UNITED STATES OF AMERICA Before the SECURITIES AND EXCHANGE COMMISSION SECURITIES EXCHANGE ACT OF 1934 Release No. 37185 / May 9, 1996 ACCOUNTING AND AUDITING ENFORCEMENT Release No. 781 / May 9, 1996 ADMINISTRATIVE PROCEEDING File No. 3-8999 ______________________________ : In the Matter of : : ORDER INSTITUTING PUBLIC PLATINUM SOFTWARE CORPORATION,: PROCEEDING AND OPINION AND JOHN F. KEANE and : ORDER PURSUANT TO SECTION WILLIAM B. FALK, : 21C OF THE SECURITIES : EXCHANGE ACT OF 1934 Respondents : ______________________________: I. The Securities and Exchange Commission ("Commission") deems it appropriate and in the public interest that a public administrative proceeding be, and hereby is, instituted pursuant to Section 21C of the Securities Exchange Act of 1934 ("Exchange Act") to determine whether Platinum Software Corporation ("PSC" or the "Company") violated Sections 13(a), 13(b)(2)(A) and 13(b)(2)(B) of the Exchange Act and Rules 12b-20, 13a-1 and 13a- 13 promulgated thereunder, and whether John F. Keane ("Keane") and William B. Falk ("Falk") caused violations of Section 10(b) of the Exchange Act and Rule 10b-5 thereunder, and violated Section 13(b)(5) of the Exchange Act and Rule 13b2-1 thereunder. II. In anticipation of the institution of this proceeding, PSC, Keane and Falk have submitted Offers of Settlement ("Offers"), which the Commission has determined to accept. In determining to accept Respondents' Offers, the Commission considered remedial acts promptly undertaken by PSC and the cooperation Respondents afforded the Commission staff. 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 Commission's findings contained herein, except as to the Commission's finding of jurisdiction over them and the subject matter of this proceeding, PSC, Keane and Falk consent to the issuance of this Order Instituting Proceedings ==========================================START OF PAGE 2====== -2- ("Order") and to the entry of the findings and the imposition of the relief set forth below. III. On the basis of this Order and the Offers, the Commission finds -[1]- that: A. FACTS 1. Summary From at least March 1993 through January 1994, a fraudulent accounting scheme devised and implemented by PSC's then-senior management -- including chief executive officer Gerald R. Blackie ("Blackie"), chief financial officer Jon R. Erickson ("Erickson") and controller Mark S. Tague ("Tague") -[2]- -- resulted in reporting by PSC of materially overstated revenue and net income, among other items, in its Annual and Quarterly Reports disseminated to the public and filed with the Commission on Forms 10-K and 10-Q. -[3]- PSC's sales managers for its two primary software lines, Keane and Falk, engaged in conduct that helped senior management to overstate revenue. In particular, PSC improperly recorded the revenue from a number of license agreements that were accompanied by side letters giving the customer the right to cancel the agreement within a specified period of time. PSC also backdated certain license agreements and shipping documents to improperly record revenue in a prior quarter. In addition, PSC improperly recognized revenue on sales that were subject to significant uncertainty about customer acceptance or to significant remaining obligations on the part of PSC. ---------FOOTNOTES---------- -[1]- The findings herein are made pursuant to Respondents' offers of settlement and are not binding on any other person or entity named as a respondent in this or any other proceeding. -[2]- The employment by PSC of Blackie and Erickson terminated on April 17, 1994. The employment of Tague terminated on October 22, 1993. -[3]- Simultaneously with instituting this proceeding, the Commission has filed a civil action against Blackie, Erickson and Tague alleging violative conduct in connection with the fraudulent scheme. The defendants have consented to the entry of final judgments of permanent injunction and other relief in that action. ==========================================START OF PAGE 3====== -3- As a result of this improper revenue recognition, for several reporting periods PSC was able to falsely report that its revenue and earnings had met or exceeded the estimates that it had previously provided to analysts for dissemination to the investing public. The scheme also involved overstatements of cash receipts and corresponding understatements of receivables to allay concerns of analysts and investors about the soundness and collectibility of PSC's receivables. 2. Respondents a. Platinum Software Corporation, a Delaware corporation with its principal place of business in Irvine, California, develops and markets financial software. PSC's common stock is registered with the Commission pursuant to Section 12(g) of the Exchange Act and is quoted on the NASDAQ National Market System. Since its initial public offering on October 22, 1992, PSC has been required to file reports with the Commission pursuant to Section 13(a) of the Exchange Act. b. John F. Keane, age 39, was vice president of sales for PSC's SeQueL to Platinum product line at all relevant times. He resigned from PSC in June 1994. c. William B. Falk, age 37, was vice president of sales for PSC's Platinum product line at all relevant times. His employment at PSC terminated in July 1994. 