U.S. SECURITIES AND EXCHANGE COMMISSION
Litigation Release No. 17852 / November 20, 2002
Accounting and Auditing Enforcement Release No. 1669 / November 20, 2002
Securities and Exchange Commission v. TenFold Corporation, Gary D. Kennedy, Robert P. Hughes, Stanley G. Hanks, and Wynn K. Clayton, Case No. 02-2284 JDB (D.D.C.)
The Securities and Exhange Commission (the "Commission") announced today that it filed a civil action in the United States District Court for the District of Columbia against TenFold Corporation ("TenFold"), a software development company based in Draper, Utah, and four of TenFold's former officers or employees. In its complaint, the Commission alleges that TenFold, Gary D. Kennedy (TenFold's former president and CEO), Robert P. Hughes (TenFold's former CFO), Stanley G. Hanks (TenFold's former controller), and Wynn K. Clayton (the former controller of TenFold's insurance subsidiary) fraudulently misrepresented or failed to disclose important information about TenFold's contracts, operations, and earnings in certain of TenFold's 1999 and 2000 filings with the Commission. According to the complaint, each of the individual defendants also sold TenFold stock in February 2000, collectively reaping significant unjust profits. TenFold has consented to the entry of an injunction against it.
Specifically, the Commission alleges that TenFold, Kennedy, and Hughes fraudulently failed to disclose the nature of two unusual transactions in TenFold's registration statement for its May 1999 initial public offering ("IPO"). For one of these transactions, TenFold allegedly manipulated the terms of a contract to recognize a significant portion of revenue earlier than it otherwise would have. Because of this acceleration of revenue, TenFold showed a profit rather than a loss in 1998, the year preceding its IPO. For the second transaction, TenFold agreed to allot an unusually large number of shares in its IPO to a significant customer in return for the customer's agreement to delete contractual language that restricted TenFold's ability to recognize revenue. As a result, TenFold was again able to accelerate its revenue recognition and show a profit rather than a loss, this time for the first quarter of 1999, the period immediately preceding its IPO.
The Commission also alleges that TenFold, Kennedy, Hughes, and Hanks fraudulently failed to disclose in TenFold's 1999 annual report and first quarter 2000 quarterly report the ongoing and pervasive problems TenFold was experiencing with completing its large software development contracts. Among other things, TenFold allegedly misled investors by listing in these filings numerous risks as possible outcomes, rather than disclosing that many of these outcomes were actually occurring at the time of the filing. The Commission further claims that TenFold, Kennedy, and Hughes made false or misleading statements in a February 2000 telephone conference with analysts when they discussed TenFold's operations and financial results for the fourth quarter of 1999 and the 1999 fiscal year.
According to the complaint, TenFold, through Kennedy, Hughes, Hanks, and Clayton, also materially overstated TenFold's earnings in press releases and filings related to TenFold's fourth quarter of 1999, 1999 fiscal year, and first quarter of 2000. These overstatements resulted from TenFold's use of incorrect data to calculate revenue recognized on three large projects. The Commission alleges that each of the individual defendants knew that this data was wrong and is responsible for the fraudulent financial reporting. The Commission further alleges that Hughes provided misleading information to TenFold's independent auditor when the firm audited TenFold's 1999 financial statements.
In addition to fraud charges under 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, the Commission has charged TenFold with violations of Sections 13(a), 13(b)(2) and 13(b)(5) of the Exchange Act and Rules 12b-20, 13a-1, 13a-13 and 13b2-1 thereunder. The Commission has charged Kennedy and Hughes with violations or aiding and abetting violations of the same provisions, except that Kennedy is not charged with violations of Section 13(b)(5) of the Exchange Act, and Hughes is charged with violating Rule 13b2-2 under the Exchange Act. Hanks and Clayton are also charged with violating or aiding and abetting violations of the same provisions alleged to have been violated by TenFold, except that they are not charged with violating Section 17(a) of the Securities Act. The Commission seeks a final judgment enjoining the individual defendants from future violations of the provisions alleged to have been violated by each, ordering them to disgorge ill-gotten gains, and imposing civil monetary penalties. The Commission also seeks an order barring Kennedy and Hughes from serving as an officer or director of a public company.
Simultaneously with the filing of the complaint, TenFold consented to the entry of a permanent injunction against future violations of the provisions it is alleged to have violated, Section 17(a) of the Securities Act and Sections 10(b), 13(a), 13(b)(2) and 13(b)(5) of the Exchange Act and Rules 10b-5, 12b-20, 13a-1, 13a-13 and 13b2-1 thereunder.
SEC Complaint in this matter