U.S. SECURITIES AND EXCHANGE COMMISSION
Litigation Release No. 17770 / October 7, 2002
Accounting and Auditing Enforcement Release No. 1641 / October 7, 2002
SECURITIES AND EXCHANGE COMMISSION v. SYSTEM SOFTWARE ASSOCIATES, INC., ROGER COVEY and JOSEPH SKADRA, Civ. No. 00C 4240 (N.D. Ill.)
FORMER TOP OFFICERS OF SYSTEM SOFTWARE ASSOCIATES, INC. SETTLE SEC CHARGES; COVEY AND SKADRA CONSENT TO FRAUD-BASED INJUNCTIONS, COVEY TO PAY $316,205 IN DISGORGEMENT AND CIVIL PENALTIES.
On October 3, 2002, the U.S. District Court for the Northern District of Illinois entered final judgments against the former Chairman and Chief Executive Officer of System Software Associates, Inc. ("SSA"), Roger Covey, and SSA's former Chief Financial Officer, Joseph Skadra, in litigation brought by the Securities and Exchange Commission in July 2000. Without admitting or denying the allegations in the Commission's complaint, Covey and Skadra agreed to the entry of judgments: (1) permanently enjoining each of them from violating or aiding and abetting violations of antifraud, reporting, books and records, and internal controls provisions of the federal securities laws, and (2) requiring Covey to pay $216,205.38 in disgorgement and prejudgment interest and $100,000 in civil penalties. The Commission has agreed to waive disgorgement and to not seek a civil penalty from Skadra based on representations Skadra made in his sworn financial statement.
According to the Commission's complaint, Covey and Skadra caused SSA to misstate its financial results during its fiscal years 1994 through 1996 by improperly reporting revenue on sales of a UNIX-language software product before the product was developed sufficiently to support revenue recognition under Generally Accepted Accounting Principles ("GAAP"). The complaint alleged that Covey and Skadra knew or were reckless in not knowing that the software did not function properly and that there were significant uncertainties about customer acceptance of that software. The complaint also alleged that, during SSA's fiscal years 1995 and 1996, SSA improperly recognized an additional $52 million in revenue from sales of UNIX software to middlemen, which sales were subject to material conditions or otherwise did not satisfy GAAP. According to the complaint, the conduct of Covey, Skadra, and SSA resulted in substantial losses to those public investors who purchased SSA stock during the period when the company's financial statements were misstated.
The consent judgments enjoin Covey from violations of Section 17(a) of the Securities Act of 1933 ("Securities Act") and Sections 10(b), 13(a), 13(b)(2)(A), 13(b)(2)(B), and 13(b)(5) of the Securities Exchange Act 1934 ("Exchange Act") and Rules 10b-5, 12b-20, 13a-1, and 13a-13, 13b2-1, and 13b2-2 thereunder. Skadra is enjoined from violations of Sections 17(a)(2) and 17(a)(3) of the Securities Act and Sections 13(a), 13(b)(2)(A), 13(b)(2)(B), and 13(b)(5) of the Exchange Act and Rules 10b-5, 12b-20, 13a-1, and 13a-13, 13b2-1, and 13b2-2 thereunder.
For information about earlier developments in this matter, see Litigation Release No. 16627 (July 14, 2000), and Litigation Release No. 16694 (September 8, 2000).