3. PSC's Senior Management Conducted a Fraudulent Accounting Scheme a. PSC Recorded Contingent and Undelivered Sales to Overstate Revenue and Income During the period of the fraud, PSC's primary products were two lines of financial accounting software: Platinum, a series of shrink-wrapped modules sold through dealers; and SeQueL to Platinum ("SeQueL"), a higher-priced series of modules that was sold directly to end-users under license agreements that were often customized to fit the customer's needs. Beginning no later than March 1993, PSC used several improper means to recognize revenue for sales of Platinum and SeQueL software, as described below. Backdating: Each quarter during the period of the fraud, a significant percentage of Platinum-series orders arrived at PSC on the last day of the quarter or shortly thereafter. As a result, PSC shipped material amounts of Platinum in the first few days following each quarter-end. PSC improperly recorded these sales in the quarter just ended. Tague instructed PSC's clerks to backdate shipping documents to falsely reflect that shipment was made on the last day of the prior period. After Tague left ==========================================START OF PAGE 4====== -4- PSC in October 1993, Blackie and Erickson directed that the same backdating method be used to overstate Platinum sales for the quarter ended December 31, 1993. Blackie and Erickson also directed PSC's sales force to ask a number of customers who signed SeQueL license agreements after December 31, 1993 to backdate the agreements to falsely indicate that they were concluded before quarter-end. PSC improperly recorded the revenue from these licenses in the quarter ended December 31, 1993. Side letters: Beginning in the quarter ended March 31, 1993, and continuing through the quarter ended December 31, 1993, PSC's sales force obtained customer signatures on a number of SeQueL license agreements by giving the customers cancellation privileges that extended beyond quarter-end. The cancellation privileges were generally embodied in separate side letters. PSC improperly recognized as revenue the software licensing fees provided for in these cancelable agreements before the cancellation privileges lapsed; in addition, PSC failed to provide the side letters to its independent auditors. Wackenhut: On the last day of PSC's fiscal year ended June 30, 1993, Blackie personally closed a $1.5 million software license agreement with The Wackenhut Corporation ("Wackenhut") with a side letter giving Wackenhut the unrestricted right to cancel the agreement until August 31. Erickson recorded the software licensing fees called for in the cancelable agreement as June revenue and deliberately withheld the side letter from PSC's independent auditors. Before the cancellation period expired, Wackenhut canceled the agreement. Nevertheless, PSC's financial statements in its Annual Report on Form 10-K, filed September 28, 1993, reflected the revenue from this cancelled sale, which alone accounted for nearly 10% of PSC's $15,758,000 in reported total revenues for the June quarter. PSC did not reverse the recognition of revenue on this transaction until January 16, 1994. Other improprieties relating to revenue recognition: During the relevant period, PSC also improperly recognized revenue from a number of software license agreements that the customer had not signed, or that were subject to significant uncertainty about customer acceptance or to significant remaining obligations on the part of PSC. PSC also improperly recorded certain transactions as revenue based only on customers' non-binding letters of intent to buy PSC software. * * * Utilizing the improper revenue recognition practices described above, PSC falsely reported revenue and net income that met or exceeded the estimates that it had previously provided to ==========================================START OF PAGE 5====== -5- analysts for the quarter and year ended June 30, 1993 and the quarter ended September 30, 1993, and materially understated the amounts by which it missed the revenue and earnings estimates that it had previously provided to analysts for the quarter ended December 31, 1993. b. PSC Misstated Cash and Receivables to Understate Days Sales Outstanding In early 1993, Blackie, Erickson and Tague learned that the high level of PSC's "days sales outstanding" ("DSO") -- a measure of the time a company takes to collect its receivables -- concerned analysts and investors. PSC's DSO increased throughout 1993, in part because PSC improperly recognized revenue on contingent or cancelled license agreements, as described above. PSC management's response was to use two improper means to lower DSO: holding PSC's books open for cash received