U.S. Securities and Exchange Commission
Litigation Release No. 16829 / December 14, 2000
SEC Files Settled Case Against Three Executive Officers of Microstrategy Inc., Obtaining Injunctions, $10 Million in Disgorgement and $ 1 Million in Penalties
SEC v. Michael Jerry Saylor, Sanjeev Kumar Bansal and Mark Steven Lynch, Civ. Action No. 1:00CV02995 (D.D.C.)(filed Dec. 14, 2000)
Accounting and Auditing Enforcement Release No. 1352 / December 14, 2000
The Securities and Exchange Commission filed today a settled civil injunctive action against MicroStrategy Inc.'s top three officers: Michael Saylor (co-founder and chief executive officer), Sanjeev Bansal (co-founder and chief operating officer) and Mark Lynch (former chief financial officer). The complaint alleges that from the time of its initial public offering in June 1998 through March 2000, MicroStrategy, a Vienna, Virginia-based software company whose securities are listed on NASDAQ, materially overstated its revenues and earnings from the sales of software and information services contrary to Generally Accepted Accounting Principles. The company's public financial reports during this time showed positive net income. In fact, the Commission alleged, MicroStrategy should have reported net losses from 1997 through the present.
Without admitting or denying the Commission's allegations, the defendants consented to the entry of a final judgment permanently enjoining each of them from violating the antifraud and record-keeping provisions of the federal securities laws (Section 17(a) of the Securities Act of 1933, Section 10(b) of the Securities Exchange Act of 1934 and Rules 10b-5 and 13b2-1 thereunder), ordering them to pay disgorgement totaling $10 million (Saylor -- $8,280,000, Bansal -- $1,630,000, Lynch -- $138,000) and ordering each to pay a $350,000 civil penalty. Lynch, the former chief financial officer, also consented to the entry of an administrative order pursuant to Commission Rule 102(e)(3) based on the entry of an injunction, barring Lynch from practicing before the Commission as an accountant, with a right to reapply after three years.
The complaint alleges that the company's reporting failures primarily derived from its premature recognition of revenue inconsistent with AICPA Statement of Position 97-2, which allows revenue to be recognized from software sales if persuasive evidence of an agreement exists, delivery has occurred, the vendor's fee is fixed and determinable, and collectibility is probable. If the sale contains other elements (such as software upgrades, enhancements, or consulting services) that are integral to the functionality of the software license, the company must apply contract accounting, which delays revenue recognition. The Commission alleges that in connection with certain multiple element deals in which significant services or future products to be provided by MicroStrategy were not separable from the sale of a license, MicroStrategy improperly recognized material amounts of revenue upfront. Additional restatements resulted from deals in which MicroStrategy had not properly executed contracts in the same fiscal period that revenue was recorded from those deals, as well as other accounting errors.
The incorrect financial results were reported in various periodic reports filed with the Commission and disseminated to the investing public from the fourth quarter of 1998 through year-end 1999, and in registration statements filed in connection with a June 1998 initial public offering and a pending public offering filed in February 2000 that was subsequently withdrawn.
On March 20, 2000, MicroStrategy announced that it intended to restate its financial results for the fiscal years 1998 and 1999. MicroStrategy stock, which had recently reached a high of $333 per share, dropped over 60% of its value in one day, dropping from $260 per share to close at $86 per share on March 20, 2000. The stock price continued to drop in the following weeks. By April 13, 2000, after MicroStrategy announced that it would also restate its fiscal 1997 financial results, the company's stock closed at $33 per share. The company's restatement reduced revenues over the three-year period by approximately $66 million of the $365 million reported. Approximately $54 million, or 80%, of these restated revenues were in 1999.
The Commission alleges that Lynch, the company's chief financial officer, was principally responsible for ensuring the veracity of MicroStrategy's financial reporting and signed the company's periodic reports. Saylor, the company's founder, controlling shareholder, and top executive officer, signed the periodic reports and participated in the negotiation of several of the largest restated deals. Bansal, the company's co-founder, participated in the negotiation of several of the restated deals and signed numerous contracts on which revenue was improperly recognized.
The Commission simultaneously instituted a settled administrative proceeding against MicroStrategy ordering the company to cease and desist from violating the reporting, books and records and internal controls provisions of the federal securities laws (Sections 13(a), 13(B)(2)(A) and (B) of the Exchange Act and Rules 13a-1 and 13a-13, thereunder), and to engage in certain undertakings to effect future compliance with those provisions. In the Matter of MicroStrategy, Inc., Admin. Proc. No. 3-10388. The Commission also instituted a settled order against MicroStrategy's corporate controller and accounting manager in which the respondents each consented to the entry of a cease-and-desist order prohibiting violations of 13(a) of the Exchange Act and Rules 13a-1, 13a-13 and 13b2-1 thereunder. In the Matter of Antoinette A. Parsons and Stacy L. Hamm, Admin. Proc. No. 3-10389.
The investigation is continuing as to other parties.