HELANE L. MORRISON (State Bar No. 127752)
Attorneys for Plaintiff
UNITED STATES DISTRICT COURT
NORTHERN DISTRICT OF CALIFORNIA
SAN FRANCISCO DIVISION
SUMMARY OF THE ACTION
1. From at least January 2000 until November 2000, Quintus Corporation ("Quintus" or the "Company"), a maker of customer relationship management software, reported false financial results to its shareholders, the Commission and the public. The false financial reports were the direct result of fraud perpetrated by Alan K. Anderson ("Anderson"), the former Chairman and Chief Executive Officer ("CEO") of Quintus.
2. To falsely inflate Quintus' reported sales revenue, Anderson fabricated three sales transactions and negotiated and signed a barter transaction between Quintus and a customer. For the three fake transactions, Anderson forged various documents and lied to and misled Quintus' accounting and finance personnel. In the barter transaction, Anderson negotiated the sale of Quintus software while secretly committing Quintus to purchase product from the same company in the following quarter. Anderson also caused false documents to be provided to Quintus' independent public accountants in order to conceal and carry out his fraud. Anderson's actions resulted in Quintus issuing press releases and filing reports with the Commission that artificially inflated revenue by 37.3% to 60.6% and fraudulently understated loss by 26.3% to 36.8%.
3. The Commission seeks to enjoin Anderson from future violations of the federal securities laws and from serving as a director and/or officer of companies reporting to the Commission. In addition, the Commission seeks to obtain disgorgement of all benefits received by Anderson from his violations of the securities laws and to obtain civil money penalties for the violations.
JURISDICTION, VENUE AND INTRADISTRICT ASSIGNMENT
4. The Commission brings this action pursuant to Sections 21(d), 21(e), and 21A of the Securities Exchange Act of 1934 ("Exchange Act") U.S.C. §§ 78u(d), 78u(e), and 78u-1(a)]. This Court has jurisdiction over this action pursuant to Sections 21(e) and 27 of the Exchange Act [15 U.S.C. §§ 78u(e) and 78aa].
5. Anderson made use of the means and instrumentalities of interstate commerce, of the mails, or of the facilities of a national securities exchange, in connection with the acts, practices, and courses of business and transactions alleged herein.
6. This district is an appropriate venue for this action under Section 27 of the Exchange Act [15 U.S.C. § 78aa]. Certain of the transactions, acts, practices and courses of business constituting the violations alleged herein occurred within the Northern District of California.
7. Assignment to the Oakland Division is appropriate pursuant to Civil Local Rule 3-2(c) because a substantial part of the events that give rise to the claims herein occurred in Alameda County, California.
8. Alan K. Anderson, age 40, is a resident of Walnut Creek, California. Anderson was Quintus' CEO from May 1995 until he was terminated in November 2000. From September 1999 until his termination, Anderson also served as Quintus' Chairman.
9. Quintus Corporation is a defunct entity whose assets are being liquidated as part of a bankruptcy proceeding. During the relevant time period in 1999 and 2000, Quintus was a Delaware corporation headquartered in Fremont and Dublin, California. The Company made customer relationship management software. The Company's common stock was registered with the Commission pursuant to Section 12(g) of the Exchange Act and was quoted on the Nasdaq National Market until November 15, 2000, when Nasdaq halted trading. On February 16, 2001, Nasdaq delisted Quintus.
ALLEGATIONS COMMON TO ALL CLAIMS FOR RELIEF
DEFENDANT MISREPRESENTED QUINTUS' FINANCIAL CONDITION.
