Francis A. Tarkenton, Donald P. Addington, Rick W. Gossett, Lee R. Fontaine, William E. Hammersla, III, Eladio Alvarez and Edward Welch

SECURITIES AND EXCHANGE COMMISSIONLitigation Release No. 16306 / September 28, 1999

Accounting and Auditing Enforcement
Release No. 1179

SECURITIES AND EXCHANGE COMMISSION v. FRANCIS A. TARKENTON, DONALD P. ADDINGTON, RICK W. GOSSETT, LEE R. FONTAINE, WILLIAM E. HAMMERSLA, III, ELADIO ALVAREZ and EDWARD WELCH,

Civil Action File No. 1:99-CV-2497 (N.D. Ga. September 28, 1999)

The Securities and Exchange Commission announced today that it filed a civil injunctive action in federal court in Atlanta, Georgia charging seven former executives of a computer software company, KnowledgeWare, Inc. ("KnowledgeWare"), with carrying out a multi-million dollar financial fraud scheme that materially inflated KnowledgeWare's reported earnings during KnowledgeWare's fiscal year ended June 30, 1994 ("Fiscal Year 1994"), and charging two of those defendants with also committing illegal insider trading.

Named in the Commission's complaint were:

Francis A. Tarkenton ("Tarkenton"), age 59, was Chief Executive Officer and Chairman of the Board of Directors of KnowledgeWare.

Donald P. Addington ("Addington"), age 48, was President and Chief Operating Officer of KnowledgeWare.

Rick W. Gossett ("Gossett"), age 47, is a certified public accountant and was Chief Financial Officer of KnowledgeWare.

Lee R. Fontaine ("Fontaine"), age 34, is a certified public accountant and was Manager of Financial Reporting at KnowledgeWare.

William E. Hammersla, III ("Hammersla"), age 45, was KnowledgeWare's Vice President for Direct Sales in the Northeastern United States.

Eladio Alvarez ("Alvarez"), age 41, was a District Sales Manager in KnowledgeWare's Direct Sales Group.

Edward Welch ("Welch"), age 55, was a District Sales Manager in KnowledgeWare's Reseller Channel Sales group.

The Commission's complaint alleges that:

Tarkenton, Addington, Gossett, Fontaine, Hammersla, Alvarez and Welch engaged in a fraudulent scheme to inflate KnowledgeWare's financial results to meet sales and earnings projections. In all, KnowledgeWare reported at least $8 million in revenue from sham software sales. KnowledgeWare "parked" inventory with software resellers and other supposed customers that were given the right not to pay for the software, either orally or in "side letters" that were kept separate from the other sales documents. As a result of this scheme, KnowledgeWare falsely reported record sales revenue and dramatic increases in earnings in press releases and in quarterly reports filed with the Commission and disseminated to the public in 1993 and 1994 ("Quarterly Reports").

Even when KnowledgeWare later restated those quarterly results, KnowledgeWare continued to mislead the investing public by claiming, in its annual report for Fiscal Year 1994 and other public documents, that the restatement resulted from a problem with the "collectibility" of reseller receivables -- without disclosing that KnowledgeWare had created the problem by "selling" software and simultaneously granting the "purchaser" the right not to pay for it.

Tarkenton, Addington and Gossett directed the fraudulent scheme and made materially false and misleading statements to purchasers of KnowledgeWare stock. Gossett also made materially false and misleading statements to KnowledgeWare's auditors. Hammersla, Alvarez and Welch implemented the fraudulent scheme by creating the sham software sales. Fontaine further implemented the fraudulent scheme by helping prepare the financial statements and other materially false and misleading portions of the Quarterly Reports. With the exception of Fontaine, each defendant received excess incentive compensation as a result of the scheme.

In addition, Hammersla and Alvarez engaged in illegal insider trading by using material nonpublic information regarding the status of KnowledgeWare's prospective acquisition by Sterling Software, Inc. when they sold all their shares of KnowledgeWare stock in late August 1994.

In the complaint, the Commission seeks: permanent injunctions and civil penalties against all defendants; and disgorgement and prejudgment interest from all defendants other than Fontaine.

Simultaneous with the filing of the complaint, Tarkenton, Addington, Gossett, Fontaine, and Hammersla consented, without admitting or denying the allegations in the complaint, to the following relief:

* Tarkenton consented to the issuance of a final judgment permanently enjoining him from (i) committing securities fraud in violation of Section 17(a) of the Securities Act of 1933 ("Securities Act") or Section 10(b) of the Securities Exchange Act of 1934 ("Exchange Act") and Rule 10b-5; (ii) falsifying corporate books and records or engaging in other conduct in violation of Section 13(b)(5) of the Exchange Act or Rule 13b2-1; and (iii) from engaging in conduct as a controlling person that would render him liable pursuant to Section 20(a) of the Exchange Act for violations of corporate reporting, recordkeeping and internal control provisions of the Exchange Act (Sections 13(a) and 13(b)(2) and Rules 12b-20, 13a-1 and 13a-13). Tarkenton also agreed to pay a civil money penalty of $100,000 and disgorge $54,187, the amount of the incentive compensation he received in Fiscal Year 1994 on the basis of KnowledgeWare's materially overstated quarterly earnings, plus prejudgment interest thereon.

