Jay Clayton, U.S. Attorney for the Southern District of New York | Department of Justice
United States Attorney for the Southern District of New York, Jay Clayton, announced that Michael Palleschi, former chairman and CEO of FTE Networks, Inc., was sentenced to 12 years in prison for leading a scheme to inflate company revenue, hide liabilities and expenses, and embezzle funds. U.S. District Judge Colleen McMahon handed down the sentence. Palleschi had previously pleaded guilty in August 2023 to several charges including conspiracy to commit securities and wire fraud, making false statements in SEC filings, improperly influencing 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.”
According to court documents and public filings, FTE was a telecommunications company with operations based in Naples, Florida, and Manhattan. Its stock traded on the New York Stock Exchange as of December 2017. From 2014 through 2019, Palleschi served as both chairman of the board and CEO.
Between 2016 and early 2019, Palleschi and others at FTE issued around 70 convertible notes totaling more than $22 million in principal to private lenders. These notes could be converted into common stock either on demand or upon default. Accounting rules require companies issuing such notes to recognize related liabilities and expenses from conversion features on their financial statements. However, under Palleschi’s direction, only principal amounts and interest expense were recorded; significant liabilities linked to conversion features were omitted.
To conceal these actions from auditors and accountants, fake notes were provided as documentation along with forged board resolutions purporting approval for note issuance. Signatures of directors were forged on these documents as well as on letters sent to lenders by FTE’s transfer agent. Additionally, auditors received repeated denials that any convertible debt had been issued.
This conduct resulted in understated debt derivative liabilities on FTE’s books for 2017-2018.
A separate fraudulent scheme involved recognizing over $13 million in non-existent revenue—including more than $10 million claimed as “unbilled” revenue supposedly earned from services never actually rendered to a major customer—and falsely reporting $2.6 million as an account receivable without supporting evidence. When auditors questioned this receivable's legitimacy and recommended writing it off, a fake email was created by conspirators purporting expedited payment from the customer so that recognition could continue.
These actions led FTE’s accounts receivable figures being overstated between 18%–120% each quarter during 2017-2018; for fiscal year 2016 the overstatement reached approximately 477%.
Palleschi also used corporate funds for personal trips via private jet travel paid by the company along with unauthorized issuances of company stock.
At sentencing Judge McMahon remarked: “this was a fraudulently run operation from the beginning.”
In addition to his prison term—Palleschi is also subject to three years supervised release following incarceration—and must pay restitution totaling $13,541,707 plus forfeiture amounting to $546,846.75.
Jay Clayton commended efforts by the Federal Bureau of Investigation as well as assistance provided by the Securities & Exchange Commission throughout the investigation.
The prosecution was managed by Assistant U.S. Attorneys Peter Davis and James McMahon from the Securities and Commodities Fraud Task Force within the office.