10. In order to sell its common stock and other securities to members of the public and maintain public trading of its securities, Quintus was required to comply with statutes, rules and regulations designed to ensure that the Company's financial information was accurately recorded and disclosed to the investing public. Under these statutes, rules and regulations, Quintus had a duty to, among other things: (a) make and keep books, records and accounts which, in reasonable detail, accurately and fairly reflected its transactions and dispositions of assets; (b) devise and maintain a system of internal accounting controls sufficient to provide reasonable assurances that transactions are recorded as necessary to permit preparation of financial statements in conformity with generally accepted accounting principles (also known as "GAAP") or any other criteria applicable to such statements and to maintain accountability for assets; (c) file with the Commission annual reports on the appropriate form (known as a "Form 10-K") for each fiscal year including a financial statement disclosing the Company's balance sheet and statements of income and cash flows prepared in conformity with GAAP and certified by an independent public accountant ("auditors"); and (d) file with the Commission quarterly reports on the appropriate form (known as a "Form 10-Q") for each of the first three quarters of each fiscal year including financial statements that disclose its financial condition and results of business operations for each three-month period.
11. In mid-November 1999, four and a half years after Anderson joined Quintus, Anderson presided over Quintus' first offering of its stock to the public. To create and maintain interest in the stock, Anderson embarked on a campaign to falsely bolster the Company's reported revenue. Anderson created false contracts, emails, purchase orders, letters, and an "audit confirmation" response, and forged various signatures, in order to cause the Company to report sales revenue that did not exist. The false sales were then recorded in Quintus' accounting books and records and, eventually, in its financial statements. Anderson then actively misled Quintus accounting personnel and auditors to prevent discovery of the fraud. By doing so, Anderson undermined the Company's accounting controls.
12. Anderson's fraud caused Quintus to overstate its true financial results, including both sales revenue and net income (or loss). Quintus recorded and reported its financial results based on a fiscal year of April 1 to March 30. As a result of his fraud, Quintus filed materially false reports to the Commission on Forms 10-Q ("10-Q") for the quarters ended December 30, 1999, and June 30, 2000, and on Form 10-K405 ("10-K") for the fiscal year ("FY") ended March 31, 2000. In addition, Anderson caused Quintus to issue false press releases for these periods and for an additional quarter ended September 30, 2000.
13. Eventually, Quintus discovered Anderson's fraud. In November 2000, Quintus announced that it would investigate certain financial reporting issues. Later that month, Quintus fired Anderson.
14. On February 22, 2001, Quintus announced in a press release the summary of its expected financial restatements to be filed with the Commission. Under the Commission's rules and regulations, to ensure that investors and the public receive accurate financial information, companies are required to file restatements to correct false financial information previously filed with the Commission. Ultimately, Quintus did not file any restatements because it filed for bankruptcy and is in the process of liquidating all assets.
15. As reported by Quintus in its February 22, 2000 press release, the difference in its financial results and the actual results achieved is detailed in the chart below:
IN CARRYING OUT HIS FRAUD, ANDERSON DEVISED AND ORCHESTRATED THE FOLLOWING FRAUDLULENT TRANSACTIONS, AMONG OTHERS:
A. The Ticketmaster Transaction: Anderson Forged Documents that Resulted in Quintus Reporting False Financial Information.
16. Ticketmaster On-line-Citysearch, Inc. ("Ticketmaster"), a subsidiary of USA Networks, Inc. ("USA"), was the first large buyer of Quintus' customer management relationship software. On July 19, 1999, Ticketmaster and Quintus entered into a master agreement whereby Ticketmaster purchased software and services for $2.3 million. The agreement stated that Ticketmaster and Quintus would work together on a pilot project, and provided Ticketmaster with the option to purchase additional Quintus software licenses if the pilot was successful. In the fall of 1999, USA placed Ticketmaster under new management as part of its Electronic Commerce Solutions ("ECS") Group.
17. In December 1999, the last month in Quintus' third quarter, Anderson proposed to ECS that Ticketmaster purchase an additional $6 million in Quintus software licenses. ECS declined but agreed to the purchase of $1.5 million, which USA had budgeted. During the evening of December 31, 1999, the last day of the quarter, Anderson called ECS and USA management repeatedly, imploring them to purchase $6 million of Quintus' products. Again, ECS and USA declined, but agreed to fax a $1.5 million purchase order to Quintus.
