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U.S. Securities and Exchange Commission

UNITED STATES OF AMERICA
Before the
SECURITIES AND EXCHANGE COMMISSION

SECURITIES EXCHANGE ACT OF 1934
Release No. 42987 / June 29, 2000

AUDITING AND ACCOUNTING ENFORCEMENT
Release No. 1281 / June 29, 2000

ADMINISTRATIVE PROCEEDING
File No. 3-10244


In the Matter of

Ronald G. Davies,

Respondent.


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ORDER INSTITUTING PUBLIC
CEASE-AND-DESIST PROCEEDING,
MAKING FINDINGS, AND ISSUING
A CEASE-AND-DESIST ORDER
AGAINST RONALD G. DAVIES

I.

The Securities and Exchange Commission ("Commission") deems it appropriate that a public cease-and-desist proceeding be instituted pursuant to Section 21C of the Securities Exchange Act of 1934 ("Exchange Act") against Ronald G. Davies.

Accordingly, IT IS HEREBY ORDERED that a cease-and-desist proceeding against Davies be, and hereby is, instituted.

II.

In anticipation of the institution of this proceeding, Davies has submitted an Offer of Settlement ("Offer"), which the Commission has determined to accept. Solely for the purpose of this proceeding and any other proceedings brought by or on behalf of the Commission or in which the Commission is a party, and without admitting or denying the findings contained herein except that Davies admits the jurisdiction of the Commission over him and over the subject matter of this proceeding, Davies consents to the issuance of this Order Instituting Public Cease-and-Desist Proceeding, Making Findings and Issuing a Cease-and-Desist Order ("Order").

III.

On the basis of this Order and the Offer, the Commission makes the following findings:1

A. Nature of Proceeding

1. This matter concerns a misleading audit confirmation sent by a customer of Hybrid Networks, Inc. ("Hybrid" or the "Company"), a Silicon Valley technology company. In late 1997, Ronald Davies, an Executive Vice President of Ikon Office Solutions ("Ikon"), participated in Ikon's purchase of a substantial quantity of products from Hybrid. As part of that transaction, Davies obtained a letter from Hybrid's sales representative providing Ikon an absolute right to return any products purchased from Hybrid (the "side letter"). In early 1998, Davies learned information that should have alerted him to the fact that Hybrid's sales personnel had concealed the existence of the side letter from the Company's management and auditors. When Hybrid and its auditors, as part of the preparation of the Company's financial statements, sought confirmation that Ikon had received no right of return, Davies provided a misleading audit response to the Company.

B. Respondent

2. Ronald G. Davies, 44, is a resident of a resident of Sandy, Utah. He was an Executive Vice President of Ikon Office Solutions during the relevant period. Davies is currently serving as an officer of a privately held company.

C. Related Entities

3. Hybrid Networks, Inc. is a Delaware corporation headquartered in San Jose, California. The Company designs, manufactures and markets cable and wireless systems that provide access to the Internet. For the fiscal year ended December 31, 1997, Hybrid recognized $14.3 million in revenue, which the Company subsequently restated to $4.1 million.

4. Ikon Office Solutions is an Ohio corporation headquartered in Malvern, Pennsylvania. Among other things, Ikon acts as a distributor of office supplies to businesses. Ikon was Hybrid's largest customer during the relevant period, accounting for over a third of Hybrid's revenue for the fourth quarter of fiscal 1997.

D. Ikon's December 1997 Purchases From Hybrid

5. In December 1997, Davies engaged in negotiations with Hybrid's sales personnel for Ikon to act as a distributor of Hybrid's products. At the time, Ikon did not have any established customers for Hybrid's products, and did not have a history of selling Hybrid's products. Davies expressed concern about Ikon accepting responsibility to pay for products which Ikon might not be able to resell to end-users.

6. On December 22, 1997, pursuant to Davies' request, Hybrid's sales representative sent a letter to Ikon providing Ikon with an absolute right to return any Hybrid products which remained in Ikon's inventory in April 1998.

7. On December 23, Ikon sent a $1.5 million purchase order to Hybrid. The purchase order included the notation, "Special pricing per letter dated 12-22-97," and attached a copy of the side letter.

8. On December 31, Ikon agreed to purchase an additional $242,000 in products based on representations from Hybrid's sales personnel that this purchase was necessary to help Hybrid meet its revenue expectations. Davies was assured that the December 31 purchase was subject to the right of return set forth in the December 22 side letter.

9. Hybrid's sales personnel understood that Hybrid would be unable to recognize some or all of the revenue associated with the Ikon transaction if the sale were subject to a right of return. Without Davies' knowledge, certain Hybrid sales personnel removed the December 22 side letter from the Company's files and altered the December 23 purchase order to delete the reference to the side letter.

E. The Product Returns And Misleading Audit Confirmation

10. On March 25, 1998, Hybrid sent Ikon an audit confirmation request asking Ikon to confirm to the Company's auditors that Ikon had received no side letters modifying the terms of its purchase orders, and had been granted no right to return products purchased from Hybrid. During this time, the statements and behavior of Hybrid's sales personnel should have indicated to Davies that Hybrid's management and auditors were unaware of the December 22 side letter. Davies did not respond to the audit confirmation request sent by Hybrid.

