UNITED STATES OF AMERICA
Release No. 44765 / September 5, 2001
In the Matter of
|ORDER INSTITUTING PUBLIC |
CEASE-AND-DESIST PROCEEDING, MAKING
FINDINGS AND ISSUING A CEASE-AND-DESIST
ORDER AGAINST CARL ALBANO
The Securities and Exchange Commission ("Commission") deems it appropriate that a public cease-and-desist proceeding be instituted pursuant to Section 21C of the Securities Exchange Act of 1934 ("Exchange Act") against Carl Albano ("Albano" or the "Respondent").
Accordingly, IT IS HEREBY ORDERED that a cease-and-desist proceeding against Albano be, and hereby is, instituted.
In anticipation of the institution of this proceeding, Albano has submitted an Offer of Settlement ("Offer"), which the Commission has determined to accept. Solely for the purpose of this proceeding and any other proceedings brought by or on behalf of the Commission or in which the Commission is a party, and without admitting or denying the findings contained herein except that Albano admits the jurisdiction of the Commission over it and over the subject matter of this proceeding, Albano consents to the issuance of this Order Instituting Public Cease-and-Desist Proceeding, Making Findings and Issuing a Cease-and-Desist Order Against Carl Albano ("Order").
On the basis of this Order and the Offer, the Commission makes the following findings:
Carl Albano, age 52, was Indus' General Manager of Sales Operations from 1997 until he left the Company in May 2000. Albano lives in Marietta, Georgia.
B. Related Party
Indus is a San Francisco, California corporation that manufactures enterprise asset management software and provides related services. On August 25, 1997, Indus merged with TSW International, Inc. located in Atlanta, Georgia. Indus' common stock is registered with the Commission pursuant to Section 12(g) of the Exchange Act and is quoted on the Nasdaq Stock Market.
This matter involves a one-quarter financial reporting fraud by former executives of Indus. In September 1999, in order to meet analysts' expectations, Indus' former Chief Administrative Officer and head of Sales ("CAO"), along with Carl Albano ("Albano") and its Vice President of Manufacturing Industry Sales ("VP of Sales"), provided side letters to two customers and then hid them from Indus' finance staff. Each side letter granted the customer the right to cancel its contract with Indus, and thus made it improper for Indus to recognize revenue on the deal. The finance staff recognized revenue, unaware of the cancellation provisions. As a result of these fraudulent deals, Indus' original Form 10-Q for the September 30, 1999 quarter improperly overstated the Company's revenue by $3.7 million (8.1%) and its income from operations by approximately $2.4 million (300.8%).
In March 2000, after an internal investigation, Indus filed with the Commission restated financials for the September 1999 quarter that showed: restated revenue of $45.8 million, compared with previously reported revenue of $50.9 million (an 11.1% overstatement), and restated income from operations of $0.8 million, compared to previously reported income from operations of $4.5 million (a 574.7% overstatement). The two fraudulent deals orchestrated by the CAO with Albano and the VP of Sales were the primary components of the restatement.
D. The Original Equipment Manufacturer Contractor Deal
1. Indus Personnel Negotiated a Contingent Contract With An Original Equipment Manufacturer Contractor and Concealed the Contingency from the Accounting Department.
On August 10, 1999, an Original Equipment Manufacturer contractor ("OEM Contractor") placed an order with Indus to license $1.7 million of Indus software and over $300,000 in services related to that software. The OEM Contractor intended to use the software as part of a larger project (which it had bid upon) for its end user. The OEM Contractor followed this order with a signed contract with Indus dated September 9, 1999 (the "September 9 contract"). However, both the purchase order and the September 9 contract were expressly contingent on the OEM Contractor being chosen to work on the end user project. The end user was expected to announce its decision on or about September 15, 1999, but did not do so. Then, on September 29, Indus learned that the end user would not make its final decision until mid-October 1999, which was in the next fiscal quarter.
That same day, the CAO directed Albano to get a new contract from the OEM Contractor with the end user contingency removed from the body of the contract and documented in a separate side agreement. Working with the VP of Sales, Albano prepared a new contract for the OEM Contractor that removed the contingency, drafted a side letter that documented the OEM Contractor's right to cancel and signed the side letter in the name of the VP of Sales.
The OEM Contractor refused to accept the side letter. However, the OEM Contractor did agree to move the contingency to a contract Addendum. The Addendum once again specified that the OEM Contractor's contract with Indus was contingent on the OEM Contractor winning the end user contract. The Addendum gave the OEM Contractor until October 20, 1999 to cancel the deal. The OEM Contractor signed the agreement, including the Addendum, and sent it to Albano for receipt on September 30 (the "September 30 contract") and Indus shipped software under the contract to the OEM Contractor.