18. Meanwhile, Anderson represented to Quintus CFO Susan Salvesen ("Salvesen") that Ticketmaster/USA would make a $6 million purchase.
19. On December 31, 1999, ECS informed Salvesen that the purchase would be $1.5 million only. When Salvesen asked Anderson about the difference, he claimed that he would resolve the matter with an executive at USA. Later that evening, Anderson told Salvesen that the purchase order was $6 million. To mislead Quintus and Salvesen, Anderson doctored USA's $1.5 million purchase order into a $6 million order. Anderson provided this doctored purchase order to the Company's finance department. Based on the doctored purchase order and Anderson's representations, Quintus fraudulently recognized revenue for $6 million rather than $1.5 million and reported this false information in its 10-Qs for the quarters ended December 31, 1999, and June 30, 2000, and in its 10-K for FY 2000, all filed with the Commission.
20. Anderson then concealed his fraud. In or about January 2000, Anderson informed Salvesen that only he was to handle the collections on the Ticketmaster/USA account. USA paid Quintus for the $1.5 million purchase in April 2000. In or about the first half of 2000, Anderson continued to try to convince USA executives to make the additional $4.5 million purchase, to no avail.
21. In or about December 1999, Anderson, pledging some of his stock options as collateral, had received a personal margin loan in excess of $1 million. Using those funds, on or about July 20, 2000, Anderson wired $1 million to Quintus as alleged partial payment from Ticketmaster/USA. In or about October 2000, Salvesen told Anderson that if Ticketmaster/USA made no additional payment by October 17, 2000, the date Quintus planned to release its financial results for quarter ended September 30, 2000, the funds that Ticketmaster/USA supposedly owed would need to be written off as bad debt. On or about October 17, 2000, Anderson told Salvesen that due to his personal friendship with the head of an affiliated USA company, the affiliate had agreed to pay the $3.7 million and that he had the check in hand ($3.7 million was supposedly outstanding rather than $3.5 million because of a service proposal that was not reflected in Anderson's forged purchase order).
22. Based on Anderson's representation, Quintus issued an October 17, 2000 false press release stating that a large receivable had been collected. For nearly a week Anderson refused to give Quintus the alleged check. When he finally provided the $3.7 million check, Quintus attempted to negotiate it, but the check was returned for lack of funds. The check Anderson provided was a personal check, lacking any identifying information. The account number on the check belonged to Anderson. When Salvesen confronted Anderson about the lack of funds, Anderson explained that the USA affiliate had failed to transfer the money to the account, but that he would have the affiliate wire the money to Quintus. In the interim, Anderson lied to a longtime friend, who had no relationship with either USA or Ticketmaster, and persuaded him to make a $3.7 million loan to Anderson, which Anderson then wired to Quintus and represented as payment from Ticketmaster/USA.
B. The Sun Transaction: Anderson Forged Documents that Resulted in Quintus Reporting False Financial Information.
23. On March 31, 2000, Sun Microsystems, Inc. ("Sun") entered into an agreement with Quintus for Sun to purchase $2 million of Quintus products. The sale was contingent upon Sun's acceptance of the product, which was effective sixty days after installation, unless Sun notified Quintus to the contrary. Under the Company's policies and GAAP, Quintus could not recognize revenue until the acceptance contingency was met because collectibility of the sales price remained uncertain.
24. In or about June 2000, the Company decided to ask Sun if it would agree to modify the agreement to remove the acceptance condition in order for Quintus to recognize the revenue for the first quarter ended June 30, 2001. Anderson volunteered to contact Harry Keeley ("Keeley"), a Sun Vice President, for the purpose of modifying the agreement.
