U.S. SECURITIES AND EXCHANGE COMMISSION
Litigation Release No. 18911 / September 29, 2004
Accounting and Auditing Enforcement
Release No. 2114 / September 29, 2004
SECURITIES AND EXCHANGE COMMISSION v. Donald M. Fitzpatrick and Thomas R. Stitt, No. C 04 4120 BZ
SEC CHARGES FORMER LIBERATE TECHNOLOGIES EXECUTIVES WITH FINANCIAL REPORTING FRAUD
The Securities and Exchange Commission today announced financial reporting fraud charges against two former high-ranking executives of Liberate Technologies, a San Carlos, California-based company that sells software and services for interactive television. Alleged to have participated in a scheme to fraudulently inflate Liberate's revenue over four successive quarters in 2002 and 2003 are former Chief Operating Officer and head of sales Donald M. Fitzpatrick, of Sydney, Australia, and former sales vice president Thomas R. Stitt of Redwood City, California. Stitt has reached a settlement of the charges against him.
The Commission's complaint, which was filed in the United States District Court for the Northern District of California, alleges that Fitzpatrick, on his own and with assistance from Stitt on several deals, devised a series of fraudulent transactions to inflate Liberate's quarterly and year-end financial results. As a result, Liberate's quarterly revenue was artificially inflated by as much as 17% during the company's 2002 and 2003 fiscal years. Liberate ultimately restated its financial statements in September 2003 to reverse and defer revenue from the fraudulent transactions.
According to the complaint, Fitzpatrick employed various devices to inflate Liberate's reported results. For instance, Fitzpatrick, aided by Stitt, effectuated an improper "round-trip" deal whereby Liberate supplied its customer with the money to make the purchase. In this deal, Liberate received no net economic benefit, essentially using its own funds to create the false appearance of legitimate revenue. In another fraudulent transaction, Fitzpatrick negotiated a side agreement with a customer that granted the customer future financial concessions, and then hid the agreement from Liberate's finance department. The concessions Fitzpatrick secretly granted, if accounted for properly, would have wiped out the revenue Liberate reported to the public for the sale.
The complaint also alleges that Fitzpatrick and Stitt lied to Liberate's outside auditors and to Liberate's own financial group, which enabled the fraud to remain undetected.
The Commission's complaint charges Fitzpatrick with securities fraud and lying to accountants. The complaint seeks injunctive relief, civil monetary penalties, disgorgement of Fitzpatrick's ill-gotten gains (including commissions and bonuses), and an order barring Fitzpatrick from serving as an officer or director of a public company.
Stitt is charged in the Commission's complaint with violating the antifraud provisions of the federal securities laws and with aiding and abetting Liberate's reporting of false financial information to the Commission and Liberate's failure to maintain accurate books and records and internal controls. The complaint additionally charges him with lying to accountants, circumventing accounting controls, and falsifying the company's books and records. Without admitting or denying the allegations, Stitt agreed to pay a total of $78,000, including $28,000 in disgorgement and a $50,000 civil monetary penalty. Stitt also agreed to the entry of a court order barring him from serving as an officer or director of a public company for 10 years and enjoining him from future violations of these laws.
The Commission's district court complaint charges Fitzpatrick with securities fraud (Section 17(a) of the Securities Act of 1933 and 10(b) of the Securities Exchange Act of 1934 ("Exchange Act") and Rule 10b-5 thereunder) and lying to accountants (Rule 13b2-2). The Commission's action charges Stitt with the same Exchange Act violations as well as violations of other Exchange Act provisions and rules, specifically, aiding and abetting Liberate in filing false periodic reports under Section 13(b) of the Exchange Act and Rules 12b-20, 13a-1, and 13a-13; aiding and abetting Liberate in maintaining inaccurate books under Section 13(b)(2)(A) of the Exchange Act; aiding and abetting Liberate in having inadequate internal accounting controls under Section 13(b)(2)(B) of the Exchange Act; and circumventing internal accounting controls under Section 13(b)(5) of the Exchange Act and Rule 13b2-1.
The United States Attorney's Office for the Northern District of California, and the Federal Bureau of Investigation, today also announced criminal charges against Fitzpatrick for his role in the financial reporting fraud.
The Commission acknowledges the assistance of the Federal Bureau of Investigation and the United States Attorney's Office for the Northern District of California.
