UNITED STATES OF AMERICA
|ORDER INSTITUTING PUBLIC CEASE-AND-DESIST PROCEEDING, MAKING
FINDINGS AND ISSUING A CEASE-AND-DESIST
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 Arsin Corporation ("Arsin" or the "Company") and Danis Yadegar-Mooshiabadi ("Yadegar") (collectively, "Respondents").
Accordingly, IT IS HEREBY ORDERED that a cease-and-desist proceeding against Arsin and Yadegar be, and hereby is, instituted.1
In anticipation of the institution of this proceeding, Arsin and Yadegar have submitted Offers of Settlement ("Offers"), 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 Respondents admit the jurisdiction of the Commission over them and over the subject matter of this proceeding, Respondents consent to the issuance of this Order Instituting Public Cease-and-Desist Proceeding, Making Findings and Issuing a Cease-and-Desist Order ("Order").
On the basis of this Order and the Offers, the Commission makes the following findings2:
Arsin Corporation is a software company primarily involved in providing consulting services. Based in Santa Clara, California, Arsin is a private corporation incorporated under California law. Arsin's stock is held by its CEO and Chairman, Danis Yadegar-Mooshiabadi, two outside investors, and by twenty-five current or former employees.
Danis Yadegar-Mooshiabadi, age 47, resides in Campbell, California and is the President, Chairman, and CEO of Arsin.
In December 2000, Unify Corporation ("Unify") restated its previously announced financial results for all four quarters of its fiscal year 2000, which ended on April 30, 2000. A portion of Unify's restatement was to correct two "roundtrip" sales transactions involving Arsin that occurred at the end of Unify's third and fourth quarters of its fiscal year 2000. As part of Unify's restatement for the third quarter, Unify reversed $450,000 in previously recognized revenue relating to Arsin's purchase of a software license from Unify. This transaction caused Unify's originally reported revenue for the quarter to be overstated by 8.6%. As part of Unify's restatement of the fourth quarter, Unify reversed $500,000 in previously announced revenue relating to a fee that Arsin agreed to pay Unify in connection with an original equipment manufacturer's agreement. The second transaction caused Unify's originally reported revenue for the quarter to be overstated by 10.9 % in Unify's fiscal year 2000 earnings announcement.
When it entered into these contracts with Unify, Arsin lacked the funds to pay for the software it was licensing from Unify and Arsin later used funds that it received from Unify to pay for Unify's software. In each instance, Arsin and Yadegar provided Unify with a check that Arsin lacked the funds to cover, with the understanding that Unify would show the check to Unify's independent auditor and that Unify would not deposit Arsin's check until Unify had provided Arsin with the funds necessary to cover Arsin's check.
In October 1999, Yadegar recruited Reza Mikailli, Unify's CEO, as the first outside member of Arsin's board of directors. Yadegar had known Mikailli for more than 12 years, since the two worked together at another high technology company. At the same time, in October 1999, Unify hired Arsin to carry out performance testing for a new software product Unify was planning to develop, called eWave. According to the terms of a so-called Funded Development Agreement dated October 20, 1999, Unify agreed to pay Arsin $125,000 to develop a testing protocol, test the product, and provide Unify with the test results. The contract provided that Arsin and Unify would jointly own both the testing protocol and the test results. Arsin completed its work under the contract in December 1999.
On January 24, 2000, Unify and Arsin entered into a software license that gave Arsin the right to have an unlimited number of its employees use Unify's eWave product, in exchange for $500,000. Unify recognized this entire amount as revenue in the Form 10-Q that Unify filed for the quarter ended January 31, 2000. Unify later determined that $450,000 of this revenue was improperly recognized because it was offset by a reciprocal agreement in which Unify supplied Arsin with funds to pay for the software license.
Yadegar and Mikailli negotiated the license agreement, along with Unify's CFO, Gary Pado. Yadegar initially informed Mikailli and Pado that Arsin did not have the funds to cover payment. Mikailli told Yadegar that the license agreement would not cost Arsin anything but that he needed an agreement in the amount of $500,000 and required a check by the end of January 2000. Mikailli informed Yadegar that Unify wanted to close the transaction by the end of January because Unify required the $500,000 for its revenue for the quarter ended January 31, 2000. Mikailli and Pado also told Yadegar that Unify required the check in order to show it to their auditors in the first week of the following month. Yadegar gave Unify a check for the full amount after reaching an agreement with Mikailli and Pado that Unify would not cash the check until Yadegar informed them that he had the money to cover the check.
