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UNITED STATES DISTRICT COURT
COMPLAINT Plaintiff Securities and Exchange Commission (the "Commission"), for its Complaint, alleges as follows: I. SUMMARY A. Overview of TenFold's Pattern of Releasing Misleading Information 1. TenFold Corporation ("TenFold" or the "Company"), a software development company, fraudulently reported misleading information regarding its financial position and business success in its registration statement filed with the Commission for its May 1999 initial public offering ("IPO") and in its public statements and periodic Commission filings related to its 1999 and first quarter 2000 operations. 2. TenFold touted itself as a uniquely reliable software development company. It boasted that "[w]e deliver [software] applications on time, for a fixed price, and on target - or we refund our customer's money." In reality, however, TenFold in 1999 and 2000 was experiencing serious problems on many of its largest projects, routinely missing contractual deadlines. But instead of providing truthful information to the investing public, TenFold's officers disseminated inaccurate, incomplete, positive and "upbeat" disclosures designed to mislead analysts and investors so that the officers could reap thousands and even millions in personal profits - at the expense of other investors -- by selling their TenFold stock at inflated prices. 3. In the registration statement for its IPO, TenFold failed to disclose that the only reason it was profitable during 1998 and the first quarter of 1999, the two fiscal periods immediately preceding its May 1999 IPO, was because of two very unusual and uniquely structured transactions. 4. The first of these unusual transactions involved TenFold changing the prices assigned to several components sold to Utica Mutual Insurance Company ("Utica") which allowed TenFold to immediately recognize revenue in 1998 and turn a loss for that year into a profit. TenFold's changes did not comport with economic realities, the prices the parties had negotiated, or TenFold's normal business practices. Among other things, TenFold increased the cost allocated to one component by over four hundred percent, and eliminated the cost associated with another component (to keep the total price paid by the customer for all components the same) in a way it had never done before. It also agreed to a stringent penalty provision demanded by the customer so that the customer would consent to TenFold's restructuring of the transaction. 5. The second unusual transaction involved TenFold's granting Ohio Farmers Insurance Company ("Ohio Farmers") an unusually large allocation of shares in the IPO - twenty-five times larger than the allocation being offered most other customers -- so that Ohio Farmers would amend its contract with TenFold in a way that would allow TenFold to immediately recognize revenue during the first quarter of 1999 rather than delaying recognition until after the IPO. The customer sold its entire allocation on the first day of the IPO, reaping a profit of over $1.6 million. TenFold failed to disclose that its reported profit for the first quarter of 1999 would have been a loss but for the payoff to this customer. 6. In 1999 and the first part of 2000, TenFold engaged in a pattern of announcing positive news and withholding negative news. By way of example, TenFold's president, Gary D. Kennedy, and its chief financial officer ("CFO"), Robert P. Hughes, held a conference call with analysts on February 1, 2000, providing information and answering questions in a way that fraudulently masked the difficulties the company was experiencing in timely completing contracts. Following the call, the company's controller, Stanley G. Hanks, sent the president an e-mail message expressing concern that false and misleading information was conveyed during the call, but no one from TenFold ever took any action to correct the erroneous statements. Rather, the four individual defendants immediately proceeded to sell TenFold stock, reaping thousands and even millions in proceeds. 7. Then, in its 1999 annual report on Form 10-K, TenFold failed to disclose ongoing and pervasive problems it had been and still was experiencing with completing on a timely basis many of its largest software development projects. The annual report contained numerous statements to the effect that adverse consequences would follow if TenFold experienced difficulties or delays in completing its projects. Instead of contributing to full and fair disclosure, however, these statements were affirmatively misleading because the types of events that were described as mere possibilities had in fact actually occurred, were occurring, and had become a prominent pattern at TenFold. In fairness to investors, TenFold should have frankly disclosed the nature and extent of the problems it was actually experiencing, and that such difficulties had become regular and pervasive occurrences. Tenfold failed to do so, and then compounded its fraud by portraying business problems that actually existed as mere possibilities. TenFold's report on Form 10-Q for the first quarter of 2000 contained information that was similarly misleading and incomplete. 8. In addition, TenFold materially overstated its revenues in its financial statements for its 1999 year-end and the first quarter of 2000. The company recognized revenue on software development projects based on an estimate of the percentage of the project that was complete. In making its estimates of the percentage of completion for accounting purposes, the company stated that it would make proper adjustment for acknowledged difficulties with its estimates. In fact, TenFold routinely missed scheduled completion dates and extended project schedules. Yet, for its calculations for three significant projects for the last quarter of 1999 and the first quarter of 2000, TenFold used project completion dates that its officers knew were incorrect. 9. Tenfold's president Gary D. Kennedy, its CFO Robert P. Hughes, its controller Stanley G. Hanks, and the controller of a TenFold group and subsidiary, Wynn K. Clayton, were all responsible for TenFold's fraud. 10. In addition, defendant Hughes provided false and misleading information to TenFold's auditors. B. Summary of Alleged Violations and Remedies Sought 11. Defendant TenFold violated Section 17(a) of the Securities Act of 1933 ("Securities Act") [15 U.S.C. § 77q(a)], Sections 10(b), 13(a), 13(b)(2), and 13(b)(5) of the Securities Exchange Act of 1934 ("Exchange Act") [15 U.S.C. §§ 78j(b), 78m(a), 78m(b)(2), and 78m(b)(5)], and Rules 10b-5, 12b-20, 13a-1, 13a-13, and 13b2-1 [17 C.F.R. §§ 240.10b-5, 240.12b-20, 240.13a-1, 240.13a-13, and 240.13b2-1] thereunder. 12. Defendant Gary D. Kennedy violated Section 17(a) of the Securities Act, Section 10(b) of the Exchange Act and Rules 10b-5 and 13b2-1 thereunder. Further, Kennedy aided and abetted TenFold's violations of Sections 13(a) and 13(b)(2) of the Exchange Act and Rules 12b-20, 13a-1, and 13a-13 thereunder. 13. Defendant Robert P. Hughes violated Section 17(a) of the Securities Act, Sections 10(b) and 13(b)(5) of the Exchange Act and Rules 10b-5, 13b2-1, and 13b2-2 [17 C.F.R. § 240.13b2-2] thereunder. Further, Hughes aided and abetted TenFold's violations of Sections 13(a) and 13(b)(2) of the Exchange Act and Rules 12b-20, 13a-1, and 13a-13 thereunder. 14. Defendant Stanley G. Hanks violated Sections 10(b) and 13(b)(5) of the Exchange Act and Rules 10b-5 and 13b2-1 thereunder. Further, Hanks aided and abetted TenFold's violations of Sections 13(a) and 13(b)(2) of the Exchange Act and Rules 12b-20, 13a-1, and 13a-13 thereunder. 15. Defendant Wynn K. Clayton violated Sections 10(b) and 13(b)(5) of the Exchange Act and Rules 10b-5 and 13b2-1 thereunder. Further, Clayton aided and abetted TenFold's violations of Sections 13(a) and 13(b)(2) of the Exchange Act and Rules 12b-20, 13a-1, and 13a-13 thereunder. 16. The Commission brings this action pursuant to the authority conferred upon it by Section 20 of the Securities Act [15 U.S.C. § 77t] and Section 21 of the Exchange Act [15 U.S.C. §§ 78u] for an order permanently restraining and enjoining each of the defendants and granting other relief. 17. The Commission seeks an order requiring all defendants to pay civil penalties pursuant to Section 20(d) of the Securities Act [15 U.S.C. § 77t(d)] and Section 21(d)(3) of the Exchange Act [15 U.S.C. § 78u(d)(3)]. 18. The Commission also seeks an order requiring Kennedy, Hughes, Hanks, and Clayton to disgorge all ill-gotten gains received or benefits derived from the illegal conduct alleged in this Complaint, including gains derived from their sales of Tenfold stock as well as any bonuses or other income they received related to TenFold's performance, plus pre-judgment interest, pursuant to Section 21(d)(5) of the Exchange Act [15 U.S.C. § 78u(d)(5)], other applicable provisions of law, and the general equitable powers of the Court. 