U.S. Charges 2 Tech Execs With Fraud
Government regulators announced criminal and civil charges Wednesday against two former executives of a Bay Area software firm, saying they fraudulently inflated the company’s financial results two years ago.
The alleged fraud took place at Indus International Inc. “They were going to be in trouble meeting their goals for the quarter,” said Helane Morrison, district administrator for the Securities and Exchange Commission. “These people decided to commit fraud to protect the stock price.”
In the overheated atmosphere of Silicon Valley during the last several years, the need to make quarterly profit and sales numbers was intense. Software makers such as Indus accounted for 16% of financial restatements between 1997 and 2000, more than any other industry, according to accounting firm Andersen. Computer makers ranked second, with 11%. A restatement can be a sign of fraud.
The SEC has several other Silicon Valley companies under investigation, as does the Justice Department. “This case is an all-too typical example of the kinds of things that a lot of Silicon Valley executives have been willing to engage in to meet short-term goals,” said Leslie Caldwell, chief of the criminal division for the U.S. attorney’s office in San Francisco.
Indus, a manufacturer of business software that has 1,300 employees, was based in San Francisco when the alleged fraud occurred. It has since relocated to Atlanta.
William Grabske, former president and chief executive of Indus, was indicted by a grand jury on 10 counts of securities fraud, conspiracy to commit securities fraud, making false statements to the SEC and mail and wire fraud. He was separately sued by the SEC for securities fraud.
Robert Pocsik, former Indus chief administrative officer, was charged with one count of conspiracy to commit securities fraud. He too was separately sued by the SEC. A third former Indus officer, Ralph Widmaier, was not indicted but was sued by the SEC for alleged securities fraud.
An arrest warrant has been issued for Grabske, the U.S. attorney’s office said. Pocsik pleaded guilty Wednesday afternoon in U.S. District Court in San Francisco on the conspiracy charge, Assistant U.S. Atty. John Hemann said.
According to the indictment and the SEC complaint, the third quarter of 1999 was about to close when Indus’ internal forecasts showed revenue would fall short of analysts’ expectations. Indus was on the verge of selling $1.7 million worth of software to an Orange-based engineering and maintenance firm, Holmes & Narver Inc. But the software purchase was contingent upon Holmes & Narver getting a contract from the National Science Foundation.
Scheduled to be announced Sept. 15 of that year, the National Science Foundation contract was delayed until the next quarter, which meant Indus’ software sale would be postponed too.
So on Sept. 29, the complaint says, the Indus executives prepared a new contract for Holmes & Narver, removing the NSF deal from the contract and relegating it to a side letter. The side letter said Holmes & Narver could cancel the deal and return the software if it failed to get the science contract. Holmes & Narver signed the deal. At the last moment, Indus could credit the much-needed revenue in the quarter, the complaint says.
All might have passed unnoticed, except Holmes & Narver didn’t win the NSF contract. On Nov. 1, Holmes & Narver returned the software. At the same time, the Indus accounting department, which knew nothing of the side letter, wanted to be paid for the software.
Holmes & Narver replied that the deal was void. Told this, the Indus executives told their own accounting department that Holmes & Narver was confused and that the software would be shipped back. To get a shipping receipt proving Indus had done so, the executives sent Holmes & Narver two bottles of wine by Federal Express as a gift, the indictment says. The shipping receipt was then given to Indus’ accounting office as evidence that the software had been sent.
When Indus’ chief financial officer tried to figure out what was going on, the executives fired her, the indictment says.
“You can fool your own accounting department, but eventually these things collapse of their own weight,” said Michael Dicke, SEC deputy assistant district administrator.
The complaint and indictment further charge that on Sept. 30, 1999, the Indus executives arranged a similar deal with another customer, Maxon Engineering Services Co., that allowed Indus to book an additional $2 million in revenue.
On Nov. 15 of that year, Indus reported revenue for the third quarter of $50.9 million and net income from operations of $4.5 million. In March 2000, after Indus’ board replaced the executives, the revenue was restated to $45.9 million and net income to $800,000.
Doug Young, attorney for former CEO Grabske, said his client was out of town.
“We haven’t read the complaint,” Young said. “We’re disappointed to see that these charges have been filed.”
Jahan Raissi, who is representing Pocsik on the civil charges, said, “I don’t have any comment.” Pocsik’s criminal lawyer didn’t return a phone call seeking comment.
An attorney for Widmaier, the former Indus vice president, didn’t return a phone call. The SEC said Widmaier had settled with the regulatory agency without admitting or denying guilt. He returned $38,000 in profit he had made trading Indus stock while the alleged fraud was underway, and paid a $15,000 penalty. He also consented to a permanent injunction.
A year ago, Indus paid a total of $4.3 million in civil lawsuits that accused it of fraudulently inflating revenue. On Wednesday, Indus said it resolved the SEC’s claims against it without paying any fines. Under the terms of the deal, Indus agreed not to violate SEC regulations about record keeping and internal controls.
“It’s all kind of good news for us,” said Indus Chief Financial Officer Michael Highland, who recently joined the company. “This is a satisfactory conclusion to an event that happened two years ago to different executives.”
Highland said that Indus was back on track and that its stock “is up 300% this year.” Indus shares closed Wednesday at $7.02, down 3 cents on Nasdaq.
