SECURITIES AND EXCHANGE COMMISSION
Litigation Release No. 17151 / September 26, 2001
Accounting and Auditing Enforcement Release No. 1455
SEC Settles Charges against Thomas Butler for His Invovlement in Financial Reporting Fraud at Cylink Corporation
Securities and Exchange Commission v. John Daws, Thomas Butler and Mark Folit, United States District Court for the Northern District of California, Civil Action No. C 01-3362 VRW
The Securities and Exchange Commission announced that on July 23, 2001, the Honorable Ronald M. Whyte, United States District Judge for the Northern District of California, issued a Final Judgment of Permanent Injunction and Other Relief against Thomas Butler, the former Vice President of Sales of Cylink Corporation. Without admitting or denying the Commission's allegations, Butler consented to the entry of a final judgment that permanently enjoins him from violating the antifraud provisions (Section 10(b) of the Securities Exchange Act of 1934 ("Exchange Act") and Rule 10b-5 thereunder); from circumvention of Cylink's internal controls and falsification of records (Section 13(b)(5) of the Exchange Act and Rule 13b2-1 thereunder); and from aiding and abetting Cylink's violations of the periodic reporting and books and records provisions (Sections 13(a) and 13(b)(2)(A) of the Exchange Act and Rules 12b-20, 13a-1 and 13a-13 thereunder) In addition, the final judgment orders him to disgorge ill-gotten gains of $50,000 to pay prejudgment interest and to pay a civil penalty of $100,000.
The Commission's complaint, filed on September 27, 2000, alleged that in order to meet Cylink's ambitious revenue goals, Butler, in conjunction with other former Cylink officers, led the Company to recognize revenue on numerous transactions that violated Cylink's own revenue recognition policy, generally accepted accounting principles or both for the first two quarters of fiscal 1998. For example, the complaint alleges that in the second quarter of fiscal 1998, Cylink recognized over $900,000 in revenue on a transaction that was not final because the customer still had up to 90 days to cancel the order. In another instance alleged in the complaint, Cylink recognized revenue on orders from a distributor even though the defendants had reason to believe the distributor could not pay for the product. The complaint also alleges that Cylink recognized revenue on software product orders that were contingent on the customers' rights to exchange the software for Cylink hardware products. Cylink overstated its quarterly revenue by as much as 97.5% during the period of the fraud, according to the Complaint.
After the fraud was uncovered, Cylink issued restated financials that sharply reduced its results for the periods in question. For the first quarter of fiscal 1998, the Company restated revenue from $15.8 million to $8 million (a 97.5% overstatement) and net income from continuing operations of $1.1 million to a net loss from continuing operations of $3.4 million. For the second quarter of fiscal 1998, the Company restated revenue from $18 million to $12.4 million (a 45% overstatement) and net income of $1.7 million to a net loss of $1.7 million.