19. Moreover, the Commission seeks an order prohibiting Kennedy and Hughes from serving as officers and directors of a public company pursuant to Exchange Act Section 21(d)(2) [15 U.S.C. § 78u(d)(2)] and the general equitable powers of the court. II. JURISDICTION AND VENUE 20. This Court has jurisdiction over this action pursuant to Section 22(a) of the Securities Act [15 U.S.C. § 77v(a)] and Sections 21(e) and 27 of the Exchange Act [15 U.S.C. §§ 78u(e) and 78aa]. Venue lies in this Court pursuant to Section 22(a) of the Securities Act and Section 27 of the Exchange Act. 21. Certain of the transactions, acts, practices and courses of business constituting the violations of law alleged herein occurred within this judicial district. 22. In connection with the transactions, acts, practices, and courses of business described in this Complaint, each of the defendants, directly and indirectly, has made use of the means or instrumentalities of interstate commerce, of the mails, of the facilities of a national securities exchange, and/or of the means and instruments of transportation or communication in interstate commerce. III. DEFENDANTS 23. TenFold Corporation, a Delaware corporation, develops large-scale software applications. TenFold completed an initial public offering on May 21, 1999, and its common stock is registered with the Commission under Section 12(g) of the Exchange Act. TenFold files periodic reports with the Commission pursuant to Section 12(b) of the Exchange Act. TenFold's stock was traded on the Nasdaq National Market System until August 20, 2001, when it was delisted for failure to meet minimum net tangible asset requirements and began trading on the Nasdaq Small Cap Market. TenFold stock was delisted from the Small Cap Market effective November 12, 2002 for failure to meet the minimum bid price and equity requirements, and now trades on the OTC Bulletin Board. 24. Gary D. Kennedy, a resident of Sandy, Utah, became president, chief executive officer ("CEO"), and a member of TenFold's board of directors in September 1996. Kennedy resigned from his positions as the president, CEO, and a director of TenFold in January 2001, at the request of the board of directors. 25. Robert P. Hughes, a resident of Sandy, Utah, began working for TenFold in February 1995. Hughes was TenFold's CFO from February 1995 until August 2000. Hughes, who is still employed at TenFold, was TenFold's senior vice president of finance, reporting to the TenFold CFO, from August 2000 until September 2002. TenFold currently does not have a CFO, and Hughes is serving as TenFold's chief accounting officer. Hughes has held a California CPA license since 1984. 26. Stanley G. Hanks, a resident of Salt Lake City, Utah, joined TenFold in March 1997. He served as TenFold's controller from March 1997 until March 2000. He served as vice president of finance for two TenFold subsidiaries from March 2000 until he resigned from the Company in May 2001. Hanks has held a Utah CPA license since 1993. 27. Wynn K. Clayton, a resident of Salt Lake City, Utah, started working for TenFold in June 1998. From June 1998 through June 1999, Clayton served as a financial analyst for TenFold, reporting to Hanks. From June 1999 until February 2001, Clayton was the vice president of finance and controller for TenFold's insurance group or subsidiary. Clayton then served as TenFold's controller from February 2001 to September 2002. Clayton has held a Utah CPA license since 1997. IV. TENFOLD BACKGROUND AND STOCK SALES BY DEFENDANTS A. Early History and Background 28. TenFold was founded in 1993. Between 1993 and 1996, TenFold focused on the development of its base technology-the "Universal Application" (the "UA")-which was intended to serve as the software platform for TenFold to develop large-scale business software applications for customers. TenFold's long-term business strategy was to develop entire software applications on specific customer projects that it could subsequently resell to other customers. B. TenFold Claims Unique Rapid Development Abilities And Offers A Money Back Guarantee 29. TenFold, which began to develop applications for customers in 1996 or 1997, claimed that it could rapidly develop software applications in a fixed time and for a fixed price using the UA platform. In marketing materials and filings with the Commission, TenFold claimed that it could develop applications in a matter of months that it would take other software developers years to develop. Further, Tenfold claimed that these abilities made it unique. 30. In 1997 or 1998, TenFold began offering the "TenFold Guarantee" to its customers, which provided that if TenFold did not deliver a customer's application in the agreed-upon time period and for the agreed-upon price, TenFold would refund the customer's money. In Commission filings and other public statements, TenFold claimed that its guarantee was unique in the industry. C. TenFold's Software Licensing Practices 31. When TenFold contracted to develop an application for a customer, TenFold also sold the customer a limited software license. This license included two components: a license to use TenFold's UA platform for development of the application and a license to use the software application once it was finished (collectively, the "Specific UA license"). 32. TenFold also offered to its customers a license to use the UA platform that was not related to any specific software development project (the "General UA license"). This license enabled customers to develop applications on their own using the UA platform, to hire third parties to develop applications for them based on the UA platform, or to later hire TenFold to develop applications using the existing license. D. Tenfold's Pricing Practices and Revenue Recognition Policies 33. When pricing a Specific UA license, TenFold typically charged its customer approximately twenty-five percent (25%) of the cost of its estimated development services. 34. TenFold did not have a standard price for the General UA, but typically priced a General UA license based on the size of the customer and the customer's intended use for the license. 35. On its application development services and Specific UA licenses, TenFold generally recognized revenue over the life of the contract using the percentage of completion method of accounting. The percentage of completion method generally provides that, in some circumstances, a company may recognize a portion of the revenue from a contract prior to completing the contract. The percentage of the total revenue that may be recognized is generally based upon how much of the contract has been completed. 36. On its General UA licenses, TenFold generally recognized revenue upon delivery of the software. E. TenFold's Disclosures Inflated Its Stock Price, Which Collapsed After Defendants Sold Shares 37. TenFold reported its first profitable year in 1998 and began preparing to register its stock for sale to the public in an initial public offering around the beginning of 1999. Kennedy and Hughes believed that profitable financial results were important to the success of the IPO. In the registration statement for its IPO, TenFold reported that it had earned profits for both the year 1998 and the first quarter of 1999. TenFold completed its IPO such that its stock began trading publicly on May 21, 1999. 38. TenFold's IPO price was $17 per share. 39. As TenFold consistently reported profits each quarter and for the entire year of 1999, the price of TenFold common stock increased to a high of approximately $70 per share in March 2000. 40. Kennedy, Hughes, Hanks, and Clayton all sold TenFold stock in February 2000 at prices in the range of $51-$54 per share. 41. On July 10, 2000, TenFold pre-announced financial results for the second quarter of 2000 that fell below expectations. 42. On July 19, 2000, TenFold announced that it was delaying reporting its results for the second quarter to allow the company to review its plans and projections. 43. On August 14, 2000, TenFold reported a net loss of $6.5 million for the second quarter of 2000, after conducting an internal review and taking significant revenue adjustments on its projects. This was the first loss for any period that TenFold reported since its IPO. 44. In August 2000, TenFold stock traded in the range of $8 per share. Two years later, TenFold stock was trading at approximately $.20 per share. V. TENFOLD'S FAILURE TO DISCLOSE UNUSUAL TRANSACTIONS IN ITS REGISTRATION STATEMENT 45. TenFold failed to disclose material information which it had a duty to disclose in its Form S-1 registration statement and various amendments to the registration statement filed with the Commission for TenFold's IPO between March and May 1999. 46. Specifically, TenFold failed to disclose the circumstances surrounding two highly unusual and unique transactions that allowed it to show a profit in the two fiscal periods immediately preceding its IPO. 47. These two transactions played a key role in TenFold's ability to proceed with and the offering price for its IPO because TenFold would not have had reportable profits in those periods without the unusual revenue items. 48. Kennedy and Hughes were both aware of the unusual and unique circumstances of these transactions, and that the unusual and infrequent dealings allowed TenFold to show a profit, rather than a loss, for the year 1998 and the first quarter of 1999. 