25. On or about June 30, 2000, Anderson forwarded to Salvesen a fictitious email of the same date purportedly from Keeley. The email stated that Keeley approved the removal of the acceptance condition from the March 31 agreement. The email misspelled Keeley's name and misstated his title. In fact, as Anderson well knew, Keeley did not write or send the email.
26. A few weeks later, Anderson gave Salvesen a hard copy of an addendum to the Sun agreement removing the acceptance condition, allegedly signed by Keeley. Keeley never signed the addendum.
27. In July 2000, Sun discovered the forged email and addendum. On or about July 27, counsel for Sun sent a letter to Anderson and Salvesen demanding an explanation of the forged email and addendum.
28. On or about August 3, Anderson called Keeley to explain the forgeries. Anderson falsely claimed that Quintus had identified the responsible employee, who had been terminated. Keeley told Anderson to put his explanation in writing and send it to Sun's counsel.
29. On or about August 11, 2000, Anderson wrote a letter to Sun's counsel stating that the "we have terminated the employee," and that "the contract in question stands and there will be no modifications." That same day, Sun's counsel responded with a letter accepting Anderson's explanation and confirming that the agreement had not been modified or amended in any way.
30. Upon receipt of Sun's July 27 letter, Salvesen demanded an explanation from Anderson. Anderson responded that Keeley had bypassed Sun's contracting protocol and lied to Sun's counsel about it, resulting in the letter. Salvesen told Anderson that Sun's accusations must be rescinded in writing. In order to conceal his fraud, Anderson doctored Sun's August 11, 2000 letter to state that the matter was satisfactorily resolved. Based on this forged letter and Anderson's explanation and existing documentation, Quintus included the $2 million as revenue in the 10-Q filed with the Commission for the quarter ended June 30, 2000.
C. Anderson Entered Into a Secret Barter Transaction with Mobileum that Resulted in Quintus Reporting False Financial Information.
31. In June 2000, Ori Sasson ("Sasson"), the founder and chairman of Mobileum, Inc. ("Mobileum"), contacted Anderson regarding a possible business relationship. Anderson told Sasson that he would only purchase Mobileum products if Mobileum purchased Quintus products. Sasson agreed to the reciprocal purchases only if the netted deal would yield a benefit to Mobileum. Sasson also informed Anderson that such a deal would be considered a "barter transaction" for accounting purposes and told Anderson to discuss the matter with his CFO and auditors. Anderson told Sasson he understood the nature of the transaction.
32. Later that month, with only Anderson negotiating on behalf of Quintus, the parties agreed that Mobileum would purchase $3 million of Quintus products by June 30, 2000, and that Quintus would purchase $4 million of Mobileum products in the next quarter. Both Mobileum and Quintus made the reciprocal purchases.
33. In or about June through October 2000, Salvesen and Quintus' outside auditors asked Anderson about the nature of the transactions. Anderson repeatedly stated that the two transactions were unrelated and that Quintus had no obligation to make any purchase from Mobileum. Based on Anderson's representations, Quintus improperly recognized and reported the $3 million as revenue on the sale to Mobileum in its 10-Q filed with the Commission for the quarter ended June 30, 2000. Under GAAP, Quintus should not have recognized the revenue because such exchanges are not accounted for as sales.
D. The AT&T Transaction: Anderson Forged Documents that Resulted in Quintus Reporting False Financial Information.
34. In Spring 2000, Quintus began negotiating an agreement for AT&T Corporation ("AT&T") to become a reseller of Quintus' products. As the negotiations progressed, Quintus asked for a payment guarantee by AT&T to purchase $8 million in Quintus products. AT&T informed Quintus' negotiating team and Anderson that there would be no upfront guarantee. Rather, AT&T would pay for Quintus products as it resold them to end users and would not guarantee to purchase any amount up-front. Under the Company's policies and GAAP, AT&T's payment terms precluded Quintus from recognizing revenue until AT&T sold the products to end users.
