SECURITIES AND EXCHANGE COMMISSION Washington, D.C. Litigation Release No. 15325 / April 10, 1997 Accounting and Auditing Enforcement Release No. 905 / April 10, 1997 SECURITIES AND EXCHANGE COMMISSION v. STRUCTURAL DYNAMICS RESEARCH CORPORATION, RONALD J. FRIEDSAM, RONALD H. HOFFMAN, ROBERT A. FISCHER, TONY TOLANI AND RICHARD J. LAJOIE, JR. (Civ. No. C-1-97-0352) (HW) The Securities and Exchange Commission ("Commission") announced today that it filed and simultaneously settled a financial fraud action seeking permanent injunctions and monetary and other relief in the United States District Court for the Southern District of Ohio, Western Division, against Structural Dynamics Research Corporation ("SDRC" or the "Company") and five former senior officers of SDRC: Ronald J. Friedsam ("Friedsam"), formerly SDRC's Chief Executive Officer, President and Chairman of the Board of Directors, Ronald H. Hoffman ("Hoffman"), formerly SDRC's Chief Financial Officer, Robert A. Fischer ("Fischer"), formerly SDRC's Senior Vice-President in charge of SDRC's Software Product Marketing Division, Tony Tolani ("Tolani"), formerly SDRC's Vice-President in charge of Far East Operations, and Richard J. LaJoie, Jr. ("LaJoie"), formerly SDRC's Controller. Besides the entry of injunctions, the defendants have agreed to pay a total of approximately $1.5 million in monetary relief. In a related action, the United States Attorney for the Southern District of Ohio announced that Tony Tolani pled guilty today to causing false statements to be made from 1992 to 1994 to the Commission by causing SDRC to report inflated revenues and earnings to the Commission in its quarterly and annual reports. Tolani faces a maximum of five years in prison, three years of supervised release, a fine of twice the gain or loss, and restitution. The Commission's Complaint alleges that from 1992 through September 1994, SDRC artificially inflated revenues and earnings by recognizing premature and fictitious revenue based on purported orders from Far East sales representatives and distributors submitted by SDRC's Vice-President in charge of Far East Operations, Tolani, and approved by his superior, Fischer. During this period, according to the Complaint, SDRC recorded premature and fictitious revenue based on, among other things, purchase orders obtained from sales representatives which contained conditional language, indicating that the sales had not been finalized. According to the Complaint, SDRC shipped the product "sold" pursuant to the fictitious and premature orders to a warehouse of a freight company, where it was held until further ==========================================START OF PAGE 2====== instructions, if any, from SDRC's Far East Operations. When the scheme was disclosed in September 1994, approximately $30 million of SDRC product was stored in a warehouse at the Cincinnati airport. The Complaint also alleges that SDRC improperly recognized a substantial amount of revenue relating to three large customers, including IBM and Sony, based on documentation submitted by Tolani and Fischer. The Complaint alleges that from at least 1993 through August 1994, Friedsam, Hoffman and Lajoie knew or were reckless in not knowing that SDRC improperly recognized material amounts of revenue in its Far East Operations. The Complaint further alleges that during the audit of SDRC's 1993 financial statements, Tolani made false statements to SDRC's auditors about the validity of orders from the Far East, and Hoffman and LaJoie, directly or indirectly, omitted to state certain material information to the auditors. In addition, the Complaint alleges, Tolani, Hoffman and Fischer each exercised SDRC stock options and sold large quantities of SDRC stock while they possessed material, non- public information about the accuracy of SDRC's financial statements, thereby avoiding losses of approximately $458,000, $150,000 and $116,000, respectively. Tolani and Fischer also received bonuses of $221,992 and $16,000, respectively, during the period of the alleged fraud based upon SDRC's purportedly strong financial performance. The Commission alleged that by such conduct SDRC, Friedsam, Hoffman, Fischer, Tolani and LaJoie violated the antifraud and certain other provisions of the federal securities laws. Specifically, each of the defendants violated Section 10(b) of the Securities Exchange Act of 1934 ("Exchange Act") and Rule 10b-5 thereunder; Tolani, Fischer and Hoffman violated Section 17(a) of the Securities Act of 1933; Tolani, Hoffman and Lajoie violated Exchange Act Rules 13b2-1 and 13b2-2 and Fischer violated Exchange Act Rule 13b2-1; and SDRC violated Sections 13(a) and 13(b)(2)(A) and (B) of the Exchange Act and Rules 12b- 20, 13a-1, and 13a-13 thereunder. Relief Simultaneous with the filing of the Commission's Complaint, SDRC, Friedsam, Hoffman, Fischer, Tolani and LaJoie, without admitting or denying the allegations of the Complaint, consented to the entry of Final Judgments permanently enjoining them from violating the relevant provisions of the federal securities laws, ordering Tolani, Hoffman and Fischer to disgorge losses avoided, plus prejudgment interest thereon, and directing Friedsam, Hoffman, Tolani and LaJoie to pay civil money penalties of $100,000, $50,000, $392,000 and $25,000, respectively. Friedsam and Hoffman also consented to provisions in the Final Judgments ==========================================START OF PAGE 3====== barring each for a period of five years from serving as an officer or director of any public reporting company. As part of the settlements, Hoffman and LaJoie have agreed to the institution of administrative proceedings pursuant to Rule 102(e) of the Commission's Rules of Practice, upon entry of the injunctions, which will bar them each for a period of at least five years from appearing or practicing before the Commission as an accountant. Other Proceedings The Commission also today entered a cease and desist order, by consent, as to SDRC's Assistant Controller, Lynn K. Blattman, based upon acts that allegedly contributed to SDRC's violations of the reporting provisions of the federal securities laws. [Securities Exchange Act of 1934 Release Number 38493.] The Commission also today instituted and simultaneously settled administrative proceedings pursuant to Rule 102(e) of the Commission's Rules of Practice as to SDRC's auditors for the audit of SDRC's 1993 financial statements, namely Philip S. Present II and William J. Scanlon, former partners of SDRC's independent auditors at the time, KPMG Peat Marwick LLP. [Securities Exchange Act of 1934 Release Number 38494.] The Order alleges that Present, the engagement partner on the 1993 audit, and Scanlon, the concurring review partner on the 1993 audit, engaged in improper professional conduct in that Present failed to conduct the 1993 audit in accordance with generally accepted auditing standards, and both Present and Scanlon failed to exercise due professional care and maintain an attitude of professional skepticism. Specifically, the Order alleges that Present was aware that certain revenue was recorded by SDRC based on purchase orders containing conditional language. The Order further alleges that both Present and Scanlon were aware that material amounts of receivables were outstanding for long periods of time and then ultimately written off, and that audit differences, representing 22% of the net income originally reported by SDRC for 1993, were not reflected in SDRC's 1993 financial statements. According to the Order, Present and Scanlon failed to consider adequately whether these factors were an indication that SDRC's financial statements were materially misstated. Without admitting or denying the allegations in the Order, Present consented to an Order barring him for a period of two and one-half years from appearing or practicing before the Commission as an accountant, and Scanlon consented to an Order censuring him.