In early October 1999, Indus' accounting department asked both the CAO and Albano for a copy of the September 30 contract for revenue recognition purposes. The CAO and Albano provided copies of the contract, but each withheld the Addendum from the accounting staff. As a result, Indus' accounting department improperly recognized approximately $1.7 million in revenue on the OEM Contractor deal for the September 1999 quarter.
2. After the OEM Contractor Cancelled the Deal, the CAO Directed the Scheme to Conceal the Cancellation from Indus' Accounting Department.
In late October 1999, the OEM Contractor learned that it had failed to win the end user contract. As a result, the OEM Contractor invoked its right to cancel the contract with Indus and returned the software to the Company. At about the same time, Indus' accounting department contacted the OEM Contractor to inquire why the OEM Contractor had failed to make its initial payment under the September 30 contract. The OEM Contractor informed the accounting department that it had exercised its right to cancel the September 30 contract and had returned the software to Indus.
When Indus accounting personnel questioned the VP of Sales and Albano about this, the accounting personnel were told that the OEM Contractor was mistaken, that the September 30 contract was valid and that the software would be re-shipped to the OEM Contractor. The CAO then directed the VP of Sales to create false shipping documents to convince Indus' accounting department that Indus had re-shipped the software to the customer.
E. The Puerto Rican Distributor Deal
1. The CAO and Albano Negotiated a Contingent Contract With a Puerto Rican Distributor.
On September 30, 1999, the CAO learned that another significant deal that Indus had forecast to close in the September 1999 quarter had fallen through. To replace that revenue, the CAO told an Indus salesperson to get a $2 million order from a Puerto Rican distributor who was an Indus reseller. The Puerto Rican distributor said that it would only do the deal if it were given a right of cancellation. The CAO authorized the right of cancellation. The CAO then signed a side letter that provided that the distributor could cancel the contract within 90 days. Albano forwarded the side letter on September 30 to the Puerto Rican distributor.
The next day, October 1, 1999, Albano called the Puerto Rican distributor to inquire about the contract. The Puerto Rican distributor's President had not yet approved the deal. To make it appear that the contract had been finalized prior to the end of Indus' third quarter, Albano asked the Puerto Rican distributor to backdate the contract and to adjust the date on his facsimile machine to September 30. The Puerto Rican distributor did as Albano requested.
2. The CAO and Albano Concealed the Contingency from Indus' Accounting Department.
When Albano received the signed Puerto Rican distributor contract on October 1, he saw that the Puerto Rican distributor had typed the right of cancellation onto the contract form. The Puerto Rican distributor refused to remove the language from the contract. Albano then called the CAO, who told him to eliminate the language from the contract. Albano altered the contract to reflect this change. The CAO then took steps to conceal the contingency from the Indus accounting staff. The CAO signed another side letter dated December 29, 1999 extending the Puerto Rican distributor's cancellation date for another 90 days.
As a result of this fraud, Indus improperly recognized $2 million in revenue in the September 1999 quarter on the Puerto Rican distributor transaction.
F. Indus' Lack of Internal Controls
The fraud at Indus was made possible, in part, by the Company's poor internal controls. Albano, who was responsible for contract administration, reported to the head of the Sales department, rather than to Indus' accounting or finance staff. The CAO (who was also the head of Sales) took advantage of this reporting structure and the Company lacked sufficient internal controls to detect or prevent him from doing so.
G. Legal Conclusions
As described in Parts III(C) through (F) above, during the third quarter of 1999, former Indus executives engaged in fraudulent conduct to improperly boost the Company's financial results. Albano's actions, as described above, caused Indus to issue financial statements for the third quarter (which were filed with the Commission and disseminated to investors) that were materially false and misleading. In addition, Albano caused the Company to fail to maintain books, records and accounts that, in reasonable detail, accurately and fairly reflected its transactions and dispositions of assets. Albano also knowingly circumvented Indus' internal accounting controls by withholding side letters from Indus' accounting staff.
Based on the foregoing, the Commission concludes that Albano violated Sections 10(b) and 13(b)(5) of the Exchange Act and Rules 10b-5 and 13b2-1 thereunder, and caused violations of Sections 13(a) and 13(b)(2)(A) of the Exchange Act and Rules 12b-20 and 13a-13 thereunder.
In determining to accept the Offer, the Commission considered remedial acts promptly undertaken by Respondent and cooperation afforded to the Commission staff.
Based on the foregoing, the Commission deems it appropriate to accept the Offer submitted by Albano. Accordingly, IT IS HEREBY ORDERED pursuant to Section 21C of the Exchange Act that:
Albano cease and desist from committing or causing any violations of Sections 10(b) and 13(b)(5) of the Exchange Act and Rules 10b-5 and 13b2-1 thereunder, and causing any violations of Sections 13(a) and 13(b)(2)(A) of the Exchange Act and Rules 12b-20 and 13a-13 thereunder.
By the Commission.
Jonathan G. Katz
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