UNITED STATES OF AMERICA
SECURITIES AND EXCHANGE COMMISSION
Securities Exchange Act of 1934
Release No. 41927 / September 28, 1999
Accounting and Auditing Enforcement
Release No. 1163 / September 28, 1999
File No. 3-10038
In the Matter of : ORDER INSTITUTING PUBLIC
Joseph A. Mathes, : SECTION 21C OF THE
: SECURITIES EXCHANGE ACT OF 1934,
: MAKING FINDINGS, AND
Respondent. : CEASE-AND-DESIST ORDER AND
: ORDER OF DISGORGEMENT
The Securities and Exchange Commission ("Commission") deems it
appropriate and in the public interest that public administrative proceedings
be, and hereby are, instituted pursuant to Section 21C of the Securities
Exchange Act of 1934 ("Exchange Act") against Joseph A. Mathes
In anticipation of the institution of these administrative proceedings,
Mathes has submitted an Offer of Settlement ("Offer"), which the
Commission has determined to accept. Solely for the purpose of this proceeding
and any other proceeding brought by or on behalf of the Commission or to which
the Commission is a party, and without admitting or denying the findings
contained herein, except as to the Commission's finding of jurisdiction over him
and the subject matter of this proceeding, which Mathes admits, Mathes consents
to the issuance of this Order Instituting Proceedings ("Order") and to
the entry of the findings and the imposition of relief set forth below.
On the basis of this Order and the Offer submitted by Mathes, the Commission
A. During the period described below, KnowledgeWare, Inc.
("KnowledgeWare"), a company engaged in the business of, among other
things, marketing computer software products, and certain of its executive
officers and employees engaged in a financial fraud that violated the antifraud,
periodic reporting, books and records, and internal controls provisions of the
federal securities laws. Specifically, from at least July 1, 1993 through June
30, 1994 ("FY 1994"), KnowledgeWare and certain of its executive
officers and employees artificially inflated KnowledgeWare's revenue and net
income on its books and records and in its public filings with the Commission by
fraudulently recognizing sales revenue in connection with transactions that did
not constitute bona fide sales. As a result, KnowledgeWare's books
and records were inaccurate and its interim reports on Forms 10-Q for the
quarters ended September 30, 1993, December 31, 1993 and March 31, 1994 were
materially false and misleading.
B. Mathes, age 38, was employed during the year ended June 30, 1994 as a
District Sales Manager at KnowledgeWare.
C. During FY 1994, KnowledgeWare was a Georgia corporation with principal
offices located in Atlanta, Georgia. At all times relevant hereto,
KnowledgeWare's common stock was registered with the Commission pursuant to
Section 12(g) of the Exchange Act. Knowledgeware common stock was quoted on the
NASDAQ National Market System.
Mathes' Role In The Financial Fraud
D. KnowledgeWare filed materially false and misleading interim reports on
Forms 10-Q with the Commission for the quarters ended September 30, 1993,
December 31, 1993 and March 31, 1994. Specifically, KnowledgeWare materially
overstated revenue and net income in each of those quarterly reports. In
addition, KnowledgeWare falsely reported a profit for both the quarter and the
nine months ended March 31, 1994 when, in fact, KnowledgeWare incurred a loss in
E. The foregoing misstatements resulted in part from conduct in which Mathes
1. In negotiating purported sales transactions with resellers of computer
software products ("Resellers"), Mathes granted the resellers the
unconditional right to return the purportedly purchased products to
KnowledgeWare ("Return Rights") and agreed that the resellers were not
obligated to pay KnowledgeWare for such products unless and until the resellers
had resold those products to others ("Contingent Payment Terms").
2. Mathes obtained from such Resellers executed purchase order documents for
KnowledgeWare products ("Order Letters") that omitted the Return
Rights and Contingent Payment Terms that KnowledgeWare had granted to the
Resellers. Instead, the Order Letters set forth an unconditional commitment to
pay KnowledgeWare for the ordered products. Mathes sent the Order Letters to
KnowledgeWare's order administration department, where they were used to
initiate the recognition of sales revenue on KnowledgeWare's books and records.
