U.S. SECURITIES AND EXCHANGE COMMISSION
Litigation Release No. 20202 / July 19, 2007
Accounting and Auditing Enforcement Release No. 2649 / July 19, 2007
SEC v. David C. Drummond, John P. Hayes, and Patrick E. Murphy, Civil Action No. 07 CV 219 JM (D.N.H.)
SEC v. Patrick T. Chew, Civil Action No. 07 CV 220 PB (D.N.H.)
SEC Files Settled Actions Against Four Former Executives of SmartForce PLC Concerning Improper Revenue Recognition
The Commission filed civil actions in U.S. District Court in New Hampshire against former SmartForce Chief Financial Officer David C. Drummond and two former vice presidents of finance, Patrick E. Murphy and John P. Hayes, in connection with the software company's overstatement of revenue by $113.6 million and net income by $127 million during a 3½-year period ending in mid-2002. The Commission also filed a separate injunctive action against Patrick T. Chew, former controller of SmartForce's subsidiary in the United States ("SmartForce US"). The four former SmartForce executives will pay civil penalties in a total amount of $325,000 in these District Court actions.
According to the Commission's Complaints, SmartForce's financial statements failed to comply with generally accepted accounting principles ("GAAP") as a result of the defendants' conduct regarding the improper recognition of revenue from various types of transactions, including multiple-element arrangements, reciprocal transactions, and reseller agreements. SmartForce, which was based in Redwood, California, has since merged into SkillSoft PLC, and is now based in Hew Hampshire, according to the Complaint.
In the District Court action against Drummond, Murphy, and Hayes, the Commission alleged that each violated Section 13(b)(5) of the Exchange Act and aided and abetted the company's violations 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 thereunder. Each defendant consented to the entry of a final judgment that requires them to pay civil penalties as follows: $125,000 for Drummond, $100,000 for Murphy, and $75,000 for Hayes. Drummond, Murphy, and Hayes neither admitted nor denied the allegations in the Commission's Complaint.
In the action against Chew, he consented to the entry of a final judgment that enjoins him from future violations of Section 13(b)(5) of the Exchange Act and Rule 13b2-2 thereunder, and from aiding and abetting the company's violations 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 thereunder. The final judgment also requires Chew to pay $85,885 in disgorgement and prejudgment interest and a civil penalty of $25,000. Chew consented to entry of the judgment without admitting or denying the allegations of the Complaint.
In the related administrative proceeding, which was instituted against Drummond, Murphy, and Hayes, each is required to pay total disgorgement and prejudgment interest as follows: $573,979 for Drummond, $567,866 for Murphy, and $862,395 for Hayes. The administrative order further bars Murphy and Hayes from practicing before the Commission as accountants, with the right to apply for reinstatement after two years. The administrative order also requires that Drummond, Murphy, and Hayes cease and desist from committing or causing any violations or future violations of Section 13(b)(5) of the Exchange Act; and from causing any violations and any future violations 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 thereunder. Drummond, Murphy and Hayes neither admitted nor denied the findings in that administrative order.