==========================================START OF PAGE 1====== UNITES STATES OF AMERICA Before the SECURITIES AND EXCHANGE COMMISSION Securities Exchange Act of 1934 Release No. 37938 / November 12, 1996 Accounting and Auditing Enforcement Release No. 853 / November 12, 1996 Administrative Proceeding File No. 3-9184 ------------------------------- : In the Matter of : : ORDER INSTITUTING PROCEEDINGS, : MAKING FINDINGS AND IMPOSING : SANCTIONS PURSUANT TO RULE KARL G. WASSMANN III, CPA : 102(e) OF THE COMMISSION'S : RULES OF PRACTICE : : : ------------------------------- I. The Securities and Exchange Commission ("Commission") deems it appropriate and in the public interest to institute pro- ceedings against Karl G. Wassmann III ("Wassmann"), pursuant to Rule 102(e)(3)(i) of the Commission's Rules of Practice.-[1]- Accordingly, IT IS HEREBY ORDERED that said proceedings be, and hereby are, instituted. II. ---------FOOTNOTES---------- -[1]- Rule 102(e)(3)(i) [17 C.F.R.  201.102(e)(3)(i)] provides in pertinent part that the Commission may suspend from appearing or practicing before it any person who by name has been permanently enjoined by a court of competent jurisdiction in an action brought by the Commission from violating or aiding and abetting the violation of any provision of the Federal securities laws or the rules and regulations thereunder. Wassmann has submitted an Offer to the Commission for the purpose of disposing of the issues raised by these proceedings. Solely for the purpose of these proceedings and any other proceedings brought by or on behalf of the Commission or to which the Commission is a party, prior to a hearing pursuant to the Commission's Rules of Practice, 17 C.F.R.  201.100 et seq., and without admitting or denying the matters set forth herein, except as to the jurisdiction of the Commission over him and over the subject matter of these proceedings, which he admits, Wassmann consents to the issuance of this Order permanently denying him the privilege of appearing or practicing before the Commission as an accountant with a right to apply for readmission after five years from the date of the Order as is set forth in Paragraph IV. of this Order. The Commission deems it appropriate and in the public interest to accept Wassmann's Offer and to impose the sanctions consented to therein. III. The Commission makes the following findings: Wassmann is a certified public accountant, licensed to practice in the State of Massachusetts. Wassmann served as chief financial officer ("CFO") of Kendall Square Research Corporation ("Kendall Square" or "the Company") from October 1993 until his employment was terminated by the Company in December 1993. At all other relevant times, Wassmann served as senior vice presi- dent and treasurer at Kendall Square. Wassmann was one of the persons responsible for overseeing Kendall Square's internal accounting controls and financial reporting functions. Wassmann signed Kendall Square's annual report on Form 10-K for 1992, which incorporated the Company's financial statements for the fiscal year ending December 26, 1992, as Kendall Square's Principal Financial Officer and Principal Accounting Officer. Wassmann also signed Kendall Square's quarterly reports on Form 10-Q for the first two quarters of fiscal 1993, which incorporated the Company's financial statements for those periods, as Kendall Square's Principal Financial Officer and Principal Accounting Officer. Kendall Square was a Delaware corporation with its principal executive offices in Waltham, Massachusetts. Kendall Square designed, manufactured and marketed a family of high performance computer systems. The Company's common stock was registered with the Commission pursuant to Section 12(g) of the Exchange Act and traded on the NASDAQ national market system under the symbol "KSRC," until April 1994 when it was delisted by the National Association of Securities Dealers. On April 29, 1996, the Commission filed a Complaint in the United States District Court for the District of Massachusetts against Wassmann and others, captioned SEC v. Kendall Square Research Corporation, Henry Burkhardt III, Peter Appleton Jones and Karl G. Wassmann III. The Complaint alleges, among other things, that certain of Kendall Square's customers sought and obtained from Kendall Square "side letter" agreements providing that they would not be obligated to pay for computer systems they had obtained from Kendall Square if they did not receive funding from governmental agencies or other third parties. The Complaint alleges that these agreements, as well as additional contingency provisions to which certain of Kendall Square's sales were subject, rendered recognition of revenue from those transactions improper under Generally Accepted Accounting Principles ("GAAP"). The