Securities and Exchange Commission v. Arthur A. Goodwin, William J. Burke and Christopher P. Whalen, (United States District Court for the District of Massachusetts) (Civil Action No. 02 CV 11913 JLT)

The Securities and Exchange Commission announced that on September 30, 2002 it filed a civil injunctive action for financial fraud against three former officers of Interspeed, Inc., a North Andover, Massachusetts Internet hardware developer. In the suit, filed in federal court in the District of Massachusetts, the Commission alleged that the three defendants participated in fraudulent revenue recognition, causing Interspeed to engage in a $9 million fraud which inflated its reported sales between 25% and 93% from January to September 2000. One defendant, Christopher P. Whalen, has agreed to settle the matter by agreeing to a permanent injunction and payment of disgorgement and a civil monetary penalty.

The Commission's complaint names Arthur A. Goodwin of Plano, Texas (formerly of Boxford, Massachusetts), William J. Burke of Andover, Massachusetts and Christopher P. Whalen of Bolton, Massachusetts. According to the complaint, Goodwin, the company's senior vice president of world-wide sales, orchestrated the scheme to inflate revenue in order to meet analysts' revenue expectations and to boost his own bonus. The Commission alleges that Goodwin, with Whalen's assistance, arranged improper transactions with customers in which secret side letters relieved them of any obligation to pay until the goods were sold to an end-user. Accounting rules prohibit recognizing revenue on such contingent sales. The Commission also alleges that Goodwin arranged "round-trip" transactions in which funds were funneled to a customer for it to use in paying for Interspeed product. In addition, Goodwin allegedly forged a signature and falsified the terms of a contract, thereby causing a non-existent transaction to be recognized improperly on Interspeed's books for the 3rd quarter of 2000. This $6.4 million transaction constituted 92% of Interspeed's reported income for the quarter.

The Commission's complaint alleges that Burke, the company's chief financial officer, recorded the contingent sales as revenue even though he was aware of the side terms which made revenue recognition improper. In addition, the complaint alleges that Burke altered accounting records to keep Interspeed's outside auditors from discovering that the sales were shams. Through the alteration, the complaint alleges, Burke and Goodwin made it appear that Interspeed was receiving payment for the round-tripping sales in which Interspeed provided the funds to the customer.

According to the complaint, Interspeed's directors uncovered the fraudulent scheme in late September 2000, and the company restated its financial results for the first three quarters of its fiscal year ended September 30, 2000, reducing its originally reported revenue of $14 million to $5 million. Goodwin and Whalen were terminated in October 2000. Burke resigned in August 2000. Interspeed has since ceased operations.

In its complaint, the Commission requests that the court issue a final judgment permanently enjoining Goodwin, Burke and Whalen from violating or aiding and abetting violations of the antifraud, periodic reporting, record keeping and internal controls provisions of the federal securities laws, Section 17(a) of the Securities Act of 1933 and Sections 10(b), 13(a), 13(b)(2)(A) and 13(b)(5) of the Securities Exchange Act of 1934 and Exchange Act Rules 10b-5, 12b-20, 13a-13 and 13b2-1, and additionally as to Goodwin and Burke, Rule 13b2-2, which prohibits officers of a company from lying to auditors as well as, for Burke, Section 13(b)(2)(B) of the Exchange Act, which requires maintenance of internal accounting controls. The Commission also seeks disgorgement of the bonuses and sales commissions the defendants received based on the fraudulent sales. According to the complaint, Goodwin received over $70,000, Burke received $41,000 and Whalen received $1,361. In addition, the Commission's complaint asks the court to impose civil monetary penalties. The Commission is also seeking an order permanently barring Goodwin and Burke from acting as officers or directors of any public company.

Whalen, without admitting or denying the allegations against him, has agreed to settle the matter by consenting to an injunction, to pay disgorgement of his entire revenue-based bonus of $1,361 and to payment of a civil monetary penalty of $15,000. In accepting Whalen's offer of settlement, the Commission considered Whalen's cooperation during the Commission's investigation.

SEC Complaint in this matter