UNITED STATES OF AMERICA
In the Matter of
KEITH M. ROBERTS,
ORDER MAKING FINDINGS AND IMPOSING A CEASE-AND-DESIST ORDER PURSUANT TO SECTION 21C OF THE SECURITIES EXCHANGE ACT OF 1934
On April 30, 2004 the Securities and Exchange Commission (the "Commission") instituted administrative proceedings against respondent Keith M. Roberts ("Roberts" or "Respondent") pursuant to Section 21C of the Securities Exchange Act of 1934 ("Exchange Act").
In response to the institution of these proceedings, Roberts has submitted an Offer of Settlement (the "Offer") which the Commission has determined to accept. 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, and without admitting or denying the findings herein, except as to the Commission's jurisdiction over him and the subject matter of these proceedings, Roberts consents to the entry of this Order Making Findings and Imposing a Cease-and-Desist Order Pursuant to Section 21C of the Securities Exchange Act of 1934, as set forth below.
On the basis of this Order and Respondent's Offer, the Commission finds that:
1. This matter involves Roberts' role in incorrectly recognizing revenue on two transactions by Quadramed Corporation ("Quadramed"), a publicly traded health care technology company, during Roberts' tenure as the company's Chief Financial Officer and General Counsel. During September 1998 and March 1999, Quadramed recognized revenue on two $5 million software licensing transactions that Roberts negotiated with Health+Cast LLC ("HealthCast"), a small start-up software development company. In the September 1998 transaction, Roberts caused Quadramed to guarantee a $12.5 million line of credit for the customer, which HealthCast then used to purchase a $5 million software license from Quadramed. In the March 1999 transaction, Roberts caused Quadramed to pay $11 million to HealthCast for a software license and prepaid royalties. HealthCast used a portion of the payment to finance an additional software purchase from Quadramed. In both instances, HealthCast lacked the financial resources to pay Quadramed for the software licenses and was not currently in a position to use or resell the Quadramed software. HealthCast therefore would not have purchased the Quadramed licenses when it did unless Quadramed was providing HealthCast with the cash necessary to buy Quadramed's software from Quadramed.
2. Quadramed's recognition of revenue from the transactions violated Generally Accepted Accounting Principles ("GAAP") because collectibility for the transactions was not probable absent financial assistance from Quadramed, and because there was no proper valuation of the licenses and services that were exchanged between Quadramed and HealthCast. Quadramed's improper reporting of revenue for these transactions rendered its filings with the Commission materially misleading. In these filings, Quadramed failed to disclose the full extent of its relationship and agreements with HealthCast, including the questionably non-arm's-length character of the revenue from these two licensing "sales." This prevented investors from understanding the nature of the licensing fees that Quadramed received for the two HealthCast transactions.1
3. Roberts, age 39, resides in San Francisco, California. From 1997 to 2000, Roberts was Quadramed's Vice President and General Counsel. From July 1998 to April 1999, Roberts also served as Quadramed's Chief Financial Officer. Roberts is presently the Executive Vice President, General Counsel and Chief Financial Officer of a private company located in Santa Clara, California.
4. Quadramed is a Delaware corporation. During the relevant period, the company was headquartered in San Rafael, California, but has subsequently relocated to Reston, Virginia. Quadramed sells information technology and consulting services to hospitals and healthcare professionals, and licenses software products. Quadramed's common stock is registered with the Commission pursuant to Section 12(g) of the Exchange Act. Quadramed was delisted from the Nasdaq stock market in March 2003, and is currently quoted on the NASDAQ bulletin board.
5. In July 1998, Roberts met with a small, privately-owned health care company, HealthCast. HealthCast was developing a computer interface that would allow hospitals and doctors to access a variety of medical software programs. Quadramed wanted to have HealthCast incorporate Quadramed's software into the interface. Initially, Quadramed offered to provide HealthCast with a $2 million equity investment and a guarantee for a $4 million line of credit for a total cash infusion of $6 million, if HealthCast would integrate Quadramed's product into the software interface. HealthCast elected, however, not to provide Quadramed with an equity stake.