11. On March 31, 1998, notwithstanding Ikon's failure to respond to the audit confirmation request, Hybrid filed its Form 10-K for the year ended December 31, 1997. The financial statements filed with the 10-K included approximately $1.8 million in revenue for the December shipments to Ikon. These shipments (which, combined, constituted the largest transaction in Hybrid's history) accounted for 35% of Hybrid's revenue for the fourth quarter, and 15% of Hybrid's revenue for the year.

12. By April 1998, Ikon had been unsuccessful in its efforts to resell the Hybrid products to end-users. Davies sent a letter to Hybrid requesting authorization to return the products. At the request of Hybrid's sales personnel, Davies drafted the return request to avoid any reference to the right of return provided by the December 22 side letter.

13. In order to accommodate its largest customer, Hybrid's management agreed to accept the product returns from Ikon. Nonetheless, Hybrid's management and auditors once again sought confirmation that Ikon had received no contractual right of return at the time of the December transactions.

14. On May 19, 1998, Hybrid's Chief Executive Officer sent a letter to Ikon asking for written confirmation that there were no side letters or oral agreements which modified Ikon's purchase orders, and that Ikon had not been granted any right to return the products it purchased from Hybrid. The letter stated that the confirmation was necessary for the completion of Hybrid's financial statements.

15. Hybrid's sales personnel asked Davies to conceal the existence of the December 22 side letter from Hybrid's management. While Davies refused to lie about the side letter, he sent an e-mail message to Hybrid's Chief Executive Officer stating that "we do not have an outside agreement beyond our purchase orders which you already have in house."

16. Davies knew or was reckless in not knowing that his e-mail message of May 19 was misleading. Davies knew, based on Hybrid's inquiries about the right of return and the requests from Hybrid's sales personnel to conceal the existence of the side letter, that the December 22 side letter had somehow been concealed from Hybrid's management and auditors, and he furthered the concealment by failing to clarify the matter.

17. Following the receipt of Davies' letter, Hybrid's management and auditors concluded that Hybrid's financial statements for the year ended December 31, 1997 were fairly stated and that the Ikon product returns did not require a restatement of the 1997 financial statements.

18. On June 1, 1998, Hybrid filed its Form 10-Q for quarter ended March 31, 1998. The filing stated that Hybrid had established an allowance "for sales recorded in 1997. . . to distributors who, although generally not having the contractual right to return the products purchased, have requested or indicated that they might request the Company to accept the return of certain of those products."

F. Davies Caused Violations Of The Exchange Act And The Regulations Thereunder

19. Section 10(b) of the Exchange Act and Rule 10b-5 thereunder prohibit material misrepresentations or omissions in connection with the purchase or sale of securities. Section 13(a) of the Exchange Act and Rules 12b-20 and 13a-13 require issuers of registered securities to file accurate reports with the Commission. Section 13(b)(5) of the Exchange Act provides that no person shall knowingly circumvent or knowingly fail to implement a system of internal accounting controls or knowingly falsify certain books, records and accounts. Rule 13b2-1 thereunder provides that no person shall falsify or cause to be falsified any book, record or account, and Rule 13b2-2 prohibits any officer or director from making or causing to be made a materially false or misleading statement or omitting or causing a person to omit material facts in connection with an audit, examination of financial statements, or the preparation or filing of documents with the Commission.

20. Hybrid and certain of its personnel violated the above provisions by, among other things, making false statements in the Company's Form 10-Q for the quarter ended March 31, 1998 relating to the Ikon returns, circumventing Hybrid's internal controls, falsifying the Company's books and records, and making materially false statements in connection with the preparation of the Company's financial statements.

21. Davies' actions described above allowed Hybrid personnel to circumvent internal controls and make false statements to the Company's auditors, and caused Hybrid to make material misrepresentations and file inaccurate reports with the Commission.

22. Based on the foregoing, Davies caused violations of Sections 10(b), 13(a), and 13(b)(5) of the Exchange Act and Rules 10b-5, 12b-20, 13a-13, 13b2-1, and 13b2-2 thereunder.

IV.

Based on the foregoing, the Commission deems it appropriate to accept the Offer submitted by Davies. Accordingly, IT IS HEREBY ORDERED pursuant to Section 21C of the Exchange Act that:

Davies cease and desist from committing or causing any violations or any future violations of Sections 10(b) and 13(b)(5) of the Exchange Act and Rules 10b-5, 13b2-1 and 13b2-2 thereunder, and from causing any violations or any future violations of Section 13(a) of the Exchange Act and Rules 12b-20 and 13a-13 thereunder.

By the Commission.

Jonathan G. Katz
Secretary


Footnote

1 The findings herein are made pursuant to Davies' Offer and are not binding on any other person or entity in this or any other proceeding.

http://www.sec.gov/litigation/admin/34-42987.htm


Modified:06/29/2000