U.S. SECURITIES AND EXCHANGE COMMISSION
Litigation Release No. 16627 / July 14, 2000
Accounting and Auditing Enforcement Release No. 1285 / July 14, 2000
SECURITIES AND EXCHANGE COMMISSION v. SYSTEM SOFTWARE ASSOCIATES, INC., ROGER COVEY and JOSEPH SKADRA, Civ. No. 00C 4240 (July 13, 2000, N.D. Ill.)
On July 13, 2000, the Securities and Exchange Commission filed a civil injunctive action against System Software Associates, Inc. ("SSA"); its former Chief Executive Officer and Chairman of the Board, Roger Covey; and its former Chief Financial Officer, Joseph Skadra, alleging fraudulent accounting practices that resulted in massive investor losses.
The Complaint alleges that CEO Covey and CFO Skadra caused SSA to misstate its financial results during its fiscal years 1994 through 1996 by improperly reporting revenue on sales of a development-stage UNIX-language software product. Those customers who purchased SSA's UNIX product during the relevant period experienced severe and continuing difficulties with its functionality and performance and in many instances rejected the product. Because there existed significant uncertainties about customer acceptance of the product and collectibility of the contract price and significant vendor obligations remained, the earnings process was not complete and recognition of revenue on sales of the product was improper under applicable accounting standards.
The Complaint also alleges that, during 1995 and 1996, in addition to the above fraudulent practice, SSA recognized approximately $52 million in revenue from sales of its UNIX product that were subject to side letters or other material contingencies.
According to the Complaint, defendants' fraudulent activities resulted in substantial losses to those public investors who purchased SSA stock during the period when the company's financial statements were misstated. During the relevant period, SSA's stock traded for as much as $45 per share, and the company's market capitalization reached $1.44 billion. In January 1997, after SSA's independent auditors required it to restate revenues for 1994 and 1995, SSA's stock price declined to approximately $10 per share. SSA is presently in a bankruptcy proceeding and its stock is virtually worthless.
SSA, Covey, and Skadra are charged with violating or aiding and abetting violations of Section 17(a) of the Securities Act of 1933, Sections 10(b), 13(a), 13(b)(2)(A), and 13(b)(2)(B) of the Securities Exchange Act of 1934 ("Exchange Act") and Rules 10b-5, 12b-20, 13a-1, and 13a-13 thereunder. Covey and Skadra, in addition, are charged with violating Section 13(b)(5) of the Exchange Act and Exchange Act Rules 13b2-1 and 13b2-2. The Complaint seeks a Judgment of Permanent Injunction against all defendants and, in addition, civil penalties and disgorgement of salary bonuses from Covey and Skadra.