49. Kennedy and Hughes participated in the preparation of TenFold's Form S-1 registration statement and, as president, chief executive officer, and chief financial officer, were responsible for the information in it. Kennedy and Hughes signed TenFold's Form S-1. 50. One of these unusual transactions was between TenFold and Utica Mutual Insurance Company ("Utica"); the other was between TenFold and Ohio Farmers Insurance Company ("Ohio Farmers"). A. The Utica Transaction 51. In late 1998, Utica hired TenFold to develop a software application that would process insurance premiums for Utica's commercial customers. 52. TenFold manipulated the structure of the Utica transaction in a way that enabled it to accelerate recognition of revenue into 1998. 53. Originally, TenFold and Utica negotiated an application development contract that provided for Utica to purchase TenFold's development services, a Specific UA license, training, and support for a total of $8.25 million. TenFold presented a written proposal and a draft contract to Utica, both of which specified that the development services would cost $5.5 million and the Specific UA license would cost $2.75 million for a total of $8.25 million. 54. The proposal and contract included a TenFold Guarantee that covered the entire $8.25 million contract price. 55. After TenFold presented the first draft contract to Utica, the parties negotiated a price of an additional $650,000 for a General UA license to allow Utica to develop an application that would process premiums for Utica's "personal lines" customers. Thus, after adding the General UA license, the cost to Utica for the licenses and services discussed totaled $8.9 million. 56. After these negotiations, however, TenFold, on its own initiative, restructured the transaction. TenFold split the components into two contracts -- one for the purchase of TenFold's development services, a Specific UA license, training, and support, and another for the purchase of a General UA license. TenFold also reallocated the cost of the various components in the two contracts, charging $3.4 million for the General UA license, and $5.5 million for the commercial lines development project, training, support, and Specific UA license. Thus, the total cost to Utica remained $8.9 million. 57. The $5.5 million price for the commercial lines application was based on the development services only, and did not include any value for the Specific UA license. Thus, contrary to its usual practice, TenFold in effect did not charge Utica for the Specific UA license. 58. The General UA license contract did not contain a TenFold Guarantee. Under generally accepted accounting principles (GAAP), TenFold could not immediately recognize all license revenue on a contract that contained a guarantee provision like the TenFold Guarantee. Since only the commercial lines application contract contained a TenFold Guarantee, the guarantee was limited to $5.5 million under the new structure presented by TenFold. 59. Upon receipt of the restructured documents, Utica informed TenFold that the TenFold Guarantee would have to extend to the full $8.25 million cost for the development project and Specific UA license as originally negotiated. To accomplish this, TenFold, contrary to its usual practices, added a liquidated damages provision, approved by Kennedy and Hughes, to the Utica application development contract that provided that if TenFold was unsuccessful in developing the application for Utica on time, TenFold would refund to Utica 150% of the money paid for the application. 60. TenFold recognized approximately $2.9 million in upfront license revenue on the sale of the General UA license to Utica. Reallocating more of the total cost to or price paid by Utica to the General UA license permitted TenFold to recognize approximately $2.25 million more in revenue in the fourth quarter of 1999 than if TenFold had left the price of the General UA license at $650,000 as originally negotiated. 61. The recognition of the additional $2.25 million in upfront license revenue on the General UA license was material to TenFold's financial results, and allowed TenFold to show a profit, instead of a loss, for fiscal 1998. 62. The Utica transaction, as restructured, was highly unusual, and designed to accelerate revenue recognition. TenFold routinely charged a price for the Specific UA license equal to approximately twenty-five percent of the cost of the development services, but in the case of Utica did not attach any value to the Specific UA license. Additionally, the Utica commercial lines development contract was the only significant customer contract TenFold entered into that provided for liquidated damages in excess of the contract price. 63. TenFold should have disclosed the circumstances surrounding the Utica transaction and its effect on TenFold's reported income, but did not do so. 64. Information concerning the Utica transaction and its effect on revenue and income would have been important to a reasonable investor. 65. Kennedy and Hughes were both aware of and approved the Utica transaction. They both knew of highly unusual circumstances surrounding the transaction that resulted in the recognition of additional revenue that turned a loss for the year into a profit, yet they both approved and signed the registration statement that failed to disclose this important information. B. The Ohio Farmers Transaction 66. In the next quarter, the first quarter of 1999, TenFold again engaged in undisclosed and unusual machinations involving a single contract that allowed it to show a profit, rather than a loss, for the period. 67. During the first quarter of 1999, TenFold entered into a contract with Ohio Farmers whereby TenFold would develop a software program to manage commercial policies for Ohio Farmers. Ohio Farmers also agreed to purchase a General UA license from TenFold. 68. Ohio Farmers insisted that its contract with TenFold contain two unusual provisions. First, the contract contained a clause permitting Ohio Farmers to terminate the contract "for convenience" at any time upon thirty days written notice to TenFold. 69. Second, the Ohio Farmers contract contained an acceptance provision, whereby payment of $5 million in fees including $4.1 million for the General UA license was due only after TenFold had finished developing the software application and Ohio Farmers agreed to accept it. 70. Under generally accepted accounting principles, TenFold was limited in the amount of revenue that it could recognize on the Ohio Farmers contract due to these two unusual clauses. 71. Shortly after signing the contract, TenFold, at Kennedy's direction, approached Ohio Farmers and asked it to amend the contract to remove the termination for convenience and acceptance clauses. Removing these clauses would permit TenFold to recognize additional revenue. 72. At about the same time, TenFold offered Ohio Farmers a standard allocation of 10,000 shares in its IPO as part of a directed share program. The directed share program allowed the purchase of TenFold common shares at the IPO price. 73. Ohio Farmers told TenFold that it would not agree to amend the contract at that time unless TenFold increased its IPO allotment to 250,000 shares. 74. TenFold agreed to increase the allotment and the parties signed the amendment just before the end of the first quarter. 75. As a result of this amendment, TenFold recognized approximately $2.6 million in revenue that it otherwise could not have recognized in the first quarter of 1999. 76. This approximately $2.6 million in revenue was material to TenFold's first quarter 1999 financial results as reported in TenFold's Form S-1. 77. If TenFold had not recognized this approximately $2.6 million in revenue, it would have shown a loss for the first quarter of 1999. 78. Ohio Farmers sold its shares on the first day of public trading, reaping a profit of approximately $1.6 million. 79. In its registration statement, TenFold disclosed that Ohio Farmers had received an allocation of 250,000 shares in its IPO and that TenFold had derived 30% of its quarterly revenue from Ohio Farmers. 80. TenFold did not, however, disclose that Ohio Farmers had agreed to amend its contract only in exchange for an unusually large allocation in the IPO, or that as a result of the amendment TenFold was able to recognize an additional approximately $2.6 million in revenue during the first quarter of 1999. It did not disclose that its reported profit for the quarter would have been a loss but for the payoff to Ohio Farmers. 81. Information concerning the removal of the termination for convenience and acceptance clauses in exchange for the unusual allocation of shares to Ohio Farmers, and the effect on revenue and income, would have been important to a reasonable investor. 82. Kennedy was aware of Ohio Farmers' condition for the amendment and approved both the amendment and the allocation. 83. Hughes approved the recognition of revenue on the Ohio Farmers contract based on the amendment and was also aware that the amendment was signed at the same time the IPO stock was allocated to Ohio Farmers. 84. Kennedy and Hughes were both aware that the unusual dealings with Ohio Farmers resulted in the recognition of additional revenue that turned a loss for the quarter into a profit, yet they both approved and signed the registration statement that failed to disclose this important information. VI. DISSEMINATION OF FALSE AND MISLEADING INFORMATION REGARDING TENFOLD'S BUSINESS OPERATIONS AND STOCK SALES BY DEFENDANTS A. Failure to Disclose Status of Large Projects 85. In the information it disseminated publicly prior to August 2000, TenFold portrayed itself as a thriving company with a strong base of customer support. 86. For example, in press releases issued during 1999 and the first quarter of 2000, TenFold announced the signing of eight customer contracts and four instances in which it had delivered projects to customers. 87. In contrast to the image TenFold portrayed publicly, by the end of 1999 and during the first quarter of 2000, TenFold was having tremendous difficulties completing complex application development projects, particularly for its insurance customers. Many of these projects were originally scheduled for completion long before the end of 1999. 88. By March 2000, when its annual report on Form 10-K for 1999 was filed with the Commission, TenFold was late on at least the following major development projects (collectively, the "Delayed Projects"):
