U.S. SECURITIES AND EXCHANGE COMMISSION
Litigation Release No. 23741 / February 3, 2017
Accounting and Auditing Enforcement Release No. 3859 / February 3, 2017
Securities and Exchange Commission v. Thomas Miller and William Liang, Civil Action No. 17-cv-00897 (C.D. Cal. filed Feb.2, 2017)
In the Matter of Ixia and Victor Alston, Administrative Procedure File No. 3-17825 (Feb. 3, 2017)
Company and Executives Charged with Financial Reporting Violations
The Securities and Exchange Commission today charged two former executives of a computer network testing company with violations related to their financial reporting obligations to investors.
The SEC's complaint, filed in federal court in Los Angeles, alleges that the former CFO and director of accounting at Calabasas, California-based Ixia, Thomas Miller and William Liang, participated in a scheme to prematurely recognize certain revenues and concealed the improper revenue recognition practice from the company's auditors. The SEC's complaint charges Miller and Liang with violating Exchange Act Sections 13(b)(5) and Rules 13b2-1 and 13b2-2, aiding and abetting Ixia's violations of Exchange Act Sections 13(b)(2)(A) and (B), and Miller for violating Exchange Act Rule 13a-14. The SEC's complaint seeks financial penalties and permanent injunctive relief against Miller and Liang.
The SEC separately announced settled administrative proceedings against Ixia and Victor Alston, Ixia's former CEO, arising from the same alleged misconduct.
The SEC's order finds that Victor Alston, who was elevated to top executive at Calabasas, Calif.-based Ixia in 2012, made changes in the company's revenue and other financial metrics in an effort to meet market expectations. Alston ordered changes to Ixia's practice of deferring revenue recognition from its sales of software combined with training and professional services until the customer actually received the training or other services, which often occurred many months after the sale.
According to the SEC's order, Alston issued a directive to split artificially the software and the professional services into separate purchase orders, which gave the false appearance that customers were buying Ixia's professional services in stand-alone sales rather than as components of the software sales. This allowed Ixia improperly to recognize software revenues earlier than allowed under Generally Accepted Accounting Principles (GAAP) and the company's own stated revenue recognition policy.
The SEC's order further finds that the practice of splitting purchase orders exploited a material weakness in the company's internal controls over financial reporting (ICFR) that was concealed from investors and Ixia's outside auditors. As CEO, Alston was obligated to disclose material weaknesses in Ixia's 2012 annual report but failed to do so. Similarly, he wasn't truthful in his periodic representation letter to Ixia's auditors.
Without admitting or denying the findings, Ixia consented to the SEC's order alleging violations of Sections 13(a), 13(b)(2)(A), and 13(b)(2)(B) of the Securities Exchange Act of 1934 and Rules 12b-20 and 13a-1 thereunder and agreed to pay a $750,000 penalty. Alston, without admitting or denying the findings, consented to the SEC order alleging violations of Section 17(a)(3) of the Securities Act of 1933 and Exchange Act Sections 10(b) and 13(b)(5) and Rules 10b-5(b), 10b-5(c), 13b2-1, 13b2-2, and 13a-14 thereunder, causing Ixia's violations, and agreed to a five-year officer-and-director bar and payment of a $100,000 penalty.
The SEC's investigation was conducted by Jason P. Lee and Dora Zaldivar and supervised by Finola H. Manvelian and John Berry of the Los Angeles office. The SEC's litigation will be led by Gary Y. Leung.