* Addington consented to the issuance of a final judgment permanently enjoining him from (i) committing securities fraud in violation of Section 17(a) of the Securities Act or Section 10(b) of the Exchange Act and Rule 10b-5; (ii) falsifying corporate books and records or engaging in other conduct in violation of Section 13(b)(5) of the Exchange Act or Rule 13b2-1; and (iii) and from engaging in conduct as a controlling person that would render him liable pursuant to Section 20(a) of the Exchange Act for violations of corporate reporting, recordkeeping and internal control provisions of the Exchange Act (Sections 13(a) and 13(b)(2) and Rules 12b-20 and 13a-13). Addington also agreed to pay a civil money penalty of $100,000 and disgorge $54,187, the amount of the incentive compensation he received in Fiscal Year 1994 on the basis of KnowledgeWare's materially overstated quarterly earnings, plus prejudgment interest thereon.

* Gossett consented to the issuance of a final judgment permanently enjoining him from (i) committing securities fraud in violation of Section 17(a) of the Securities Act or Section 10(b) of the Exchange Act and Rule 10b-5; (ii) falsifying corporate books and records, misleading auditors or engaging in other conduct in violation of Section 13(b)(5) of the Exchange Act or Rules 13b2-1 and 13b2-2; and (iii) and from engaging in conduct as a controlling person that would render him liable pursuant to Section 20(a) of the Exchange Act for violations of corporate reporting, recordkeeping or internal control provisions of the Exchange Act (Sections 13(a) and 13(b)(2) and Rules 12b-20, 13a-1 and 13a-13). Gossett also agreed to pay a civil money penalty of $25,000 and disgorge $2,812, the amount of the incentive compensation he received in Fiscal Year 1994 on the basis of KnowledgeWare's materially overstated quarterly earnings, plus prejudgment interest thereon.

* Fontaine consented to the issuance of a final judgment permanently enjoining him from (i) committing securities fraud in violation of Section 10(b) of the Exchange Act and Rule 10b-5; and (ii) falsifying corporate books and records or engaging in other conduct in violation of Section 13(b)(5) of the Exchange Act or Rule 13b2-1. Fontaine also agreed to pay a civil money penalty of $10,000.

* Hammersla consented to the issuance of a final judgment permanently enjoining him from (i) committing securities fraud in violation of Section 17(a) of the Securities Act or Section 10(b) of the Exchange Act and Rule 10b-5; and (ii) falsifying corporate books and records or engaging in other conduct in violation of Section 13(b)(5) of the Exchange Act or Rule 13b2-1. Hammersla also agreed to disgorge, and pay prejudgment interest on, the following two amounts: (i) $39,781, representing the incentive compensation he received as a result of his violative conduct in connection with the financial fraud scheme; and (ii) $11,575, representing the losses he avoided by illegally selling KnowledgeWare stock. In addition, Hammersla agreed to pay civil money penalties totaling $21,575, consisting of a $10,000 penalty in connection with his financial fraud violations and a $11,575 penalty in connection with his insider trading violations.

The Commission further announced today that it instituted administrative proceedings against four former KnowledgeWare sales executives who were also charged with participating in the financial fraud scheme:

Laura M. Drews ("Drews"), age 35, was the Vice-President in charge of KnowledgeWare's Reseller Channel Sales group during Fiscal Year 1994.

Stephen J. Pace ("Pace"), age 39, was KnowledgeWare's Vice-President of Direct Sales for the Southern and Mid-Western United States during Fiscal Year 1994.

Robert S. Chamberlain ("Chamberlain") , age 41, was KnowledgeWare's Vice President for Direct Sales in the Western United States.

Joseph A. Mathes ("Mathes"), age 38, was a District Sales Manager in KnowledgeWare's Reseller Channel Sales group during Fiscal Year 1994.

 

Simultaneous with the institution of these proceedings, the Commission accepted settlement offers made by Drews, Pace, Chamberlain and Mathes, who settled the proceedings without admitting or denying the Commission's findings. Pursuant to their settlement offers, the Commission ordered Drews, Pace, Chamberlain, and Mathes to cease and desist from committing or causing violations of Sections 10(b) and 13(b)(5) of the Exchange Act and Rules 10b-5 and 13b2-1. The Commission also ordered them to disgorge the following amounts, together with prejudgment interest thereon: Drews $31,824, Pace $6,728, Chamberlain $14,529, and Mathes $10,959. These amounts represent the excess incentive compensation that they received as a result of their violative conduct.

The litigation against Alvarez and Welch is pending.