3. Mathes prepared and signed separate letters to such Resellers
memorializing the Return Rights and Contingent Payment Terms that had been
granted to the Resellers ("Side Letters"), but Mathes did not send or
otherwise disclose the terms of the Side Letters to KnowledgeWare's order
4. Mathes prepared and signed Transaction Approval Forms ("TAFs")
with respect to certain purported sales transactions with Resellers, but nowhere
in such TAFs did Mathes disclose the existence of the Side Letters or the Return
Rights and Contingent Payment Terms.2In
certain other instances, Mathes did not prepare the requisite TAFs with respect
to purported sales transactions with Resellers to whom KnowledgeWare had granted
Return Rights and Contingent Payment Terms.
F. Mathes never disclosed the Side Letters, Return Rights or Contingent
Payment Terms to KnowledgeWare's order administration personnel or to
KnowledgeWare's accounting personnel. KnowledgeWare recognized revenue on these
purported sales transactions, although the existence of the Return Rights and
Contingent Payment Terms made KnowledgeWare's recognition of revenue on such
G. The Resellers to whom KnowledgeWare granted Return Rights and Contingent
Payment Terms in Side Letters executed by Mathes never paid KnowledgeWare for
the products which, according to the Order Letters and TAFs, the Resellers
purportedly had purchased from KnowledgeWare.
H. During July and August of 1994, KnowledgeWare reversed a total of
approximately $20 million in sales revenue that had been improperly recorded in
FY 1994, including revenue that had been recorded on the purported sales
transactions described in paragraphs III.E through III.G.
Mathes' Violations And Unjust Enrichment
I. By reason of the conduct and events set forth above, Mathes violated, and
was a cause of violations of, Sections 10(b) and 13(b)(5) of the Exchange Act
and Rules 10b-5 and 13b2-1.
J. As a result of the conduct described in paragraphs III.E through III.F,
Mathes improperly received excess incentive compensation for FY 1994 in the
amount of $10,959.
CEASE-AND-DESIST ORDER AND ORDER OF DISGORGEMENT
Accordingly, IT IS HEREBY ORDERED, pursuant to Section 21C(a) of the
Exchange Act, that Mathes cease and desist from committing or causing any
violation, and committing or causing any future violation, of Sections 10(b) and
13(b)(5) of the Exchange Act and Rules 10b-5 and 13b2-1; and
IT IS HEREBY FURTHER ORDERED, pursuant to Section 21C(e) of the
Exchange Act, that Mathes shall, within thirty (30) days of the date of this
Order, disgorge to the United States Treasury a total of $15,880, representing
the sum of the $10,959 in excess incentive compensation that Mathes improperly
received as a result of the conduct described above plus prejudgment interest
thereon of $4,921. Such payment shall be: (A) made by United States postal money
order, certified check, bank cashier's check or bank money order payable to the
Securities and Exchange Commission; and (B) hand-delivered or sent by certified
mail (return receipt requested) to the Comptroller, Securities and Exchange
Commission, Operations Center, 6432 General Green Way, Stop 0-3, Alexandria,
Virginia 22312; and (C) submitted under cover letter that identifies Mathes as
the Respondent in these proceedings, the file number of these proceedings and
the Commission's investigation number (NY-6231), a copy of which cover letter
and the money order or check shall be sent to Carmen J. Lawrence, Esq., Regional
Director, U.S. Securities and Exchange Commission, Northeast Regional Office, 7
World Trade Center, New York, NY 10048, Attn: George N. Stepaniuk, Esq.
By the Commission.
Jonathan G. Katz
-- The findings herein are made pursuant to
Mathes' Offer of Settlement and are not binding on any other person or entity in
this or any other proceeding.
--Before entering into transactions with terms
that differed from KnowledgeWare's standard terms of sale, KnowledgeWare sales
personnel were required to obtain approval for such transactions by filling out
and submitting TAFs. KnowledgeWare required that TAFs include all proposed
deviations from KnowledgeWare's standard terms of sale and were required to be
sent to KnowledgeWare's order administration personnel along with the Order
Letters and all other relevant sales documents.