Complaint further alleges that the Company's improper recognition of revenue from such transactions resulted in the Company overstating its total revenues by approximately 50% for fiscal 1992 and the first two quarters of fiscal 1993. The Complaint alleges that Wassmann knew or was reckless in not knowing that, as a result of its improper revenue recognition practices, Kendall Square's financial statements, as incorporated in its annual report on Form 10-K for 1992, its quarterly reports on Form 10-Q for the first two quarters of 1993 and a regis- tration statement on Form S-1 for a March 1993 secondary offer- ing, were materially false and misleading. In addition, the Complaint alleges that during the audit of Kendall Square's fiscal year 1992 financial statements, and the interim review of its quarterly financial statements for the first two quarters of fiscal 1993, Wassmann omitted to state material facts to the Company's independent accountants con- cerning certain transactions upon which Kendall Square had recognized revenue that was not in accordance with GAAP. Finally, the Complaint alleges that certain officers of Ken- dall Square, including Wassmann, sold substantial amounts of the Company's common stock during August 1993 while in possession of material nonpublic information concerning the Company's financial condition and results of operations. On April 29, 1996, Wassmann consented to the entry of a Final Judgment as to Karl G. Wassmann III ("Final Judgment") in the SEC v. Kendall Square Research Corporation et al. matter, without admitting or denying the allegations of the Complaint, except as to jurisdiction, which he admitted. On October 31, 1996, the Honorable Mark L. Wolf, United States District Judge of the United States District Court for the District of Massachusetts, entered the Final Judgment, which permanently restrains and enjoins Wassmann from engaging in conduct violative of Section 17(a) of the Securities Act of 1933 ("Securities Act"), Sections 10(b), 13(a) and 13(b)(2)(A), 13(b)(2)(B) and 13(b)(5) of the Exchange Act and Rules 10b-5, 12b-20, 13a-1, 13a- 13, 13b2-1 and 13b2-2 promulgated thereunder. Based on the foregoing, the Commission finds that: (1) Wassmann is a certified public accountant licensed to practice in ==========================================START OF PAGE 3====== the State of Massachusetts; and (2) Wassmann was permanently enjoined by the United States District Court for the District of Massachusetts from committing violations of certain provisions of the Federal securities laws. IV. Accordingly, IT IS HEREBY ORDERED that: A. Wassmann be, and hereby is, permanently denied the privilege of appearing or practicing before the Commission as an accountant. B. Five years after the date of this Order, Wassmann may apply to resume appearing or practicing before the Commission as: 1. a preparer or reviewer of financial statements required to be filed with the Commission or a person responsible for the preparation or review of financial statements required to be filed with the Commission provided that, in Wassmann's practice before the Commission, his work will be reviewed (a) by the independent audit committee of each company with respect to which he prepares or reviews such financial statements or is responsible for the preparation or review of such financial statements or (b) in some other manner acceptable to the staff of the Commission; 2. an independent public accountant upon submission of an application to the Office of the Chief Accountant of the Commission containing a showing satisfactory to the Commission that: (a) Wassmann, or any firm with which he is or becomes associated in any capacity, is and will remain a member of the SEC Practice Section of the American Institute of Certified Public Accountants Division for CPA Firms ("SEC Practice Section"); (b) Wassmann, or any firm with which he is or becomes associated, has received an unqualified report relating to his or the firm's most recent peer review conducted in accordance with the guidelines adopted by the SEC Practice Section; and (c) Wassmann will comply with all applicable SEC Practice Section requirements, including all requirements for periodic peer reviews, concurring partner reviews, and continuing professional education, as long as he appears or practices before the Commission as an independent accountant; and 3. The Commission's review of Wassmann's application to resume appearing or practicing before it may include consideration of any other matter relating to Wassmann's ==========================================START OF PAGE 4====== character, integrity, professional conduct or qualifications to practice before the Commission. By the Commission. Jonathan G. Katz Secretary ==========================================START OF PAGE 5======