6. Eventually, on September 29-30, 1998, Quadramed and its customer entered into a series of related transactions - that was negotiated by Roberts - in which Quadramed arranged bank financing for HealthCast so that HealthCast had $6 million in working capital for development work on the customer interface and another $5 million to pay the licensing fee to Quadramed. Quadramed and its customer simultaneously executed an Investment Agreement, Credit Agreement, Note, Guarantee, Security Agreement, Registration Rights Agreement, Warrant Purchase Agreement, Non-exclusive Reseller Agreement, Escrow Agreement, License Agreement, Non-exclusive Software Agreement and a Development Agreement whereby HealthCast was to become a development unit for Quadramed. Under the terms of the License Agreement, HealthCast agreed to purchase a nonexclusive license of source code from Quadramed for $5 million. Under the terms of the Credit Agreement and Guarantee, Quadramed guaranteed a $12.5 million line of credit for HealthCast, under which the bank would advance revolving loans "for the acquisition of technology rights and in the development of its business and for the purchase of capital equipment and working capital purposes," i.e., for purchasing the $5 million license from Quadramed. Additionally, under the credit agreement, $1.5 million was set aside to cover interest. Thus, when the $1.5 million interest reserve and the $5 million licensing fee are deducted from the $12.5 million Guarantee, Quadramed essentially provided HealthCast with the very same $6 million cash infusion that had been discussed for the equity proposal.
7. Quadramed's guarantee was supposedly secured by a lien on all of HealthCast's assets. However, HealthCast's financial records for the period ended July 31, 1998, indicate that the company had less than $2 million in total assets on its balance sheets, revenue of less than $500,000 for the first five months of the year, and an operating loss of $2 million. Hence, HealthCast was not creditworthy because it had no financial ability to pay for Quadramed's software absent Quadramed's guarantee of the line of credit. HealthCast drew down from the line of credit in order to pay Quadramed for the software license. Additionally, neither HealthCast nor Quadramed made a reasonable determination of the fair market value of the software license.
8. Roberts authorized Quadramed's Controller to recognize $4 million in revenue on the sale of the software license to HealthCast in Quadramed's books and records for the quarter ended September 30, 1998. That revenue failed, however, to comply with GAAP due to HealthCast's reliance on the line of credit guaranteed by Quadramed to pay for the transaction. On November 16, 1998, Quadramed filed its Form 10-Q for the third quarter, after previously issuing a press release detailing its financial results. Roberts signed the Form 10-Q as the company's Chief Financial Officer and General Counsel. The 10-Q reported total revenue of $43.8 million and net loss of $2.2 million for the quarter. The improper recognition of revenue from the transaction caused Quadramed's reported revenue to be overstated by about 10% and its reported net loss to be understated by about 218%.
9. A footnote to Quadramed's Form 10-Q read as follows:
In September 1998, the Company entered into an arrangement to guarantee a line of credit of another company for up to $12,500,000. Outstanding balances under the line of credit accrue interest at 8.5% and are due October 1, 2001. The Company has also entered into a reseller agreement with the same company. Under the terms of the reseller agreement, the Company has a non-exclusive license to resell the company's software. This reseller agreement remains in effect for an initial term of three (3) years, expiring on September 29, 2001, and thereafter is subject to renewal for additional one-year terms.
That footnote involved a material omission because it failed to disclose that the guarantee was made for a customer who was using funds from the line of credit to purchase software from Quadramed. It also failed to disclose that Quadramed was booking revenue from a "customer" in which it had essentially become an investor through the Investment Agreement and related documents.
10. On March 31, 1999, Quadramed filed its Form 10-K for the fiscal year ended December 31, 1998. Roberts signed the Form 10-K as the company's Chief Financial Officer and General Counsel. The 10-K reported total annual revenue of $159.4 million and a net loss from operations of $14 million. As a result of the improper reciprocal transaction, revenue for the fiscal year was overstated by 2.6% and the company's net loss was understated by 14.6%. As in the Form 10-Q, the Form 10-K mentioned the $12.5 million line of credit guarantee with a "reseller," but omitted any reference to the use of the credit line to pay Quadramed for the $5 million license and to the relationship between Quadramed and HealthCast.