after period-end, and arbitrarily reclassifying accounts receivable as cash. Holding the books open: After June 30, 1993, Erickson and Tague recorded checks received by PSC during early July on PSC's balance sheet as an increase in cash and a reduction in receivables as of June 30, resulting in a cash overstatement and associated receivable understatement of $1,899,000. For the quarter ended September 30, 1993, Erickson and Tague included cash that PSC received for about a week into October, resulting in a cash overstatement and accounts receivable understatement of $724,000. Similarly, after the end of the quarter ended December 31, 1993, Erickson caused cash to be held open for ten days, resulting in a cash overstatement and accounts receivable understatement of $3,463,000. Arbitrary reclassification: In October 1993, Erickson arbitrarily reclassified $750,000 of accounts receivable as cash on PSC's financial statements for September 30, 1993. 4. PSC's Internal Controls Were Inadequate PSC's senior management failed to devise and maintain an adequate system of internal accounting controls. PSC had no procedure established to ensure that side letters and other documents critical to accounting for license agreements would be forwarded to the accounting department. Nor did PSC have documented procedures for the proper recording of revenue. PSC also failed to adequately enforce the control procedures that were in place. PSC officers and employees frequently backdated shipping documents and license agreements to circumvent existing controls. Consequently, PSC's books and records contained false and misleading statements relating to, among other things, the timing of product deliveries and cash receipts, and contingent and backdated license agreements. ==========================================START OF PAGE 6====== -6- 5. Revelations of PSC's True Financial Condition Caused Its Stock Price to Plunge PSC publicly announced the facts underlying the fraud in two stages, and both times its stock price fell substantially. On January 17, 1994, PSC announced before the stock market opened that it had fallen short of analysts' earnings and revenue estimates for the quarter ended December 31, 1993, and that the poor results were due in part to its decision to write off $1.5 million of a previously-booked contract (the Wackenhut agreement). This announcement caused the price of PSC stock to fall from $13.75 per share at the opening to $10.75 per share at the close. These events triggered a shareholder's class action suit, which resulted in the discovery by PSC's two outside directors of widespread accounting irregularities. On Monday, April 18, 1994, before the stock market opened, PSC released information about the accounting irregularities and announced that its top executives, including Blackie and Erickson, and inside directors had resigned from their positions. The price of PSC stock, which had closed the previous Friday at $10 per share, declined precipitously to close on the day of the announcement at $3.56 per share, a drop of 64 percent. 6. PSC Filed Misstated Reports with the Commission On September 28, 1993, PSC filed with the Commission its Annual Report on Form 10-K for its fiscal year ended June 30, 1993. This report, which was signed by the Company's senior management, contained audited financial statements in which PSC materially misstated revenue, net income and earnings per share for the fiscal year. On or about May 7, 1993, November 12, 1993, and February 14, 1994, PSC filed with the Commission its Quarterly Reports on Forms 10-Q for the quarters ended March 31, 1993, September 30, 1993, and December 31, 1993, respectively. These Quarterly Reports contained unaudited financial statements in which PSC materially misstated revenue, net income and earnings per share. In May 1994, PSC restated its financial statements for the quarter and fiscal year ended June 30, 1992, for all quarters of and for the fiscal year ended June 30, 1993, and for the first two quarters of fiscal 1994, ended September 30, 1993 and December 31, 1993, respectively. The cumulative amount of revenue reversed in the restatement was nearly $18.2 million as of December 31, 1993. PSC restated revenues for the third quarter of fiscal 1993 from $9.3 million to $6.8 million, for fiscal 1993 from $38.6 million to $28 million, and for the first two quarters of fiscal 1994 from $15.5 million to $11.4 million and from $17.2 million to $14.6 million, respectively. ==========================================START OF PAGE 7====== -7- 7. Acts of Keane and Falk a. Keane: Keane reported directly to Blackie, and spoke frequently with Blackie and Erickson after the end of each quarter about SeQueL sales figures and the need for more revenue. In March 1993, at Erickson's suggestion, Keane told PSC's SeQueL sales force to induce prospective customers to sign a license agreement dated before the end of March by offering discount prices and the right, pursuant to a side letter, to cancel the