U.S. Securities and Exchange Commission
Litigation Release No. 17869 / December 2, 2002
Accounting and Auditing Release No. 1679 / December 2, 2002
SEC v. Ralph K. Ungermann, Alan J. McMillan, and James O. Mitchell, U.S. District Court for the Northern District of California, Civil Action No. C 02-05613 RS
SEC Charges Current Director of and Former Officers of First Virtual Communications, Inc. with Overstating Revenues and Earnings
The Securities and Exchange Commission announced the filing of a complaint on November 26, 2002, against three former senior executives (including the founder and current Chairman of the Board) of First Virtual Communications, Inc. ("FVC") for causing FVC to announce overstated revenues and earnings and then selling FVC shares before issuance of the correct financial information. The former executives charged today are: FVC's current Chairman of the Board and former President and CEO, Ralph K. Ungermann; its former CFO, James O. Mitchell; and its former Vice President of Sales, Alan J. McMillan. Ungermann, Mitchell, and McMillan settled the Commission's action without admitting or denying the allegations in the complaint. They agreed to repay a total of about $1.3 million in illegal trading profits, interest, and civil money penalties.
Since 1993, FVC, a Silicon Valley technology company, headquartered in Santa Clara, California, has engineered and manufactured video-conferencing products and, through independent distributors, marketed and sold these products to the ultimate customer. FVC's common stock traded on Nasdaq's National Market from April 1998 through August 8, 2002, when it started trading on Nasdaq's small cap market.
The Commission's complaint, filed in United States District Court for the Northern District of California, alleges that Ungermann, Mitchell, and McMillan caused FVC to announce overstated revenues and earnings figures in a January 28, 1999 press release. The complaint alleges that, in order to meet revenue goals for the fourth quarter and year end 1998, FVC entered into an agreement with its largest distributor in which the distributor agreed to buy $3 million of FVC product in exchange for FVC's agreement to grant the distributor various return rights on the $3 million of FVC product and on product FVC had previously sold to the distributor.
FVC improperly recognized as revenue approximately $5.9 million in sales that were subject to the return rights, in violation of Generally Accepted Accounting Principles. The complaint alleges that, as a result of the defendants' actions, in its January 28, 1999 earnings release, FVC overstated its fourth quarter revenue by 114% and annual revenue by 16% and announced annual earnings of $1.1 million instead of a loss of $2 million. The complaint also alleges that Ungermann, Mitchell, and McMillan failed to disclose this agreement to FVC's auditors, even when specifically asked.
The complaint further alleges that, in February 1999, after the earnings release, the defendants sold a total of 330,000 shares of FVC stock, reaping illegal trading profits. In April 1999, after the auditors learned of the return rights that FVC had granted, FVC filed an annual report on Form 10-K that correctly reported FVC's fourth quarter and annual revenue and earnings. After the announcement of FVC's correct financial results, FVC's stock price dropped 60%.
The defendants are:
The Commission charged Ungermann, McMillan, and Mitchell with antifraud violations (Section 17(a) of the Securities Act and Section 10(b) of the Exchange Act and Rule 10b-5 thereunder) and lying to the auditors (Rule 13b2-2 under the Exchange Act). Further, the Commission charged Ungermann and Mitchell with violating, and aiding and abetting violations of the record keeping provisions of the federal securities laws (Section 13(b)(2)(A) of the Exchange Act and Rule 13b2-1 thereunder).
In a related enforcement action, the Commission ordered FVC to cease and desist from violating the antifraud (Section 10(b) of the Exchange Act and Rule 10b-5 thereunder) and record-keeping provisions (Section 13(b)(2)(A) of the Exchange Act) of the federal securities laws. The Commission's order found that FVC materially overstated its revenues and earnings for the fourth quarter and year end December 1998 in the January 28, 1999 press release by improperly recognizing revenue from sales with various return rights. FVC, without admitting or denying the Commission's findings, consented to the order to cease and desist.