11. Previously, in August 1998, Roberts had discussed the proposed transactions with Quadramed's independent auditors, who advised Roberts that Quadramed could not record revenue from a hypothetical sale in which Quadramed guaranteed a line of credit for HealthCast unless the guarantee was secured by assets that could be converted to cash. Despite that advice, Roberts based the decision to recognize revenue by relying upon a security interest in largely intangible assets with a speculative value. That reliance upon largely intangible assets with a speculative value did not comply with GAAP.
12. Quadramed's independent auditors reviewed the company's revenue recognition decisions shortly after the end of each fiscal quarter. At the time the auditors reviewed the transaction in early October 1998, Roberts failed to explain fully to the auditors and Quadramed's Controller the character of the relationship between Quadramed and HealthCast. As a result - and because the payment was not outstanding at the end of the quarter - the independent auditors and the Controller did not analyze the creditworthiness of HealthCast in order to determine whether collectibility was probable for the licensing transaction. Had the auditors reviewed the transaction, they could have seen that HealthCast lacked sufficient cash to pay for the purchase outside of the line of credit guaranteed by Quadramed, and thus that revenue recognition was improper.
13. Roberts should have known that his failure to explain fully the relationship between Quadramed and HealthCast to the Controller and independent auditors would cause the sale to be recorded improperly on Quadramed's books and records, and would cause material misrepresentations in the company's Form 10-Q for the quarter ended September 30, 1998 and the year ended December 31, 1998.
14. In February 1999, HealthCast's CEO contacted Roberts to ask for more money. Roberts and HealthCast's CEO then negotiated another reciprocal transaction in March 1999. HealthCast acquired a $5 million source code license for a suite of software products from Quadramed. In return, Quadramed agreed to prepay non-refundable licensing royalties of $5 million, and to pay HealthCast $6 million for a software license and source code for another software program.
15. HealthCast lacked sufficient funds to make the $5 million payment to Quadramed. Roberts arranged for Quadramed to wire funds to HealthCast in return for a software license and as prepaid royalties. HealthCast used a portion of those funds to cover the $5 million payment to Quadramed. In late March 1999, HealthCast sent Quadramed a $5 million check. HealthCast's CEO also sent a letter to Roberts, which stated:
In anticipation of funding the transaction contemplated by the Memorandum of Understanding, we are forwarding to you our company check in the amount of $5,000,000. We are providing this with the understanding that you will not present the check for collection at any bank or financial institution until such time as your company wires to us the total sum of $11,000,000 in completion of the various cash transactions agreed upon.
16. As with the September 1998 transaction, the transactions were structured so that Quadramed would receive HealthCast's payment by the end of the fiscal quarter. As a result, there were no outstanding payments due at the end of the quarter, and the transaction escaped scrutiny by Quadramed's outside auditors.
17. On May 17, 1999, Quadramed filed its Form 10-Q for the quarter ended March 31, 1999, after issuing a press release detailing the quarterly results. The Form 10-Q was signed by Roberts as the General Counsel. The Form 10-Q reported revenue of $59.6 million and a net loss of $25.6 million. As a result of the improper reciprocal transaction, Quadramed's reported revenue was overstated by about 9% and its reported net loss from operations was understated by about 12%.
18. Quadramed's Form 10-Q was also deficient because it failed to disclose the related-party character of the transactions with HealthCast and that Quadramed had provided funds to HealthCast to purchase software from Quadramed.
19. On March 29, 2000, Quadramed filed its Form 10-K for the fiscal year ended December 31, 1999. Roberts reviewed a draft Form 10-K but did not sign the filing. The 10-K reported revenue of $240 million and a net loss from operations of $9.3 million. Because revenue from the $5 million March 1999 transaction should not have been recognized, Quadramed's reported revenue for the fiscal year was overstated by about 2% and its reported net loss was understated by about 23%. As in the Form 10-Q, the Form 10-K omitted any reference to the related-party character of the transactions with HealthCast.