89. The Delayed Projects accounted for approximately 43% of TenFold's services revenue and 29% of TenFold's overall revenue in 1999. 90. Because of its late performance, TenFold took percentage of completion adjustments on six of its eight ongoing large projects in the fourth quarter of 1999. 91. By the end of 1999, all of the contracts for the Delayed Projects except one contained the TenFold guarantee. Therefore, if TenFold had failed to complete them on time without securing an extension, TenFold risked not only its future revenue stream but also risked the expense of repaying these customers all of the money they had paid to date. 92. Before August 2000, TenFold did not disclose any problems with its software development projects, except for the Ohio Farmers contract, which had resulted in litigation by the third quarter of 1999. 93. Thus, TenFold engaged in a pattern of announcing positive news and withholding negative news. 94. Kennedy, Hughes, Hanks, and Clayton were all aware of the status of TenFold's development projects, including the Delayed Projects. 95. From mid-1998 through at least the end of 2000, TenFold held weekly conference calls that were known as the weekly forecast meetings. Kennedy, Hughes, Hanks and Clayton all participated, at various times, in the weekly forecast meetings. At the end of 1999 and the beginning of 2000, Kennedy, Hughes, Hanks and Clayton all participated in the weekly forecast meetings on a regular basis. 96. At the beginning of each weekly forecast meeting, each of the projects was reviewed by a TenFold employee with knowledge of the project's status. Accordingly, schedules and completion dates, as well as changes and adjustments, were discussed at the weekly forecast meetings. 97. In connection with the weekly forecast meetings, Hanks prepared a spreadsheet that was distributed to all participants. This document showed the anticipated end date of a project, the percentage of the project that was complete, and the amount of revenue recognized on the project. Hanks updated the spreadsheet weekly on the basis of information learned in the call. 98. Hughes, as CFO, managed and supervised the work of Hanks and Clayton. 99. Clayton also participated in formulating the accounting adjustments for extended completion dates on projects in the insurance group, which included five of the Delayed Projects. 100. Kennedy was very involved in certain projects during January 2000, including Nielsen and Untitrin, as he actively worked to manage those customer accounts. Kennedy knew that some of TenFold's customers were extremely dissatisfied and unhappy with TenFold's performance. B. TenFold's Announcement of Fourth Quarter 1999 and Year-End Results 1. Financial Results 101. TenFold announced its fourth quarter and year-end 1999 financial results on January 31, 2000. These results materially overstated TenFold's revenue and net income. 102. As discussed in more detail below, the overstatements of revenue and income resulted from errors in TenFold's percentage of completion revenue calculations, including without limitation use of incorrect completion dates and the need to maintain appropriate holdbacks. For its fourth quarter and year-end 1999 results, TenFold used completion dates for purposes of calculating revenue recognition that, by January 31, 2000, were clearly incorrect. 103. For example, with respect to a software development project for Utica, TenFold had missed an August 31, 1999 completion date and a December 14, 1999 guarantee date, and had been negotiating a revised completion date since November of 1999. On March 14, 2000, the completion date for the Utica project was extended many months to September 30, 2000. Yet, for purposes of its revenue calculations for the Utica project through December 31, 1999, TenFold used completion dates of February 29 and March 15, 2000. 104. Similarly, with respect to an application for Unitrin Services Company ("Unitrin"), TenFold had missed a completion date of March 7, 1999 and an extended completion date of November 30, 1999. Moreover, on January 28, 2000, the parties amended the contract and extended the completion date to September 1, 2000. Yet, for purposes of its revenue calculations for the Unitrin project through December 31, 1999, TenFold used a completion date of March 31, 2000. 105. As discussed in more detail below, Kennedy, Hughes, Hanks and Clayton knew at the time the fourth quarter and year-end 1999 results were released that completion dates that were no longer correct or feasible had been used to calculate revenue. Further, Hanks and Clayton were responsible for performing revenue calculations, and Hughes supervised their work and was responsible for TenFold's financial reporting. 2. February 1, 2000 Analyst Call 106. Kennedy and Hughes held a conference call with analysts to discuss the fourth quarter and year-end 1999 financial results on February 1, 2000. Both Kennedy and Hughes addressed the participants and answered questions during the call. 107. Kennedy made a number of materially false and misleading statements that were designed to mask the difficulties TenFold was experiencing on its development projects. Hughes also provided materially inaccurate and misleading information during the call. Hughes did nothing to correct Kennedy's statements or the false impression they created, and Kennedy failed to correct misinformation provided by Hughes. 108. TenFold's business plan was to resell applications it developed for one customer to other companies in the same industry as that customer. When TenFold resold these products, it sold these other companies a license to use the previously developed software application-a "product" license that was different from the General UA license or the Specific UA license described above. Because of TenFold's business plan, analysts covering TenFold often focused on the ratio between the percentage of revenue TenFold obtained from license sales and the percentage it obtained from software development services. They looked for the percentage of revenue attributable to license sales to grow if TenFold was succeeding with its business model. 109. Despite TenFold's true circumstances, Kennedy opened the analyst call on February 1, 2000 by stating: "I have been searching for some sort of adjective to describe our performance this quarter other than the trite awesome, phenomenal, everything else I could think of but everything just does not seem to give apt descriptions of what kind of quarter it was. Whatever words I use though, it was, by far, our best quarter ever." The reasons Kennedy cited for his assessment of the quarter were TenFold's "bookings," cash flow, and mix between license and service revenue. Although TenFold did have unusually large bookings during the fourth quarter, primarily because of sales of General UA licenses, the other two reasons Kennedy cited were misleading. 110. With respect to TenFold's cash flow position, Kennedy misleadingly discussed TenFold's success obtaining "deferred revenue" -- money that customers had paid but that TenFold had not yet earned -- and collecting its bills. Kennedy emphasized that the amount of time it took customers to pay bills had decreased since the last quarter. He said this decrease was "very important" to him "because it indicates how satisfied our customers are and how successful we are with them. Obviously, customers who are not satisfied are not going to be paying their bills." 111. In reality, these developments were largely a result of TenFold's project delays and did not show customer satisfaction. For those customers whose payments were not tied to TenFold's achievement of certain intermediate results (called "milestones"), TenFold sometimes collected money from its customers that it could not yet recognize as revenue because the projects were behind schedule. For those customers whose payments were tied to contract milestones, TenFold had not yet achieved the results necessary to trigger the billing of many of these customers. Because TenFold had not billed these customers, TenFold did not include their projects when it calculated the amount of time it took customers to pay bills. 