license. After March 31, 1993, until about two days before PSC's quarterly earnings release on April 15, Keane informed Blackie and Erickson at least several times a week about the status of these contingent transactions. Keane knew that Blackie and Erickson intended to, and did, record these contingent sales as revenue as of March. Keane and PSC's SeQueL sales force continued to use side letters to close sales through the quarter ended December 31, 1993, and Keane knew that Erickson was recognizing the associated revenue. In addition, during the quarter ended December 31, 1993, Erickson told Keane to discontinue the use of side letters to close SeQueL license agreements, but directed him to backdate license agreements. After the quarter ended, Keane and PSC's SeQueL sales team asked a number of customers who signed SeQueL license agreements before PSC's earnings release in mid-January to backdate the agreements to indicate that they were concluded before quarter-end. Keane knew that Erickson intended to recognize revenue for PSC on these license agreements for the quarter ended December 31, 1993. b. Falk: In the first few days of each quarter during the period of the fraud, Falk encouraged PSC's Platinum- series sales force to close orders and send them in to PSC headquarters for inclusion in the prior period. He also occasionally encouraged PSC's accounting department to backdate Platinum sales. Falk was aware that it was improper to record revenue for sales of software before the products were shipped. He knew that PSC recognized revenue for the quarters ended June 30, 1993, September 30, 1993, and December 31, 1993 for Platinum products shipped after the end of those quarters. B. LEGAL ANALYSIS 1. PSC a. The Reporting Provisions -- Section 13(a) of the Exchange Act and Rules 13a-1, 13a-13 and 12b-20 thereunder Section 13(a) of the Exchange Act requires issuers with securities registered pursuant to Section 12 of the Exchange Act, such as PSC, to file with the Commission periodic and other ==========================================START OF PAGE 8====== -8- reports containing information required by Commission rules and regulations. PSC became subject to the provisions of Section 13(a) in October 1992 when it registered its securities with the Commission under Section 12(g) of the Exchange Act. Pursuant to Section 13(a), the Commission has promulgated Rule 13a-1, which requires issuers to file Annual Reports on Form 10-K with the Commission. Among other things, such reports must make disclosures regarding an issuer's periodic revenues, income, sales, and net earnings, and must also include audited financial statements. Rule 13a-13 promulgated under the Exchange Act requires issuers to file Quarterly Reports on Form 10-Q. Rule 12b-20, also promulgated under the Exchange Act, requires that such reports contain, in addition to disclosures expressly required by statute and rules, such other information as is necessary to ensure that the statements made in those reports are not, under the circumstances made, materially misleading. Because the reporting provisions of the Exchange Act necessarily include the requirement of supplying accurate information, a violation of Section 13(a) is established if Annual or Quarterly Reports are shown to contain materially false or misleading statements or to omit to state material facts necessary to make statements made therein not misleading. SEC v. Kalvex, Inc., 425 F. Supp. 310, 316 (S.D.N.Y. 1975); SEC v. IMC Int'l, Inc., 384 F. Supp. 889, 893 (N.D. Texas), aff'd mem., 505 F.2d 733 (5th Cir. 1974), cert. denied, 420 U.S. 930 (1975). No showing of scienter is required to establish a violation of Section 13(a) of the Exchange Act. See, e.g., Texas Commerce Bancshares, Inc., Exchange Act Release No. 24,803 (August 17, 1987). PSC violated Section 13(a) of the Exchange Act and Rules 13a-1, 13a-13 and 12b-20 thereunder by disseminating to the public and filing with the Commission an Annual Report on Form 10-K for the year ended June 30, 1993, and Quarterly Reports on Form 10-Q for the third quarter of 1993 and the first and second quarters of 1994, that contained materially false and misleading financial statements, including overstated revenue and net income. Cash was overstated for each of these periods except the third quarter of fiscal 1993, and accounts receivable were misstated for each period. b. The Record-Keeping and Internal Controls Provisions -- Sections 13(b)(2)(A) and 13(b)(2)(B) of the Exchange Act Section l3(b)(2) of the Exchange Act is comprised of two accounting provisions referred to as the "books and records" and "internal controls" provisions. These accounting provisions were enacted to strengthen the accuracy of issuers' records and to "promote the reliability and completeness of financial ==========================================START OF PAGE 9====== -9- information that issuers are required to file with the Commission or disseminate to investors pursuant to the Exchange Act." SEC v. World-Wide