U.S. SECURITIES AND EXCHANGE COMMISSION
Litigation Release No. 20164 / June 22, 2007
Accounting and Auditing Release No. 2622 / June 22, 2007
SEC v. Forman, et al., United States District Court, District of Massachusetts, Civil Action No.: 07-11151 (RWZ)
Commission Charges Former CFO, Controller, and Director of Finance at Massachusetts Technology Company
The Securities and Exchange Commission announced that it had filed a civil fraud action in Massachusetts federal court against Richard J. Westelman and Steven Forman, the former CFO and controller of Speechworks International, Inc. (now a part of Nuance, Inc.). The Commission charged that Westelman, a resident of Scituate, Massachusetts, and Forman, a resident of Chelmsford, Massachusetts, engaged in a fraudulent scheme to inflate Speechworks' revenues and misstate other important financial metrics so as to deceive investors as to the company's true financial condition. The Commission also charged Arthur Haberman, Speechworks' former director of finance, with violating and aiding and abetting Speechworks' violations of various books and records provisions of the federal securities laws. Both Westelman and Haberman have agreed to settle with the Commission without admitting or denying the allegations in the complaint. Westelman 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 a $100,000 civil penalty. Haberman agreed to the entry of an order that enjoins him from future violations of the books and records provisions of the securities laws and requires payment of a $25,000 civil penalty. The Commission's action against Forman, in which it is seeking injunctions, an officer and director bar, and a civil penalty, is pending in the U.S. District Court for the District of Massachusetts.
The Commission's complaint, dated June 21, 2007, alleges that from at least 2001 through at least 2003, Westelman and Forman engaged in a fraudulent scheme to inflate Speechworks' revenues and misstate other key financial information. According to the complaint, Westelman negotiated and approved a series of transactions between Speechworks and one of its key resellers, Intervoice, Inc., that called for the reseller to make royalty payments prior to its shipment of software to end customers. For one transaction, the complaint alleges Westelman requested Intervoice to provide falsified documents that allowed him to improperly recognize as revenue a $900,000 cash payment Intervoice made in return for amending a warrant Speechworks had previously issued to Intervoice. For another transaction, the complaint alleges that Westelman and Forman schemed to recognize as revenue $2 million in prepayments to Speechworks, even though they knew the deal was not properly documented and did not otherwise qualify for revenue recognition under Speechworks' policies and GAAP. The complaint further claims that Westelman and Forman purposefully misled Speechworks' external auditors about the terms of the deal and, among other things, permitted the auditors to rely on documents that they knew to be false and misleading. The complaint also alleges that Westelman helped Intervoice improperly recognize revenue. Finally, the complaint alleges that Haberman improperly recorded Intervoice's royalty prepayments as revenue in the company's books and records.
The complaint alleges that through their conduct, Westelman and Forman variously violated, or aided and abetted Speechworks' violations of, 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 thereunder, aided and abetted Speechworks' 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 Westelman also aided and abetted Intervoice's violations of Section 10(b) of the Exchange Act and Rule 10b-5 thereunder; and Haberman violated Rule13b2-1 of the Exchange Act and aided and abetted Speechworks' 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.
In a related proceeding, the Commission filed a civil injunctive action against Rob Roy J. Graham, Intervoice's former CFO. Graham has agreed to settle with the Commission without admitting or denying the allegations in the complaint. For further information, see Litigation Release No. 20163
A copy of the Commission's complaint is attached.