112. In his opening remarks, Kennedy also touted the success of TenFold's resale strategy as reflected in the fact that TenFold had increased its percentage of license revenue as opposed to software development service revenue. He stated that TenFold had obtained 70% of its revenue from licenses and 30% from services in the fourth quarter of 1999. However, although TenFold did sell an unusually large amount of licenses during the fourth quarter, this ratio was materially affected by the lower service revenues TenFold recorded as a result of revenue adjustments caused by the project delays. Indeed, if TenFold had not been required to push back its completion dates during the fourth quarter, and instead had obtained the service revenues it had forecasted, then its revenue from services would have been greater than its revenue obtained from licenses. 113. Later in the call, one participant specifically questioned why TenFold's service revenues were down from the third quarter of 1999. While Kennedy mentioned that TenFold had experienced project delays, he minimized that factor's impact and focused on other factors, including staff vacations, customers choosing not to put applications into production until after the fourth quarter of 1999 presumably because of Y2K concerns, and costs associated with the acquisition of another entity. 114. After Kennedy finished discussing service revenues, Kennedy asked Hughes if Hughes had anything to add. Hughes stated that Kennedy had "covered all the points [he] would have," such that he had nothing to add. 115. Kennedy's statements relating to the reasons service revenues had declined were materially misleading. Staff inefficiency and seasonal staff vacations could not have directly affected TenFold's fourth quarter service revenues because of TenFold's accounting method. TenFold's percentage of completion accounting method assumed that TenFold would expend consistent effort in each month over the life of a project, regardless of the actual time its staff spent on the development project. 116. Kennedy's statement that some customers were holding off on implementation of projects until the first quarter of 2000 was simply false. In fact, TenFold completed just one project during the first quarter of 2000, a project that was finished before the analyst call and had a minimal effect on revenues. In truth, project delays were the primary reason for the decline in service revenues. 117. In addition, a participant in the call asked about the breakdown between "product" revenue and "technology" revenue in the revenue that TenFold reported. Other questions and answers earlier in the call made clear that this distinction was between sales of developed application "products," which TenFold could resell to other companies, and sales of the General UA "technology" license, which were construed as early payments for future projects TenFold later might secure. 118. Kennedy responded that much more of the license revenue recognized was from product sales than from technology sales. 119. Kennedy's statement, however, was false; only about 22% of TenFold's license revenue for the quarter was derived from the sale of products. 120. In addition, Kennedy stated in the call that TenFold had resold developed products in its insurance, energy, and health care groups. 121. While TenFold did recognize product revenue in its insurance group, TenFold did not recognize product revenue in either the health care or energy groups during the fourth quarter of 1999. 122. Hughes stated that TenFold was "prudent and conservative" in closing its books for the year. That statement was materially inaccurate and misleading. TenFold was not conservative in recognizing revenue on some of its most significant projects. 123. Kennedy and Hughes failed in the February 1, 2000 analyst call to adequately disclose the significant and material project difficulties and delays that TenFold was experiencing, or the changes in completion date estimates that materially effected revenue and income. 3. E-Mail Concerning Analyst Call 124. On February 3, 2000, Hanks sent an e-mail to Kennedy, copied to Hughes and blind-copied to Clayton, expressing his concern that Kennedy made false and misleading statements in the analyst call. 125. Hanks stated that Kennedy should have been clearer about project problems. He said that Kennedy should have disclosed the status of certain problem projects, pointing out that TenFold booked a loss of $1.7 million on one project and $1 million on another during the fourth quarter. Hanks stated that, "[t]elling [the public] about some of [TenFold's] problem projects is material information which should be disclosed." 126. Hanks also pointed out that Kennedy falsely stated that the majority of the license revenue was product revenue when in fact the majority of the license revenue was technology revenue. Hanks stated that, "[w]e set the wrong expectations, we're not yet a products company." 127. Hanks also criticized Hughes for claiming that TenFold was "conservative" with its revenue recognition at year-end. Hanks stated that TenFold was not conservative with its revenue recognition for three of TenFold's "critical" projects. 128. Kennedy and Hughes acknowledge receiving and reviewing Hanks' February 3, 2000 e-mail. 129. No one from TenFold took any action to correct the erroneous statements made by Kennedy and Hughes. C. Stock Sales by Defendants 130. In early February 2000, Kennedy, Hughes, Hanks, and Clayton all sold TenFold stock. The amounts of those sales and the gross proceeds of those sales are set forth below:
131. Kennedy, Hughes, Hanks, and Clayton were all aware of the status of TenFold's development projects and other material nonpublic information at the time they traded in TenFold stock in February of 2000. 132. By way of example, Kennedy, Hughes, Hanks and Clayton were all aware of the problems and changing schedules associated with the Delayed Projects and all of TenFold's development projects. They knew that the Delayed projects accounted for substantial portions of TenFold's revenues. They knew that TenFold had not fully and fairly disclosed the problems and delays it had been experiencing in its development projects. 133. Kennedy, Hughes, Hanks and Clayton knew that end dates which were no longer correct or feasible were being used to calculate revenue on certain TenFold contracts. 134. Kennedy, Hughes, Hanks and Clayton also knew that Kennedy had made false and misleading statements and provided incomplete information during the February 1, 2000 analyst call, and that no one from TenFold had taken any action to correct the erroneous and misleading statements made by Kennedy. 135. Kennedy and Hughes knew of the highly unusual circumstances surrounding the Utica and Ohio Farmers transactions and that these transactions turned losses for the year 1998 and first quarter of 1999 into profits. They knew that this information had not been disclosed in TenFold's S-1 registration statement or anywhere else. D. TenFold's 10-K for 1999 136. TenFold filed its 10-K for 1999 on March 9, 2000. Kennedy, Hughes, and Hanks all signed the filing. 137. Hanks drafted the Management's Discussion and Analysis portion of the 1999 10-K. 138. In the 10-K, TenFold touted the success of its business strategy and attempted to distinguish itself as a software provider that solved the "buy vs. build" dilemma faced by many companies seeking to replace enterprise-wide applications. 139. TenFold stated in several different places in its 10-K that it delivers applications on time to its customers or it refunds the customer's money. 140. At the time the 10-K was filed, however, there were many instances in which TenFold failed to complete a customer application on time. TenFold had never returned a customer's money. 141. Additionally, the customers for the Delayed Projects are all listed in TenFold's 1999 10-K as TenFold customers, but no disclosure was made about the significant and material problems TenFold was experiencing on those projects. 142. In the 10-K, TenFold made extensive disclosures concerning the potential risks of TenFold's operations. These disclosures include the following:
143. TenFold, however, made no disclosures regarding the significant and material problems and delays that actually were occurring or the changes in TenFold's completion date estimates that resulted in material revenue impacts. 144. Further, the risk disclosures were affirmatively misleading because they created the false illusion that TenFold was not at the time experiencing significant project delays. 145. TenFold also failed to discuss delay factors that were the fault of TenFold, including establishing project completion schedules that were overly aggressive, nor did it disclose the impact these project problems would have on its future revenue stream. 146. TenFold's failure to disclose the facts surrounding its business operations, coupled with positive statements that risks were potential rather than actual, rendered the 10-K materially false and misleading. E. TenFold's 10-Q for the First Quarter of 2000 147. TenFold filed its 10-Q for the first quarter of 2000 on April 15, 2000. Hughes signed TenFold's first quarter 2000 10-Q. 148. The Tenfold's 10-Q for the first quarter of 2000 contained risk disclosures similar to those contained in the 1999 10-K. 149. And like the 1999 10-K, the first quarter 2000 10-Q also failed to disclose any information regarding the delayed status of TenFold's development projects. 150. TenFold's failure to disclose the facts surrounding its business operations, coupled with positive statements that risks were potential rather than actual, rendered the first quarter 2000 10-Q materially false and misleading. F. False Financial Reporting in the 1999 10-K and the First Quarter 10-Q 151. TenFold materially overstated revenues and income reported in its 1999 10-K and its 10-Q for the first quarter of 2000. 152. This overstatement of revenue and income resulted from TenFold's improper recognition of revenue on three customer contracts. Those contracts were with Utica, Unitrin, and Trumbull Services LLC ("Trumbull"). 153. On these contracts, TenFold recognized revenue on a percentage of completion basis, and utilized completion dates for purposes of calculating revenue recognition that were clearly wrong at the time it filed its financial statements. 154. Under generally accepted accounting principles, in order to use the percentage of completion method of revenue recognition an entity must be able to make estimates that are reasonably dependable. 155. TenFold's process for estimating the percentage of completion and amount of revenue to recognize for each project included identifying the date the project was to be completed and calculating the percentage of the project schedule that had passed. Accordingly, use of proper completion dates was essential in TenFold's method of calculating percentage of completion revenue. 156. Additionally, due to inherent uncertainties involved in accurately estimating the percentage of completion for its development projects, TenFold established a policy, which it communicated to its auditors, of holding back twenty percent (20%) of the revenues from a project (the "holdback") until the project was completed or close to completion. TenFold's auditors considered use of the holdback to be appropriate and consistent with TenFold's historical experience. The holdbacks were essential in order for TenFold to be able to utilize the percentage of completion method for revenue recognition, since TenFold's method of tracking progress on its contracts was rudimentary, its projects often required additional effort later in the project schedule, and TenFold routinely missed its scheduled completion dates and negotiated extensions of project schedules. 157. As noted above, TenFold filed its 10-K for 1999 on March 9, 2000. 158. TenFold filed its 10-Q for the first quarter of 2000 on April 15, 2000. 1. Utica Contract 159. TenFold and Utica contracted for TenFold to complete the development portion of a software development project for Utica by August 31, 1999. Under the terms of the contract, Utica was entitled to invoke the TenFold Guarantee on December 14, 1999. 160. TenFold missed the August 31, 1999 completion date. 161. The parties began negotiating revised completion and guarantee dates for the project in November 1999. On March 14, 2000, the parties signed a formal amendment to the contract extending the completion date for both development and implementation to September 30, 2000. Clayton signed the amendment on behalf of TenFold. 162. For the results TenFold reported in its 10-K for 1999, TenFold utilized end dates of February 29, 2000 and March 15, 2000 to calculate the revenue it would recognize on the Utica project. 163. Using February 29, 2000 and March 15, 2000 as the end dates was improper. TenFold knew at the time the 10-K was filed that it had not completed the project by February 29, 2000 and that the project would not be completed by March 15, 2000. 164. TenFold should have used September 30, 2000, or a later date, as the end date to calculate revenue on the Utica contract for the results reported in its 10-K for 1999. 165. For the financial results TenFold reported in its 10-Q for the first quarter of 2000, TenFold used completion dates of May 31, 2000 and August 31, 2000 to calculate revenue on the Utica project. 166. Using May 31, 2000 and August 31, 2000 as the completion dates was improper. TenFold knew at the time the first quarter 2000 10-Q was filed that the completion date had been extended to September 30, 2000. 167. TenFold should have used September 30, 2000, or a later date, as the end date to calculate revenue on the Utica contract for the results reported in its 10-Q for the first quarter of 2000. 2. Unitrin Contract 168. TenFold and Unitrin originally contracted for TenFold to complete an application for Unitrin by March 7, 1999. That date was later extended to November 30, 1999. 169. TenFold missed the November 30, 1999 completion date. On January 28, 2000, the parties amended the contract and extended the completion date to September 1, 2000. 170. TenFold utilized a completion date of March 31, 2000 for purposes of calculating the revenue it would recognize on the Unitrin contract in its 1999 10-K. 171. Use of the March 31, 2000 end date was improper. At the time the 10-K was filed, TenFold was aware that the projected end date for the project had been extended to September 1, 2000. 172. TenFold should have used September 1, 2000, or a later date, as the end date to calculate revenue on the Unitrin contract for the results reported in its 10-K for 1999. 173. For the financial results TenFold reported in its 10-Q for the first quarter of 2000, TenFold used a completion date of June 1, 2000 to calculate revenue on the Unitrin project. 174. Using June 1, 2000 as the completion date was improper. TenFold knew at the time that the 10-Q was filed that the completion date for the Unitrin contract had, months earlier, been extended to September 1, 2000. 175. TenFold should have used September 1, 2000, or a later date, as the end date to calculate revenue on the Unitrin contract for the results reported in its 10-Q for the first quarter of 2000. 3. Trumbull Contract 176. TenFold and Trumbull contracted for TenFold to complete the development portion of a software development project for Trumbull by January 10, 2000. Under the terms of the contract, Trumbull was entitled to invoke the TenFold Guarantee if TenFold had not completed the project by March 25, 2000. 177. TenFold missed the completion date. The parties began negotiating an extension in March of 2000, and signed an amendment to the contract on April 13, 2000 that extended the completion date for both development and implementation to July 14, 2000. 178. TenFold utilized completion dates of February 18, 2000 and April 3, 2000 to calculate revenue on the Trumbull contract for the results reported in its 1999 10-K. 179. Using February 18, 2000 and April 3, 2000 as the end dates was improper. At the time the 10-K was filed, TenFold was aware that the project had not been completed by February 18, 2000 and would not be completed by April 3, 2000. 180. TenFold should have used July 14, 2000, or a later date, as the end date to calculate revenue on the Trumbull contract for the results reported in its 10-K for 1999. 181. For the financial results TenFold reported in its 10-Q for the first quarter of 2000, TenFold used completion dates of March 25, 2000 and April 3, 2000 to calculate revenue on the Trumbull project. 182. Using March 25, 2000 and April 3, 2000 as the completion dates was improper. TenFold knew at the time that the 10-Q was filed that it had not completed the project as of March 25, 2000 or April 3, 2000. Moreover, the completion date for the Trumbull contract had been extended to July 14, 2000 by an amendment that was signed two days prior to submission of the 10-Q. 183. TenFold should have used July 14, 2000, or a later date, as the end date to calculate revenue on the Trumbull contract for the results reported in its 10-Q for the first quarter of 2000. 4. Materiality and Further Allegations Concerning Knowledge 184. As a result of errors in its percentage of completion revenue calculations for the Utica, Unitrin and Trubull contracts, including but not limited to use of incorrect completion dates and the need to maintain appropriate holdbacks, TenFold overstated revenues and income in its 1999 10-K and its 10-Q for first quarter of 2000 in amounts that were material. 185. Kennedy, Hughes, Hanks and Clayton were aware of the end dates used to calculate revenue on the projects. Among other reasons, and as noted above, they all participated in the weekly forecast meetings and received the spreadsheets containing completion dates on a weekly basis. The status of every project was reviewed at these weekly meetings, and matters discussed would include schedules, completion dates, changes and adjustments. Thus, Kennedy, Hughes, Hanks and Clayton all would have known that incorrect completion dates were being used to calculate revenue. 186. Hanks prepared the spreadsheets for the weekly forecast meetings. 