HPL Fires CEO, Issues Warning on Accounting

The wave of accounting scandals sweeping corporate America claimed a Silicon Valley victim Friday when a small maker of specialty software fired its chief executive and warned investors not to rely on its past financial statements.

Shares of HPL Technologies Inc. of San Jose plummeted as much as 71% to $4 on Nasdaq before the market halted trading and demanded more information from the company.

HPL said that it removed Chairman and CEO David Lepejian from his posts and that the board’s audit committee was investigating “financial and accounting irregularities” with the aid of a law firm.

“Based on its preliminary investigation, the company believes that a material amount of revenue was improperly recognized during one or more earlier periods,” HPL said in a statement.

The company had about 300 employees in March and isn’t widely known, but HPL had been reporting increasing profit and sales.

News of the inquiry resonated with Silicon Valley investors and executives, who have wondered privately when the prevalent stock options and creative accounting of the high-tech boom originating here would come back to haunt more local firms, as they have at companies elsewhere.

In May, federal prosecutors charged former CEOs of two publicly traded technology firms, Unify Corp. and Quintus Corp., with criminal securities fraud for allegedly inflating sales figures. Though no charges have been filed against HPL, it is the first Silicon Valley warning of a misstatement since WorldCom Inc. announced it had misclassified a record $3.9 billion in expenses.

A former top official of the Securities and Exchange Commission, speaking on condition of anonymity, recently estimated that as many as 20% of Silicon Valley companies used fraudulent accounting methods, while 50% to 70% used “aggressive accounting practices--whether legal or not is another question.”

One person who has been following HPL closely speculated that the board examined the sales figures only because of the increased pressure being brought on executives and directors to stand by their books. CEOs soon will have to sign oaths that their numbers are accurate.

“Nothing else has changed” at the company, the person said.

HPL said the problem involved sales to an international distributor, which people close to the company said was a Canon Inc. unit in Japan responsible for three-fourths of HPL’s revenue.

Elie Antoun, a company director and the CEO of MediaQ Inc., was named acting CEO of HPL. The company said the crisis probably would scuttle HPL’s planned acquisition of closely held IDS Software Systems Inc. for stock and $23 million in cash.

HPL makes software used by major semiconductor chip manufacturers to improve their processes.

“The distressing thing is that customers report they really like the technology,” said analyst Jennifer Jordan of Wells Fargo Securities, who had been recommending the company’s stock. Jordan doesn’t own the shares personally and Wells Fargo has no investment banking business with HPL.

Three other analysts who had been recommending the shares work for firms that underwrote HPL’s initial public offering, UBS Warburg, SoundView Technology Group and Adams, Harkness & Hill Inc. Those analysts didn’t return calls seeking comment. The company scheduled a conference call for investors Monday morning.

Lepejian, 41, couldn’t be reached. He owned more than 10 million HPL shares in February, though he sold 30,000 shares that month for more than $450,000.

The company’s auditor, PricewaterhouseCoopers, said it couldn’t comment on client matters. PricewaterhouseCoopers also performed other services for HPL, according to that firm’s securities filings.

In its fiscal year ended in March, HPL said it earned $6.7 million on sales of $37 million, nearly triple the year-earlier figure. It had said it would have at least $77 million in sales this fiscal year.

Staff writer David Streitfeld contributed to this report.