According to the complaint, in April 2023, Lovesac’s finance team found that invoices for products shipped during fiscal year 2023 were not recorded in the company’s books and records until the first quarter of fiscal year 2024.  The invoices totaled approximately $2.2 million and would have significantly impacted certain of the company’s financial metrics for the first quarter of fiscal year 2024.

The complaint alleges that, to avoid impacting the company’s financial metrics and to avoid a costly restatement of the company’s fiscal year 2023 SEC filings, Dellomo and Um fraudulently concealed the $2.2 million shipping expenses.  According to the complaint, Dellomo furthered the fraud by withholding information from Lovesac’s outside audit firm and then signing a document filed with the SEC she knew was false and misleading.  Moreover, the complaint alleges that Lovesac and Dellomo failed to implement sufficient internal controls that may have prevented the fraudulent accounting.

As part of the scheme, Dellomo also submitted a false and misleading management representation letter to Lovesac’s outside auditor and otherwise failed to alert Lovesac’s auditors to the fraudulent accounting for the $2.2 million in last mile shipping expenses, SEC charges. 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.

In the end, Lovesac was required to restate its financial statements for fiscal year 2023 and the first quarter of fiscal year 2024 to correct Dellomo and Um’s fraud.

Dellomo, 60, is a resident of Williamsburg, Virginia, and has been licensed as a CPA since 1991 and is currently licensed in New York. Between January 2017 and June 2023, Dellomo served as Lovesac’s CFO and executive vice president. She retired from Lovesac in June 2023. After retiring, Dellomo worked as a strategic consultant for Lovesac for a year through June 2024.

Um, 41, is a resident of Athens, New York, and has been licensed as a CPA since 2009 and is currently licensed in New York. She was employed as Lovesac’s controller and vice president starting in November 2022 and agreed to resign in July 2023.

In its case against Dellomo and Um, the SEC seeks permanent injunctions, civil penalties, conduct-based injunctions, and officer-and-director bars.