35. For the next several months, Quintus continued to add the upfront guarantee language into draft agreements, and AT&T continued to inform Quintus that such payment terms were unacceptable. On or about September 29, 2000, the last business day for the quarter ended September 30, 2000, AT&T's Managing Partner, Randy Johnston, informed Anderson that an agreement could not be finalized by that quarter because the offending payment guarantee language was still contained in the draft agreement.
36. At some time between September 30 and October 2, 2000, Anderson forged two documents. First, he forged Johnston's signature on an agreement entitled "September 30 2000 Agreement Between Quintus Corporation and AT&T Corp. for Quintus' e-Contact Software and Support Services" that contained a payment guarantee of $7 million. Next, because Quintus needed a purchase order or an equivalent from AT&T in order to recognize revenue, Anderson forged Johnston's signature on a letter stating that "[t]his letter is authorization for the purchase of software licenses from Quintus Corporation in the amount of $7,000,000."
37. On or about October 2, 2000, Anderson handed to Salvesen the forged letter and the forged contract dated September 30, 2000. Based on the forged documents and Anderson's representations, Quintus fraudulently recognized $7 million as revenue and issued a press release announcing its financial results that included the $7 million as revenue for the quarter ended September 30, 2000.
38. In or about October 2000, as part of the auditors' review of Quintus' quarterly financial statements to be filed with the Commission and at their request, Quintus sent a confirmation request to AT&T asking AT&T to confirm that money was owed under the September 30, 2000 forged contract. A confirmation request is one of the methods used by auditors to test the accuracy of a company's books and records. When AT&T did not respond to the request for confirmation, Anderson offered to locate Johnston and deliver the confirmation request. Instead of sending the confirmation request, in or about October 2000, Anderson forged Johnston's signature and returned a response to the confirmation request to the Company's auditors, falsely certifying that AT&T had agreed to pay $7 million to Quintus under the September 30, 2000 forged contract.
E. Misrepresentations In Quintus' Press Releases and Filings with the Commission.
39. On or about January 19, 2000, Quintus issued a press release announcing its financial results for its third quarter ended December 31, 1999. Prior to issuing the press release, Anderson was provided a draft copy for his review and approval. The press release reported revenue that included $6 million from the fictitious Ticketmaster transaction rather than the actual $1.5 million.
40. On or about February 14, 2000, Quintus filed with the Commission a 10-Q for the quarter ended December 31, 1999. The 10-Q contained several false statements due mostly to the fraudulent Ticketmaster transaction, including misstating the total revenue as $13.5 million and net loss as $(8.8 million). In its February 22, 2001 press release, the Company announced that it expected to restate net revenue and net loss for the quarter ended December 31, 1999, in the amounts of $8.4 million and $(13.9 million), respectively.
41. On or about April 19, 2000, Quintus issued a press release announcing its financial results for FY 2000. Prior to issuing the press release, Anderson was provided a draft copy for his review and approval. The release reported revenue of $51.7 million, which included the false Ticketmaster transaction. In the press release, Anderson was quoted as saying "we grew our revenue by over 70% year over year, exceeding $51 million in fiscal year 2000." Anderson's statements were false because neither the revenue growth nor the revenue amount were accurate.
42. On or about June 2, 2000, Quintus filed with the Commission its 10-K for FY ended March 31, 2000. The 10-K contained false financial information based on the fraudulent Ticketmaster transaction, including inaccurate net revenue and net loss. Anderson signed the 10-K.
43. On or about July 20, 2000, Quintus issued a press release announcing its financial results for first quarter of FY 2001 ended June 30, 2000. Prior to issuing the press release, Anderson was provided a draft copy for his review and approval. The press release reported false financial information including false revenue from the fraudulent Sun transaction and the barter transaction with Mobileum. In the release, Anderson was quoted as saying "[w]e are pleased to report our third consecutive quarter as a public company in which we have shown record revenues, exceeded analysts expectations and have narrowed pro forma loss per share." Anderson's statements were false because without the Sun and Mobileum transactions, the company would not have shown record revenues or exceeded analysts' expectations.