Coin Invs. Ltd., 567 F.Supp. 724, 747 (N.D. Ga. l983). Section 13(b)(2)(A) of the Exchange Act, the books and records provision, requires a reporting company to make and keep books, records, and accounts which, in reasonable detail, accurately and fairly reflect its transactions and dispositions of assets. The internal controls provision, Section 13(b)(2)(B) of the Exchange Act, requires a reporting company to "devise and maintain a system of internal accounting controls sufficient to provide reasonable assurances that . . . transactions are recorded as necessary to permit preparation of financial statements in conformity with generally accepted accounting principles . . . ." As a result of the fraudulent scheme, PSC's books and records contained extensive false and misleading entries relating to, among other things, the timing of product deliveries and cash receipts, and contingent and backdated license agreements, and so did not fairly and accurately reflect the Company's sales, cash receipts and receivables. PSC therefore violated Section 13(b)(2)(A). PSC also violated Section 13(b)(2)(B). PSC management did not devise a sufficient system of internal accounting controls or adequately enforce the control procedures that were in place. Indeed, management deliberately circumvented existing controls. As a result, transactions were improperly recorded and PSC's financial statements were not prepared in conformity with generally accepted accounting principles. 2. Keane and Falk a. The Antifraud Provisions --Section 10(b) of the Exchange Act and Rule 10b-5 thereunder As described above, Blackie, Erickson and Tague devised and implemented a fraudulent accounting scheme at PSC and thereby violated Section 10(b) of the Exchange Act and Rule 10b-5 thereunder. Even though Keane and Falk were not part of PSC's senior management and were not involved in the preparation of PSC's financial statements, each knew or recklessly disregarded the fact that he was contributing to this fraudulent scheme. Keane knew that PSC recorded revenue on sales that he, or his salespeople at his direction, closed through the use of side letters making the sales cancelable after period-end. He also knew or recklessly disregarded the fact that he was contributing to the fraud because he knew that PSC recorded revenue on sales based on license agreements that he backdated or directed others to backdate. Falk knew that PSC recorded revenue on sales that ==========================================START OF PAGE 10====== -10- he, or his salespeople at his direction, closed after period-end. He also knew or recklessly disregarded the fact that he was contributing to the fraud because he knew that PSC recorded revenue on sales based on documents that he asked others to backdate. Therefore, Keane and Falk each caused violations of Section 10(b) of the Exchange Act and Rule 10b-5 thereunder. b. Sections 13(b)(5) of the Exchange Act and Rule 13b-1 thereunder Section l3(b)(5) of the Exchange Act prohibits any person from knowingly circumventing or knowingly failing to implement a system of internal accounting controls or knowingly falsifying any book, record, or account required to be made and kept by Section 13(b)(2) of the Exchange Act to, in reasonable detail, accurately and fairly reflect an issuer's transactions and dispositions of assets. Rule 13b2-1 prohibits any person from directly or indirectly falsifying or causing to be falsified any book, record or account subject to Section 13(b)(2)(A) of the Exchange Act, which has been discussed above. Keane knowingly circumvented existing controls by, for example, causing license agreements to be backdated. Falk knowingly circumvented existing controls by, for example, causing shipping documents to be backdated. Thus, each violated Section 13(b)(5) of the Exchange Act. Moreover, by indirectly causing to be falsified various books, records, or accounts, as described above, Keane and Falk each violated Rule 13b2-1. IV. Based on the foregoing, the Commission finds that: A. PSC violated Sections 13(a), 13(b)(2)(A) and 13(b)(2)(B) of the Exchange Act and Rules 12b-20, 13a-1 and 13a-13 promulgated thereunder; and B. Keane and Falk caused violations of Section 10(b) of the Exchange Act and Rule 10b-5 thereunder, and violated Section 13(b)(5) of the Exchange Act and Rule 13b2-1 thereunder. V. Accordingly, IT IS HEREBY ORDERED, pursuant to Section 21C of the Exchange Act, that: A. PSC cease and desist from committing or causing any violation, and committing or causing any future violation, of Sections 13(a), 13(b)(2)(A) and 13(b)(2)(B) of the Exchange Act and Rules 12b-20, 13a-1 and 13a-13 promulgated thereunder; and ==========================================START OF PAGE 11====== -11- B. Keane and Falk cease and desist from committing or causing any violation, and committing or causing any future violation, of Sections 10(b) and 13(b)(5) of the Exchange Act and Rules 10b-5 and 13b2-1 promulgated thereunder. By the Commission. Jonathan G. Katz Secretary