UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Litigation Release No. 17578 / June 21, 2002
Accounting and Auditing Enforcement Release No. 1582 / June 21, 2002
SEC CHARGES FORMER OFFICERS AND EMPLOYEES OF INSO CORP. WITH ACCOUNTING SCHEMES
SEC v. Bruce Hill, et al., (United States District Court for the District of Massachusetts, Civil Action No. 02-CV-11244 (EFH), Filed June 21, 2002)
SEC v. Richard P. Vatcher,(United States District Court for the District of Massachusetts, Civil Action No. 02-CV-11245 (REK), Filed June 21, 2002)
The Commission today filed two civil injunctive actions in federal district court in Massachusetts alleging separate revenue recognition schemes perpetrated during 1998 by former officers and employees of Inso Corp., now known as eBT International, Inc., a software company formerly located in Boston, Massachusetts and now headquartered in Providence, Rhode Island. The Commission's first complaint alleges that Inso's former general counsel, Bruce Hill of Belmont, Massachusetts, and a former vice president, Graham Marshall of Lexington, Massachusetts, engaged in fraud related to a phony $3 million sales transaction. This complaint also charges Inso's former chief executive officer, Steven Paxhia of Boston, Massachusetts, with being liable for certain violations as a controlling person of Inso. The Commission's second complaint alleges that another former Inso vice president, Richard Vatcher of Framingham, Massachusetts, engaged in fraud related to several false sales totaling approximately $3.6 million. Paxhia and Vatcher have offered to settle with the Commission.
The Charges Against Hill and Marshall
The Commission's first complaint alleges that, when an anticipated sales transaction with a major customer failed to close prior to the end of Inso's third quarter on September 30, 1998, Bruce Hill and Graham Marshall arranged for a Malaysian distributor, who had no prior involvement in the transaction, to place a $3 million purchase order for the transaction that evening. Because they promised the distributor that he would not have to pay Inso for the transaction, and that Inso, rather than the distributor, would resell the software to the intended end user, this transaction was a sham and should not have been included in Inso's reported financial results. However, Hill and Marshall concealed the oral terms of the sale from Inso's finance department and, as a result, Inso improperly included the $3 million as revenue in its third quarter 1998 financial statements. Thereafter, the sale of the software to the intended end user was never consummated, and Hill and Marshall took steps to cover up the fraudulent nature of the third quarter transaction. Among other things, Hill orchestrated the providing of $4 million in letters of credit to the Malaysian distributor to finance his payment of the $3 million third quarter receivable and caused a false board resolution to be provided to Inso's bank purporting to authorize the letters of credit.
The complaint charges Hill and Marshall with violating the antifraud provisions of the federal securities laws [Section 17(a) of the Securities Act of 1933 ("Securities Act") and Section 10(b) of the Securities Exchange Act of 1934 ("Exchange Act") and Rule 10b-5 thereunder]; circumvention of Inso's internal accounting controls and falsification of records [Section 13(b)(5) of the Exchange Act and Exchange Act Rule 13b2-1]; lying to accountants [Exchange Act Rule 13b2-2]; and aiding and abetting Inso's uncharged violations of the periodic reporting and books and records provisions [Sections 13(a) and 13(b)(2)(A) of the Exchange Act and Rules 12b-20 and 13a-13 thereunder]. The complaint seeks permanent injunctions against Hill and Marshall, monetary penalties, disgorgement of losses avoided from their sales of Inso stock during the period of the fraud, and an order barring them from serving as officers or directors of any public company.
The Charges Against Paxhia
The Commission's first complaint also charges Inso's former chief executive officer, Steven Paxhia, with liability, as a controlling person of Inso, for the company's uncharged violations of various provisions of the Exchange Act. The complaint alleges that, after learning in the evening of the last day of the third quarter of 1998 that Inso had failed to conclude the $3 million transaction with a major customer, Paxhia authorized others at Inso to find a distributor for the deal before the end of the quarter. Because of his position as CEO of Inso, Paxhia should have known that finding a distributor in so short a period risked having Inso enter a transaction that was not consistent with generally accepted accounting principles. However, Paxhia did not take steps to learn about or prevent the side agreement with the Malaysian distributor and the fraudulent revenue recognition scheme carried out by Hill and Marshall. He further did not inquire into certain factors concerning the transaction, such as that the Malaysian distributor engaged by Hill and Marshall had not previously been involved in the transaction and that, with little notice, the distributor purportedly accepted responsibility for a $3 million transaction on the last night of the quarter.
The complaint charges Paxhia with being liable for certain of Inso's uncharged violations of the Exchange Act as a controlling person of Inso under Section 20(a) of the Exchange Act. Without admitting or denying the allegations in the complaint, Paxhia has consented to entry of a final judgment permanently enjoining him from future violations of Sections 10(b), 13(a), and 13(b)(2)(A) of the Exchange Act and Rules 10b-5, 12b-20, and 13a-13 thereunder. He has also agreed to pay disgorgement of his losses avoided from the sale of Inso stock during the relevant time period of $101,000, including pre-judgment interest.
The Charges Against Vatcher
The Commission's second complaint charges Richard Vatcher, Inso's former vice president of international sales, with a separate revenue recognition scheme that falsely boosted Inso's revenue by approximately $3.6 million during the first three quarters of 1998. According to the Commission's complaint, in at least six transactions, Vatcher obtained sales orders from foreign customers by grantingside agreements allowing the customers to cancel the sales. Because the customers had the right to cancel the sales, the transactions should not have been included in Inso's reported financial results. However, Vatcher failed to report the side agreements to Inso's finance department. In at least one of the transactions, Vatcher falsified documents provided to Inso's finance department to conceal a side agreement that would have negated the recognition of revenue from the sale. As a result of Vatcher's fraud, Inso improperly included approximately $3.6 million of revenue in its financial statements for the first three quarters of 1998.
Without admitting or denying the allegations in the complaint, Vatcher has consented to entry of a final judgment permanently enjoining him from future violations of Section 17(a) of the Securities Act, Sections 10(b), 13(a), 13(b)(2)(A), and 13(b)(5) of the Exchange Act and Rules 10b-5, 12b-20, 13a-13, and 13b2-1 thereunder. He has also agreed to pay a $25,000 civil penalty.