44. On or about August 14, 2000, Quintus filed with the Commission its 10-Q for the first quarter of FY 2001. The 10-Q contained several false statements concerning Quintus' revenues, losses and earnings because it included the Sun and Mobileum transactions. The 10-Q reported total revenue as $13.5 million and net loss as $(11.5 million). In its February 22, 2001 press release, the Company announced that it expected to restate net revenue and net loss for the quarter ended June 30, 2000, in the amounts of $13.5 million and $(16.5 million), respectively.
45. On or about October 17, 2000, Quintus issued a press release announcing financial results for the second quarter of FY 2001 ended September 30, 2000. Prior to issuing the press release, Anderson was provided a draft copy for his review and approval. The press release was false because it included the $7 million from the non-existent September 30, 2000, AT&T transaction. In the press release, Anderson was quoted as saying "[w]e are very pleased to report our fourth consecutive quarter as a public company in which we have shown record revenues." Anderson's statement was false because without the forged AT&T transaction, revenue would have been less than reported in the prior quarter.
FIRST CLAIM FOR RELIEF
Violations of Section 10(b) of the Exchange Act
and Rule 10b-5.
46. The Commission realleges and incorporates by reference Paragraphs 1 through 45 above.
47. During the relevant period, Anderson, directly or indirectly, in connection with the purchase or sale of securities, by the use of means or instrumentalities of interstate commerce, or of the mails, with scienter:
(a) employed devices, schemes, or artifices to defraud;
(b) made untrue statements of material facts or omitted to state material facts necessary in order to make the statements made, in the light of the circumstances under which they were made, not misleading; and
(c) engaged in acts, practices, or courses of business which operated or would operate as a fraud or deceit upon other persons, including purchasers and sellers of securities.
48. Anderson has violated and, unless restrained and enjoined, will continue to violate Section 10(b) of the Exchange Act, 15 U.S.C. §78j(b), and Rule 10b-5, 17 C.F.R. §240.10b-5.
SECOND CLAIM FOR RELIEF
Violations of Rule 13b2-2.
49. The Commission realleges and incorporates by reference Paragraphs 1 through 45 above.
50. By engaging in the conduct described above, and in connection with an examination of the financial statements of Quintus and the preparation and filing of statements and reports with the Commission, Anderson, directly or indirectly, made or caused to be made materially false or misleading statements to accountants and omitted to state, or caused another person to omit to state to accountants, material facts necessary in order to make statements made to the accountants, in light of the circumstances under which such statements were made, not misleading.
51. Anderson has violated and, unless restrained and enjoined, will continue to violate Rule 13b2-2, 17 C.F.R. §240.13b2-2.
PRAYER FOR RELIEF
WHEREFORE, the Commission respectfully requests that this Court:
Permanently enjoin Anderson from violating Sections 10(b) of the Exchange Act and Rules 10b-5 and 13b2-2 thereunder.
Permanently enjoin Anderson from serving as an officer or director of any entity having a class of securities registered with the Commission pursuant to Section 12 of the Exchange Act [15 U.S.C. §78l] or that is required to file reports pursuant to Section 15(d) of the Exchange Act [15 U.S.C. §78o(d)].
Order Anderson to disgorge any wrongfully obtained benefits, including prejudgment interest.
Order Anderson to pay civil penalties pursuant to Section 21(d)(3) of the Exchange Act [15 U.S.C. § 78u(d)(3)].
Retain jurisdiction of this action in accordance with the principles of equity and the Federal Rules of Civil Procedure in order to implement and carry out the terms of all orders and decrees that may be entered, or to entertain any suitable application or motion for additional relief within the jurisdiction of this Court.
Grant such other and further relief as this Court may determine to be just and necessary.
Dated: May 20, 2002 Respectfully submitted,
Kashya K. Shei