U.S. SECURITIES AND EXCHANGE COMMISSION
Litigation Release No. 20163 / June 22, 2007
Accounting and Auditing Release No. 2621 / June 22, 2007
SEC v. Graham, United States District Court, District of Massachusetts, Civil Action No. 07-11152 (RWZ)
Commission Charges Former Intervoice CFO of Texas Company in Fraudulent Scheme to Inflate Revenue
The Commission announced today that it had filed a civil fraud action in Massachusetts federal court against Rob Roy J. Graham, the former CFO of Intervoice, Inc., for engaging in a fraudulent scheme to inflate Intervoice's revenues and misstate other important financial metrics so as to deceive investors as to the company's true financial condition. Graham, a resident of Dallas, Texas, has agreed to settle with the Commission without admitting or denying the allegations in the complaint. Under the settlement, Graham agreed to the entry of an order that enjoins him from future violations of the antifraud and books and records provisions of the securities laws, imposes a permanent officer and director bar, and requires payment of over $200,000 for civil penalties and disgorgement.
The Commission's complaint, dated June 21, 2007, alleges that the scheme involved the improper recognition of revenue from a series of transactions that resulted in Intervoice's publication of materially false and misleading financial statements in four financial periods between 2000 and at least 2002. As set forth in the complaint, Graham negotiated and approved transactions between Intervoice and its distributors that were each subject to significant, ongoing, post-transaction obligations and thus did not qualify for revenue recognition under Intervoice's policies or generally accepted accounting principles (GAAP). The complaint alleges that, as to certain transactions, Graham agreed in advance to reconfigure the hardware and software products, or to substitute products of commensurate value, in order to meet the needs of its distributors' ultimate end users, thereby precluding revenue recognition under GAAP. As to other transactions, the complaint alleges that Graham requested distributors to take products in advance of their receiving orders from end customers, and agreed to allow the distributors to return the products without penalty if the end customers failed to purchase the products. According to the complaint, Graham failed to document these terms, and, in some cases, affirmatively misled Intervoice's external auditors by providing false information and documents. In addition, the complaint also alleges that, during 2001, Graham helped one of Intervoice's suppliers, Speechworks International, Inc., to improperly recognize revenue by falsifying documents that he knew the company would use to deceive its own auditors.
The complaint further alleges that during the fourth quarter of fiscal 2001, Graham negotiated a transaction in which Intervoice paid $900,000 to Speechworks in exchange for Speechworks amending a stock warrant that it had previously issued to Intervoice. The amendment purported to permit Intervoice to immediately exercise the warrant and resell the underlying shares as freely trading shares pursuant to a specific registration exemption. The complaint alleges, however, that because of the $900,000 payment to Speechworks, these shares were not eligible for the exemption and should have been issued to Intervoice as restricted stock. Nonetheless, the complaint alleges, Intervoice improperly sold the shares of Speechworks' stock as freely-trading shares and earned gross proceeds of $21.4 million.
The complaint alleges that through his fraudulent conduct Graham violated Sections 5(a), 5(c) and 17(a) of the Securities Act of 1933 ("Securities Act"), Sections 10(b) and 13(b)(5) of the Securities Exchange Act of 1934 ("Exchange Act") and Rules 10b-5, 13b2-1 and 13b2-2 thereunder, aided and abetted Intervoice's violations of Sections 13(a), 13(b)(2)(A) and 13(b)(2)(B) of the Exchange Act and Rules 12b-20, 13a-1 and 13a-13 thereunder, and aided and abetted Speechworks' violations of Section 10(b) of the Exchange Act and Rule 10b-5 thereunder. I addition to injunctions and a permanent officer and director bar, Graham has consented to the entry of a judgment that requires disgorgement of $75,000 with $33,270.37 in prejudgment interest, and a civil penalty of $100,000.
In a related proceeding, the Commission filed a civil action against Richard J. Westelman and Steven Forman, the former CFO and controller of Speechworks (now a part of Nuance, Inc.), and Arthur Haberman, Speechworks' former director of finance, for their role in the improper transactions with Intervoice. Westelman and Haberman have agreed to settle with the Commission without admitting or denying the Commission's allegations. The Commission's action against Forman is pending in the Massachusetts federal district court. For further information, see Litigation Release No. 20164.
The Commission's investigation is continuing.
A copy of the Commission's complaint is attached.