U.S. SECURITIES AND EXCHANGE COMMISSION
Litigation Release No. 21210 / September 14, 2009
Accounting and Auditing Release No. 3050 / September 14, 2009
Securities and Exchange Commission v. Stuart W. Fuhlendorf, Case No. C-09-1292 (TSZ) (W.D. Wash. filed Sept. 14, 2009)
Securities and Exchange Commission v. Isilon Systems, Inc., Case No. C-09-1293 (RAJ) (W.D. Wash. filed Sept. 14, 2009)
SEC CHARGES FORMER ISILON SYSTEMS CFO WITH FRAUDULENTLY BOOSTING REVENUE
The Securities and Exchange Commission today filed securities fraud charges against Stuart W. Fuhlendorf, former Chief Financial Officer of Isilon Systems, Inc. On the heels of the Seattle-based electronic storage company's successful initial public offering (IPO), Fuhlendorf allegedly cut secret side deals with Isilon customers to allow the company to report inflated sales to its shareholders.
The SEC alleges Fuhlendorf concealed the true deal terms from Isilon's controller, audit committee, and outside auditor, leading the company to report $4.8 million in improper revenue during 2006 and 2007. In a separate proceeding, the SEC also filed settled charges against Isilon for its misleading financial information.
According to the SEC's complaints, filed in federal district court in Seattle, Isilon became a publicly-traded company in December 2006 and its stock price increased 77 percent on its opening day. The high expectations created by the successful IPO placed significant pressure on Isilon's management to meet analysts' lofty revenue forecasts. When anticipated deals failed to materialize, the SEC alleges that Fuhlendorf personally negotiated deal terms so that Isilon could get product out the door, even though the secret deal terms made revenue recognition improper under Generally Accepted Accounting Principles (GAAP) and the company's own internal policies.
The SEC's complaints allege that Isilon improperly booked revenue on five transactions, including three transactions with oral side agreements between Fuhlendorf and representatives of Isilon customers; a sale in which the terms were not fixed and determinable until after Isilon's quarter ended; and a roundtrip transaction that was essentially a circular flow of cash from Isilon to the customer and back to Isilon. The SEC alleges that Fuhlendorf lied to Isilon's audit committee about the true nature of the deal, which was merely a sham transaction designed to artificially boost Isilon's revenues.
In February 2008, following an internal investigation, Isilon restated its financial statements to correct its accounting for these and other transactions.
In its federal court action against Fuhlendorf, the SEC alleges Fuhlendorf violated Section 17(a)(1), (a)(2), and (a)(3) of the Securities Act of 1933 ("Securities Act"), Sections 10(b) and 13(b)(5) of the Securities Exchange Act ("Exchange Act"), and Rules 10b-5, 13a-14, 13b2-1, and 13b2-2 thereunder and aided and abetted violations of Sections 13(a), 13(b)(2)(A), and 13(b)(2)(B) of the Exchange Act and Rules 12b-20, 13a-1, 13a-11, and 13a-13. The SEC seeks a permanent injunction, disgorgement of ill-gotten gains plus prejudgment interest, financial penalties, forfeiture of bonuses and other compensation, and an officer-and-director bar.
In the separate settled proceeding against Isilon, the company has agreed (without admitting or denying the SEC's allegations) to be enjoined from future violations of Sections 13(a), 13(b)(2)(A), and 13(b)(2)(B) of the Exchange Act and Rules 12b-20, 13a-1, 13a-11 and 13a-13 thereunder. In deciding to accept Isilon's offer of settlement, the SEC took into account the cooperation that Isilon provided the SEC staff during the investigation.