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U.S. Securities and Exchange Commission

UNITED STATES OF AMERICA
Before the
SECURITIES AND EXCHANGE COMMISSION

Securities and Exchange Act of 1934
Release No. 42045 / October 21, 1999

Accounting and Auditing Enforcement Release No. 1194
Administrative Proceeding
File No. 3-10083


                         :
 In the Matter of        :
                         : ORDER INSTITUTING PUBLIC 
                         : PROCEEDINGS AND IMPOSING 
Lee R. Fontaine, CPA     : A SANCTION PURSUANT TO 
                         : RULE 102(e) OF THE 
                         : COMMISSION'S RULES OF PRACTICE
    Respondent.          : 
                         :
                         :

I.

The Securities and Exchange Commission ("Commission") deems it appropriate and in the public interest that public administrative proceedings be, and hereby are, instituted pursuant to Rule 102(e)(3)(i)(A) of the Commission's Rules of Practice against Lee R. Fontaine ("Fontaine").1

II.

In anticipation of the institution of these administrative proceedings, Fontaine has submitted an Offer of Settlement ("Offer"), which the Commission has determined to accept. Solely for the purpose of this proceeding and any other proceeding brought by or on behalf of the Commission or to which the Commission is a party, and without admitting or denying the findings contained herein, except as to the Commission's findings of jurisdiction over him and the subject matter of this proceeding and of the entry of the injunction set forth in paragraph III.D below, which Fontaine admits, Fontaine consents to the issuance of this Order Instituting Public Proceedings and Imposing a Sanction Pursuant to Rule 102(e) of the Commission's Rules of Practice ("Order") and to the entry of the findings and the imposition of relief set forth below.

III.

FINDINGS

On the basis of this Order and the Offer submitted by Fontaine, the Commission finds2 that:

A. Fontaine, age 33, is a certified public accountant and has been licensed since 1988. During the year ended June 30, 1994 ("FY 1994"), Fontaine was employed as Manager of Financial Reporting at KnowledgeWare, Inc. ("KnowledgeWare").

B. During FY 1994, KnowledgeWare was a Georgia corporation with principal offices located in Atlanta, Georgia. At all times relevant hereto, KnowledgeWare's common stock was registered with the Commission pursuant to Section 12(g) of the Securities and Exchange Act of 1934 ("Exchange Act"). KnowledgeWare's common stock was quoted on the NASDAQ National Market System.

C. On September 22, 1999, the Commission filed a complaint ("Complaint") against Fontaine and others (SEC v. Tarkenton, 1:99-CV-2497-CC), alleging, in relevant part, as follows:

1. During FY 1994, Fontaine and other KnowledgeWare employees knowingly or recklessly engaged in a fraudulent scheme to overstate materially KnowledgeWare's revenue and net income in quarterly financial statements that were filed with the Commission and disseminated to the public.

2. As a result of such scheme, KnowledgeWare filed materially false and misleading interim reports on Forms 10-Q with the Commission for the quarters ended September 30, 1993 ("First Quarter 10-Q"), December 31, 1993 ("Second Quarter 10-Q") and March 31, 1994 ("Third Quarter 10-Q"). Specifically, KnowledgeWare materially overstated revenue and net income in each of those quarterly reports. In addition, KnowledgeWare falsely reported a profit in the Third Quarter 10-Q for both the quarter and the nine months ended March 31, 1994 when, in fact, KnowledgeWare incurred a loss in both periods.

3. As part and in furtherance of such scheme, Fontaine prepared, in part, the First Quarter 10-Q, Second Quarter 10-Q and Third Quarter 10-Q and the financial statements included therein, when he knew, or was reckless in not knowing, that these reports and financial statements were false and misleading because:

a. KnowledgeWare improperly recognized revenue with respect to purported sales transactions in which the purported purchasers, so-called "resellers," had been granted, by means of a "side letter" or orally, unconditional return rights and/or contingent payment terms or had never placed a purchase order at all;

b. the reports did not disclose that material amounts of accounts receivable arising from the foregoing purported sales to "resellers" were unpaid and uncollectible;

c. despite the foregoing facts, there was no provision at all for bad debt expense recorded for the quarters ended September 30, 1993 and March 31, 1994;

d. despite the foregoing facts, the entire provision for bad debt expense recorded for the quarter ended December 31, 1993 was attributable to a single transaction and was therefore also understated;

e. in light of the foregoing facts, the balance in the allowance for doubtful accounts receivable was insufficient to cover the amount of uncollectible accounts receivable at the end of the quarters ended September 30, 1993, December 31, 1993 and March 31, 1994; and

f. the Third Quarter 10-Q falsely attributed KnowledgeWare's mounting cash flow problems to the use of extended payment terms and increased sales to modestly capitalized "resellers" who were "slow to pay," rather than to the facts set forth in sub-paragraph (a) above.

D. On October 4, 1999, the United States District Court for the Nothern District of Georgia entered a Final Consent Judgment Of Permanent Injunction And Other Relief As To Defendant Lee R. Fontaine ("Final Judgment") that, among other things, permanently enjoins Fontaine from violating Sections 10(b) and 13(b)(5) of the Exchange Act and Rules 10b-5 and 13b2-1. Fontaine consented to the entry of the Final Judgment without admitting or denying the allegations in the Complaint, except as to jurisdiction.

IV.

ORDER IMPOSING SANCTIONS

Based on the foregoing, the Commission deems it appropriate and in the public interest to impose the sanction specified in the Offer submitted by Fontaine, and accordingly,

IT IS HEREBY ORDERED, effective immediately, that:

A. Fontaine is denied the privilege of appearing or practicing before the Commission as an accountant.

B. Three years from the date of the Order, Fontaine may apply to the Commission by submitting an application to the Office of the Chief Accountant which requests that he be permitted to resume appearing or practicing before the Commission as:

1. a preparer or reviewer, or a person responsible for the preparation or review, of financial statements of a public company to be filed with the Commission, provided that Fontaine's application is satisfactory to the Commission and Fontaine undertakes therein that, in his practice before the Commission, Fontaine's work will be reviewed by the independent audit committee of the company for which he works or in some other manner acceptable to the Commission; and

2. an independent accountant provided that Fontaine's application contains a showing satisfactory to the Commission that:

a. Fontaine, 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") as long as Fontaine appears or practices before the Commission as an independent accountant;

 

b. Fontaine or the firm 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. Fontaine 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 Fontaine appears or practices before the Commission as an independent accountant.

C. The Commission's review of any request or application by Fontaine to resume appearing or practicing before the Commission may include consideration of, in addition to the matters referenced above, any other matters relating to Fontaine's character, integrity, professional conduct, or qualifications to appear or practice before the Commission.

By the Commission.

Jonathan G. Katz
Secretary


Footnotes

1 Rule 102(e)(3)(i)(A) provides, in relevant part, as follows:

The Commission, with due regard to the public interest and without preliminary hearing, may by order temporarily suspend from appearing or practicing before it any . . . accountant . . . who . . . has been by name . . . permanently enjoined by any court of competent jurisdiction by reason of his misconduct in an action brought by the Commission from violation . . . any provision of the Federal securities laws (15 U.S.C. 77a to 80b-20) or of the rules and regulations thereunder.

2 The findings herein are made pursuant to Fontaine's Offer of Settlement and are not binding on any other person or entity in this or any other proceeding.

http://www.sec.gov/litigation/admin/34-42045.htm

Modified:10/22/1999