SEC Hammers Company’s Customers
for Securities-Fraud Participation
January 7, 2004
The SEC has again gone after customers of a company for allegedly helping to perpetrate the company’s securities fraud by “round-tripping,” i.e., creating fictitious transactions that were reported as revenue. As part of the settlement, the customers’ principals, as well as the company insiders who were involved, were barred from serving as an officer or director of a publicly-held company.
Backdated Sales Contracts Resurface Years Later
October 9, 2003
The CFO of software giant Computer Associates was forced to resign, along with two other senior financial executives of the company — and who knows what else now lies in store for those folks — because several years ago the company “held the books open” to recognize revenue for sales contracts signed after the quarter had ended.
According to CA’s press release of yesterday, in the fiscal year ended March 31, 2000, the company took sales into revenue in Quarter X even though the contracts weren’t signed until after the end of the quarter. See also these stories from Reuters, the AP, and Dow Jones.
(Continued below)
Altered (Document) States
September 26, 2003
The SEC continues its enforcement efforts, yesterday announcing that criminal charges had been filed against a former E&Y accountant for allegedly altering and destroying documents to obstruct an investigation. The SEC’s press release pretty much speaks for itself (bold-faced emphasis is mine):
Yet Another “You Fired Me Because I Blew the Whistle” Case Settled for Almost $1M
September 17, 2003
The press is reporting the settlement of yet another wrongful-termination case grounded on a former employee’s claim that she was fired for whistleblowing. The employer paid nearly $1 million — almost half of which goes to the fomer employee’s attorney, according to the employer’s Web site — after having spent more than $300K defending the case. See this story at the law.com Web site. This story illustrates the hazards of letting an employee go if the employee had any connection at all with uncovering alleged corporate improprieties.
The story is also a nice opportunity to recall the wisdom of keeping fair and accurate written records to document employee performance. If you’re a manager who wants to get rid of a worthless employee, don’t believe that your cheery smile and golden voice alone will convince a jury that the employee really did deserve firing. Juries often discount witness testimony, especially by defendants seen as trying to make excuses for their actions. Juries also tend to believe written business records and other contemporaneous documentary evidence. So if you keep decent records about your employees, you’ll be better armed if you ever find yourself in a lawsuit — and good records might even help you be a better boss.
Side Letter in Sales Deal Leads to SEC Fraud Suit
September 16, 2003
Last week the SEC announced that it had filed a civil lawsuit against a former Logicon executive who allegedly placed a $7 million order with Legato Systems that included a secret side letter giving Logicon the right to cancel its purchase. According to the SEC, the Logicon executive not only knew that Legato planned to fraudulently misstate its financial results, he even advised Legato’s sales people how to conceal the cancellation right from the Legato finance department.
LESSON: The SEC’s news release quoted Helane L. Morrison, District Administrator for the Commission’s San Francisco District Office, as saying, “Sales executives who book phony deals often rely on assistance from people who work for their customers. Today’s action highlights the Commission’s resolve to hold such persons responsible when they knowingly assist in fraudulent revenue recognition practices.”
Backdating Contracts Leads to Prison Term —
But It Can Be Entirely Proper
August 23, 2003
From the notes I took while getting ready to start this blog:
A former public-company CFO was recently sentenced to three and a half years in federal prison. His company, Media Vision Technology, had inflated its reported revenues, in part by backdating sales contracts. Because of the inflated revenue reports, the company’s stock price went up – until the truth came out, which eventually drove the company into bankruptcy. (We’ve all seen that particular movie in the past couple of years, eh?)
The judge noted that the CFO had an otherwise-exemplary record. If the new, stiffer penalties of the post-Enron sentencing guidelines had applied, however, the CFO likely would have faced more than 10 years in prison. (The Recorder, Apr. 8, 2003; see archived story.)
But backdating a contract is not necessarily illegal, depending on the circumstances.