187. Kennedy, Hughes, Hanks and Clayton all would have known that the Utica and Trumbull systems had not been completed at the time TenFold filed its 1999 10-K. 188. An internal e-mail reflects that by February 28, 2000, Hughes and Clayton knew the projected end date for the Utica project was September 30, 2000. 189. Kennedy was aware that the March 31, 2000 end date for Unitrin was inaccurate as he was involved in negotiating the January 28, 2000 amendment with the customer. 190. Clayton was the individual responsible for calculating the amount of revenue to be recognized on the Utica, Unitrin and Trumbull projects and provided those numbers to Hughes for the financial statements. 191. Hughes managed and supervised the work of Hanks and Clayton and, as CFO, was responsible for TenFold's financial reporting. 192. TenFold's accounting or finance department or division, of which Hughes, Hanks and Clayton were a part, received copies of all contract amendments. 193. In addition, Hughes put pressure on TenFold's staff to use and acquiesce in the use of inaccurate completion dates. By the end of January 2000, the audit of TenFold's financial statements by its outside auditors was largely complete. Hughes prepared a document in February or early March 2000 stressing that end date estimates that had already been audited should not be changed. In the document, which was prepared for senior staff members and was also presented in a training session for controllers, Hughes stated that, "the auditors will come back to sign our 10-K later this month and ask us to update them - this will include asking if we changed ANY of our project estimates. If we have any revenue adjustments we will have to restate our year-end financial statements. We cannot allow that to happen. [...] The auditors warning was clear - if we are not accurate in our project estimates we will lose our ability to recognize license revenue up-front! It's up to you to ensure that this does not happen. If any one of you blows it, you blow it for all of us." VII. INADEQUATE INTERNAL CONTROLS 194. Under GAAP, an issuer must record a loss on a contract at the time it becomes evident the contract will enter a loss position. 195. TenFold performed its loss position calculations based on the estimated labor expended on a project. 196. In order to reach this estimate, TenFold assumed that a standard number of people worked on a development project and expended consistent effort over the course of a week. 197. TenFold's estimation methodology was inadequate because TenFold's team sizes did not remain constant. When TenFold was having difficulty completing a project, one way it attempted to get back on schedule was to assign additional people to the project. 198. TenFold did not factor any additional people into its calculation of costs because it did not track the actual number of people working on a project, nor did it track the actual number of days and hours worked by the teams. 199. Moreover, the TenFold accounting department was generally not informed when team sizes changed on projects, so it could not even re-estimate labor costs. 200. Since TenFold's fundamental assumption in estimating labor was inaccurate, and it did not track actual costs on its projects, TenFold was unable to determine if and when it was in a loss position. 201. Hughes, Hanks, and Clayton, as part of TenFold's accounting or finance department or division, were responsible for and implemented TenFold's system of internal controls. VIII. LIES TO THE AUDITORS 202. During all relevant periods, KPMG LLP ("KPMG") served as TenFold's outside auditors. 203. During KPMG's audit of TenFold's 1999 financial statements, TenFold supplied KPMG with the various project end dates it used when it calculated the amount of revenue to recognize on a percentage of completion basis. 204. KPMG relied on the information concerning completion dates it received from TenFold. 205. In connection with KPMG's audit of TenFold's 1999 financial statements, KPMG requested that TenFold confirm end dates with certain customers. The confirm documents, which were sent in January 2000, were to be returned directly to KPMG by the customer. 206. The confirm request sent to Utica specified a completion date for the project of February 29, 2000. 207. At the time that Utica received the confirm, TenFold and Utica were in the process of negotiating an amendment and new completion date for the project. 208. Utica did not return the confirm to KPMG because it felt that the February 29, 2000 end date was inaccurate. Utica communicated this to the president of the TenFold group or subsidiary formed to market and develop applications in the insurance industry, Bernard Mazon. 209. In response, Mazon provided Utica with ambiguous language to be used in the confirmation response. 210. Utica used this language in its response. 211. KPMG asked TenFold to provide it with an explanation of customer comments on the confirmation responses. Hughes prepared TenFold's response. 212. With respect to the Utica confirm, Hughes wrote an explanation that misconstrued the language provided by Utica. As CFO, Hughes had a duty to provide correct information to KPMG. 213. Hughes failed to contact Utica concerning its response prior to interpreting that response for KPMG. 214. KPMG relied on Hughes' explanation in its audit of TenFold's 1999 financial statements. 215. Hughes failed to inform KPMG at any time prior to the filing of TenFold's 1999 10-K that the Utica project would not be complete by the end date provided to KPMG and that the completion date was being extended well beyond the date provided. 216. Unitrin also received a confirm request listing an end date of March 31, 2000. Unitrin informed TenFold that it refused to sign the confirm because Unitrin felt that the stated end date was inaccurate. Unitrin never returned the original confirm. Instead, after the parties executed the amendment extending the completion date to September 1, 2000, Unitrin sent a letter to KPMG stating the new completion date and mentioning the contract amendment. 217. TenFold, however, represented to KPMG that the Unitrin project was scheduled to be completed months earlier. 218. The confirm Trumbull received listed an end date of March 25, 2000. Trumbull returned the confirm without comment, and its officers may not have known at that time that TenFold would seek an extension of the completion date. 219. Hughes never informed KPMG at any time prior to the filing of TenFold's 1999 10-K that the completion date TenFold provided for the Trumbull contract was inaccurate. 220. Shortly before the 1999 10-K was filed, Hughes represented to KPMG in a letter dated March 7, 2000 that no events had occurred from December 31, 1999 through the date of the letter that would have a material effect on TenFold's financial statements. 221. As CFO, Hughes was responsible for the information transmitted to KPMG, but he failed to provide updated and accurate information, and affirmatively misled KPMG. 222. Further, Hughes warned TenFold employees against providing accurate and updated information to the auditors, telling them that altering any completion dates would result in "blow[ing]" TenFold's ability to recognize upfront license revenue. FIRST CAUSE OF ACTION (Violations by TenFold, Kennedy and Hughes of
223. Plaintiff repeats and realleges paragraphs 1 through 222 above. 224. TenFold, Kennedy and Hughes, directly or indirectly, with scienter, in the offer or sale of securities, by the use of means or instruments of transportation or communication in interstate commerce, or by the use of the mails, employed devices, schemes, or artifices to defraud in violation of Section 17(a)(1) of the Securities Act [15 U.S.C. § 77q(a)(1)]. 225. By reason of the foregoing, TenFold, Kennedy and Hughes violated Section 17(a)(1) of the Securities Act and unless restrained and enjoined will continue to do so. SECOND CAUSE OF ACTION (Violations by TenFold, Kennedy and Hughes of
226. Plaintiff repeats and realleges paragraphs 1 through 225 above. 227. TenFold, Kennedy and Hughes, directly or indirectly, in the offer or sale of securities, by the use of means or instruments of transportation or communication in interstate commerce, or by the use of the mails, obtained money or property by means of untrue statements of material facts or omissions to state material facts necessary in order to make the statements made, in light of the circumstances under which they were made, not misleading, in violation of Section 17(a)(2) of the Securities Act [15 U.S.C. § 77q(a)(2)]. 228. By reason of the foregoing, TenFold, Kennedy and Hughes violated Section 17(a)(2) of the Securities Act and unless restrained and enjoined will continue to do so. THIRD CAUSE OF ACTION (Violations by TenFold, Kennedy and Hughes of
229. Plaintiff repeats and realleges paragraphs 1 through 228 above. 230. TenFold, Kennedy and Hughes, directly or indirectly, in the offer or sale of securities, by the use of means or instruments of transportation or communication in interstate commerce, or by the use of the mails, engaged in transactions, practices or courses of business which operated or would operate as a fraud or deceit upon purchasers of securities, in violation of Section 17(a)(3) of the Securities Act [15 U.S.C. § 77q(a)(3)]. 231. By reason of the foregoing, TenFold, Kennedy and Hughes violated Section 17(a)(3) of the Securities Act and unless restrained and enjoined will continue to do so. FOURTH CAUSE OF ACTION (Violations by TenFold, Kennedy, Hughes, Hanks and Clayton of