In order to provide Arsin with the funds to pay for the license agreement, Yadegar and Pado simultaneously negotiated an amendment to the prior Funded Development Agreement between Arsin and Unify. Under the amended Funded Development Agreement, Arsin agreed to provide a revised testing protocol for eWave, run additional tests, and give Unify sole ownership of both the testing protocol and results, in exchange for an additional $450,000. The amended Funded Development Agreement was a sham agreement. No technical work was done under the agreement, and its purpose was to provide Arsin with the funds it needed to pay for the software license.
On April 29, 2000, Unify and Arsin entered into an original equipment manufacturer ("OEM") agreement, in which Arsin agreed to pay $500,000 for the right to incorporate Unify's eWave product into software that Arsin had not yet developed. Unify recognized this entire amount as revenue in its earnings release for the fourth quarter ended April 30, 2000. Unify later determined that all of this revenue was improperly recognized because Unify supplied Arsin with the funds it needed to pay for the OEM agreement just two weeks after the agreement was signed.
Mikailli and Pado called Yadegar in April 2000 and requested that Arsin do another $500,000 deal with Unify. Yadegar again informed them that Arsin lacked the funds to cover a $500,000 payment. Mikailli told Yadegar that Arsin ultimately would not have to pay for the agreement, but that Unify required a check from Arsin by the end of April. Mikailli and Pado told Yadegar that Unify wanted the contract to include it in Unify's quarterly revenue and required the check by the end of April so that they could present it to Unify's auditors. Yadegar executed the OEM contract on April 29, and provided Unify with a check for the entire $500,000 on the same day. Yadegar, Mikailli and Pado agreed that Unify would refrain from depositing the check until Arsin received funds from Unify to cover it.
Despite this agreement, in early May 2000 Unify deposited Arsin's check, which bounced due to insufficient funds. Upon learning of the bounced check, Yadegar threatened to cancel the OEM agreement with Unify. On May 12, 2000, Unify wired Arsin $500,000 to cover the bounced Arsin check. Arsin used the funds from the wire transfer to pay Unify.
As described in Parts III.A through III.E above, from January 2000 through the end of May 2000, Arsin and Yadegar engaged in misconduct intended to assist Unify in fraudulently boosting its financial results. As a result, Unify's financial statements for the periods ended January 31, 2000 and April 30, 2000 (which were filed with the Commission, or otherwise disseminated to investors) were materially false and misleading.
Based on the foregoing, the Commission finds that Arsin and Yadegar caused Unify's violations of Sections 13(a) and 13(b)(2)(A) of the Exchange Act and Rules 12b-20 and 13a-13 thereunder, and caused certain former officers of Unify's violations of Sections 10(b) and 13(b)(5) of the Exchange Act and Rules 10b-5, 13b2-1, and 13b2-2, thereunder.
Based on the foregoing, the Commission deems it appropriate to accept the Offers submitted by Arsin and Yadegar. Accordingly, IT IS HEREBY ORDERED pursuant to Section 21C of the Exchange Act that:By the Commission.
Jonathan G. Katz
1 Arsin cease and desist from committing or causing any violations or any future violations of Sections 10(b), 13(a), 13(b)(2)(A) and 13(b)(5) of the Exchange Act and Rules 10b-5, 12b-20 and 13a-13; and 13b2-1 thereunder, and from causing any violations or any future violations of Rule 13b2-2 thereunder, and
2 Yadegar cease and desist from committing or causing any violations or any future violations of Sections 10(b), and 13(b)(5) of the Exchange Act and Rules 10b-5, 13b2-1, and 13b2-2 thereunder, and from causing any violations or any future violations of Section 13(a), 13(b)(2)(A) of the Exchange Act and Rules 12b-20 and 13a-13 thereunder.
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