20. Roberts authorized Quadramed's Controller to improperly recognize $5 million in revenue on the licensing contract with HealthCast in its books and records. The transaction failed to comply with the requirements for recognition under GAAP because HealthCast did not have an independent ability to pay for the transaction until it received funds from Quadramed, and because there was no reliable and/or independent valuation of the consideration being exchanged in this reciprocal transaction. Quadramed also recorded the pre-paid royalties as an asset in its books and records, in violation of GAAP.
21. Roberts provided the March 31 letter from HealthCast's CEO to Quadramed's outside legal counsel and asked counsel to respond and reject it. However, Roberts did not show the March 31 letter to Quadramed's independent auditors or Controller, or otherwise advise them of HealthCast's financial situation. Roberts also failed to advise the auditors that Quadramed had wired $11 million to HealthCast prior to cashing HealthCast's check. As a result - and because the payment was not outstanding at the end of the quarter - the auditors and the Controller did not analyze the creditworthiness of HealthCast in order to determine whether collectibility was probable for the licensing transaction. Had the auditors reviewed the transaction during the quarterly review process, they could have seen that HealthCast had no means to pay for the purchase outside of the money that was wired from Quadramed, and thus that revenue recognition was improper.
22. Roberts' failure to inform the Controller and independent auditors about HealthCast's letter and the related nature of all the transactions with HealthCast caused the sale to be recorded improperly on Quadramed's books and records, and caused material misrepresentations in the company's Form 10-Q for the quarter ended March 31, 1999 and the year ended December 31, 1999.
23. On June 6, 2003, Quadramed filed restated financial statements for the fiscal years ended December 31, 1999, December 31, 2000 and December 31, 2001. In its restated financial statements, Quadramed reversed the revenue from the March 1999 transaction. The financial statements for the year ended December 31, 1998 were not restated.
24. As a result of the conduct described above, Quadramed reported false and misleading financial results in various Commission filings and public statements. Quadramed also failed to file with the Commission accurate and complete reports, and filed reports that failed to include material information necessary to make its statements not misleading for the periods ended September 30, 1998, December 31, 1998, March 31, 1999 and December 31, 1999. In addition, Quadramed failed to maintain books, records and accounts that, in reasonable detail, accurately and fairly reflected its transactions and dispositions of assets, and failed to maintain a system of internal accounting controls sufficient to provide reasonable assurances that transactions were recorded as necessary to permit the preparation of financial statements in conformity with GAAP.
25. Based on the foregoing, Roberts caused Quadramed's violations of Sections 13(a) and 13(b)(2)(A) of the Exchange Act and Rules 13a-1 and 13a-13 thereunder, which require all issuers whose securities are registered with the Commission pursuant to Section 12 of the Exchange Act to file with the Commission annual and quarterly reports containing such information as the Commission shall prescribe by its rules and regulations.
26. Based on the foregoing, Roberts caused Quadramed's violations of Rule 12b-20, which requires that the annual and periodic reports filed pursuant to Rules 13a-1 and 13a-13 contain any additional information necessary to ensure that the required statements in the reports are not, under the circumstances, materially misleading.
27. Based on the foregoing, Roberts caused Quadramed's violations of Section 13(b)(2)(A) of the Exchange Act, which requires issuers to make and keep books, records and accounts which, in reasonable detail, accurately and fairly reflect the transactions of the issuer.
28. Based on the foregoing, Roberts violated Section 13(b)(5) of the Exchange Act and Rule 13b2-1, which prohibits a person from knowingly circumventing or knowingly failing to implement a system of internal accounting controls or knowingly falsifying an issuer's books, records and accounts.
Based on the foregoing, the Commission deems it appropriate to accept the Offer submitted by Roberts. Accordingly, it is hereby ORDERED, pursuant to Section 21C of the Exchange Act, that Respondent Roberts cease and desist from causing any violations and any future violations of Sections 13(a) and 13(b)(2)(A) of the Exchange Act and Rules 12b-20, 13a-1, and 13a-13 thereunder, and from committing or causing violations of Section 13(b)(5) of the Exchange Act and Rule 13b2-1 thereunder.
By the Commission.
Jonathan G. Katz
|Home | Previous Page||