232. Plaintiff repeats and realleges paragraphs 1 through 231 above. 233. TenFold, Kennedy, Hughes, Hanks and Clayton, directly or indirectly, with scienter, in connection with the purchase or sale of securities, by the use of means or instrumentalities of interstate commerce, the mails, or any facility of a national securities exchange, have employed devices, schemes, or artifices to defraud; have made untrue statements of material fact or omitted to state material facts necessary in order to make the statements made, in light of the circumstances under which they were made, not misleading; or have engaged in acts, practices, or courses of business which operated or would operate as a fraud or deceit upon any person; in violation of Section 10(b) of the Exchange Act [15 U.S.C. § 78j(b)] and Rule 10b-5 thereunder [17 C.F.R. § 240.10b-5]. 234. By reason of the foregoing, TenFold, Kennedy, Hughes, Hanks and Clayton violated Section 10(b) of the Exchange Act and Rule 10b-5 thereunder and unless restrained and enjoined will continue to do so. FIFTH CAUSE OF ACTION (TenFold's violations of
235. Plaintiff repeats and realleges paragraphs 1 through 234 above. 236. Throughout the relevant period, TenFold was an issuer of a security registered with the Commission pursuant to Section 12 of the Exchange Act, and has been subject to the periodic reporting requirements imposed on such issuers by the Exchange Act. 237. As described elsewhere in this Complaint, during the relevant period, TenFold filed materially inaccurate and misleading annual and quarterly reports with the Commission. 238. TenFold also failed to add such further material information as was necessary to make the required statements or reports, in light of the circumstances under which they were made, not misleading. 239. By reason of the foregoing, TenFold violated Section 13(a) of the Exchange Act and Rules 12b-20, 13a-1, and 13a-13 [15 U.S.C. § 78m(a), 17 C.F.R. §§ 240.12b-20, 240.13a-1, and 240.13a-13] and unless restrained and enjoined will continue to do so. SIXTH CAUSE OF ACTION (Aiding and Abetting by Kennedy, Hughes, Hanks and Clayton of TenFold's Violations of Section 13(a) of the Exchange Act and Exchange Act Rules 12b-20, 13a-1, and 13a-13) 240. Plaintiff repeats and realleges paragraphs 1 through 239 above. 241. Kennedy, Hughes, Hanks and Clayton knew or were reckless in not knowing of TenFold's violations of Section 13(a) of the Exchange Act and Rules 12b-20, 13a-1, and 13a-13 thereunder and substantially assisted TenFold in committing these violations. 242. By reason of the foregoing, Kennedy, Hughes, Hanks and Clayton aided and abetted TenFold's violations of Section 13(a) of the Exchange Act and Rules 12b-20, 13a-1, and 13a-13 thereunder [15 U.S.C. § 78m(a), 17 C.F.R. §§ 240.12b-20, 240.13a-1, and 240.13a-13], and unless restrained and enjoined will continue to aid and abet violations of these provisions. SEVENTH CAUSE OF ACTION (TenFold's violations of Section 13(b)(2)(A) of the Exchange Act) 243. Plaintiff repeats and realleges paragraphs 1 through 242 above. 244. Throughout the relevant period, TenFold failed to make and keep books, records, and accounts which, in reasonable detail, accurately and fairly reflected the company's transactions and disposition of its assets. 245. By reason of the foregoing, TenFold violated Section 13(b)(2)(A) of the Exchange Act [15 U.S.C. § 78m(b)(2)(A)] and unless restrained and enjoined will continue to do so. EIGHTH CAUSE OF ACTION (Aiding and Abetting by Kennedy, Hughes, Hanks and Clayton of TenFold's
246. Plaintiff repeats and realleges paragraphs 1 through 245 above. 247. Kennedy, Hughes, Hanks and Clayton knew or were reckless in not knowing of TenFold's violations of Section 13(b)(2)(A) of the Exchange Act [15 U.S.C. § 78m(b)(2)(A)] and substantially assisted TenFold in committing these violations. 248. By reason of the foregoing, Kennedy, Hughes, Hanks and Clayton aided and abetted TenFold's violations of Section 13(b)(2)(A) of the Exchange Act, and unless restrained and enjoined will continue to aid and abet violations of these provisions. NINTH CAUSE OF ACTION (TenFold's Violations of Section 13(b)(2)(B) of the Exchange Act) 249. Plaintiff repeats and realleges paragraphs 1 through 248 above 250. At all relevant times, TenFold failed to devise and maintain a system of internal accounting controls sufficient to provide reasonable assurances that transactions were recorded as necessary to permit preparation of financial statements in conformity with generally accepted accounting principles or any other criteria applicable to such statements. 251. By reason of the foregoing, TenFold violated Section 13(b)(2)(B) of the Exchange Act [15 U.S.C. § 78m(b)(2)(B)], and unless restrained and enjoined will continue to do so. TENTH CAUSE OF ACTION (Aiding and Abetting by Hughes, Hanks and Clayton of TenFold's
252. Plaintiff repeats and realleges paragraphs 1 through 251 above. 253. Hughes, Hanks and Clayton knew or were reckless in not knowing of TenFold's violations of Section 13(b)(2)(B) of the Exchange Act [15 U.S.C. § 78m(b)(2)(B)] and substantially assisted TenFold in committing these violations. 254. By reason of the foregoing, Hughes, Hanks and Clayton aided and abetted TenFold's violations of Section 13(b)(2)(B) of the Exchange Act, and unless restrained and enjoined will continue to aid and abet violations of these provisions. ELEVENTH CAUSE OF ACTION (Violations by TenFold, Kennedy, Hughes, Hanks and Clayton of
255. Plaintiff repeats and realleges paragraphs 1 through 254 above. 256. TenFold's books, records and accounts were subject to Section 13(b)(2)(A) of the Exchange Act. 257. Defendants TenFold, Kennedy, Hughes, Hanks and Clayton directly or indirectly falsified or caused to be falsified TenFold's books, records and accounts. 258. By reason of the foregoing, TenFold, Kennedy, Hughes, Hanks and Clayton violated Rule 13b2-1 under the Exchange Act [17 C.F.R. § 240.13b2-1] and unless restrained and enjoined will continue to do so. TWELFTH CAUSE OF ACTION (Violations by TenFold, Hughes, Hanks and Clayton of
259. Plaintiff repeats and realleges paragraphs 1 through 258 above. 260. Throughout the relevant period, defendants TenFold, Hughes, Hanks and Clayton knowingly circumvented or knowingly failed to implement a system of internal accounting controls and knowingly failed to implement a system of internal accounting controls, and knowingly falsified books, records, or accounts described in Section 13(b)(2) of the Exchange Act. 261. By reason of the foregoing, TenFold, Hughes, Hanks and Clayton violated Section 13(b)(5) of the Exchange Act [15 U.S.C. § 78m(b)(5)], and unless restrained and enjoined will continue to do so. THIRTEENTH CAUSE OF ACTION (Violations by Hughes of Rule 13b2-2
262. Plaintiff repeats and realleges paragraphs 1 through 261 above. 263. Defendant Hughes directly or indirectly made or caused to be made materially false or misleading statements, or omitted to state or caused other persons to omit to state material facts necessary in order to make statements made, in light of the circumstances under which such statements were made, not misleading to an accountant in connection with: (1) an audit or examination of the financial statements of an issuer required to be made pursuant to the Exchange Act; or (2) the preparation or filing of any document or report required to be filed with the Commission pursuant to the Exchange Act or otherwise. 264. By reason of the foregoing, Hughes violated Rule 13b2-2 under the Exchange Act [17 C.F.R. § 240.13b2-2] and unless restrained and enjoined will continue to do so. PRAYER FOR RELIEF WHEREFORE, the Commission respectfully requests that the Court: I. Find that the defendants, and each of them, committed the violations alleged. II. Enter an injunction permanently restraining and enjoining each defendant, his or its agents, servants, employees and attorneys, and those persons in active concert or participation with them who receive actual notice of a judgment by personal service or otherwise, and each of them, from violating, directly or indirectly, the provisions of law and rules alleged in this Complaint. III. Order Kennedy, Hughes, Hanks, and Clayton to disgorge and pay over, as the Court may direct, all ill-gotten gains received or benefits in any form derived from the illegal conduct alleged in this Complaint, together with pre-judgment interest as provided by law. IV. Order each of the defendants to pay civil money penalties pursuant to Section 20(d) of the Securities Act and Section 21(d)(3) of the Exchange Act. V. Enter an order barring Kennedy and Hughes from serving as an officer or director of any publicly-held company pursuant to Section 21(d)(2) of the Exchange Act. VI. Grant such other relief as this Court may deem just or appropriate. DEMAND FOR JURY TRIAL Plaintiff demands a jury trial in this case. Dated: November 18, 2002
http://www.sec.gov/litigation/complaints/comp17852.htm
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