U.S. SECURITIES AND EXCHANGE COMMISSION
Litigation Release No. 19521 / January 4, 2006
Accounting and Auditing Enforcement Release No.2361 / January 4, 2006
Securities and Exchange Commission v. Alan C. Goldsworthy, Walter T. Hilger, and Mark E. Sullivan, Civil Action No. 06-CV-10012-MLW (D. Mass.)
SEC CHARGES FORMER CEO, CFO AND CURRENT EXECUTIVE OF APPLIX , INC. WITH ACCOUNTING FRAUD
The Securities and Exchange Commission today brought civil fraud charges against two former officers and a current executive of Applix, Inc., a Westborough, Massachusetts Internet software company. In the suit, filed in federal court in the District of Massachusetts, the Commission alleged that former CEO Alan C. Goldsworthy of Gloucester, Massachusetts; former CFO Walter T. Hilger of Natick, Massachusetts; and Mark E. Sullivan of Bridgewater, Massachusetts, Applix's current Director of World-Wide Operations participated in two fraudulent revenue recognition schemes, causing Applix to report inflated revenue and understated net loss figures for the year ended December 31, 2001 and for the quarter ended June 30, 2002.
According to the complaint, the three defendants engaged in two separate schemes to inflate revenue reported in Applix's publicly-filed financial statements and heralded in press releases. In the first scheme, Applix prematurely recognized $898,000 in revenue in its Form 10-K for the year ended December 31, 2001. The revenue, generated in a December 31, 2001 transaction, enabled Applix to meet its publicly announced year-end revenue goal of $40 million. The complaint alleges that the three defendants collectively agreed to recognize the revenue during 2001 despite knowing that Applix was prohibited from doing so under generally accepted accounting principles. The complaint also alleges that Goldsworthy and Hilger both received year-end bonuses based on the company's falsely inflated financial results. In the second scheme, the defendants allegedly caused Applix to report improperly $341,000 in revenue from a transaction with a German customer in its Form 10-Q for the quarter ended June 30, 2002. The complaint alleges that the defendants did so even though they knew that the customer had a six-month right to return the software product and that no revenue should have been recorded until the customer had definitively accepted the product. By reporting this revenue, Applix was able to falsely trumpet a "74% improvement in Net Loss." Again, Goldsworthy and Hilger allegedly received bonuses based on the false revenue figures.
On February 28, 2003, Applix announced that the company would restate its financial statements for the two periods involved and that Goldsworthy had resigned. Thereafter, on March 31, 2003, Applix filed its Form 10-K for the year ended December 31, 2002, a restated Form 10-K for December 31, 2001, and restated Forms 10-Q for the first three quarters of 2002. Applix also filed a restated Form 8-K on April 4, 2003.
In its complaint, the Commission requests that the court issue a final judgment permanently enjoining Goldsworthy, Hilger and Sullivan from violating or aiding and abetting violations of the antifraud, periodic reporting, record keeping and internal controls provisions of the federal securities laws. The Commission also seeks disgorgement of the bonuses Goldsworthy and Hilger received based on the fraudulent financial statements. In addition, the Commission's complaint asks the court to impose civil monetary penalties and an order permanently barring the defendants from acting as officers or directors of any public company. The complaint alleges that by their conduct, the defendants violated Section 17(a) of the Securities Act of 1933 (Securities Act") and Sections 10(b), 13(a), 13(b)(2)(A) and 13(b)(2)(B) of the Securities Exchange Act of 1934 ("Exchange Act") and Exchange Act Rules 10b-5, 12b-20, 13a-1, 13a-11, 13a-13 and 13b2-1, and additionally as to Goldsworthy and Hilger, Rule 13b2-2, which prohibits officers of a company from lying to auditors. The complaint also alleges that Hilger and Sullivan violated Exchange Act Section 13(b)(5), which prohibits knowing falsification of books and records at a public company.
In a related administrative proceeding, the Commission issued a settled Order Instituting Cease-and-Desist Proceedings, Making Findings, and Imposing Cease-and-Desist Order Pursuant to Section 8A of the Securities Act of 1933 and Section 21C of the Securities Exchange Act of 1934 against Applix, Inc. The Order finds that Applix materially overstated net income in the two periodic reports and a registration statement filed with the Commission. Applix, while neither admitting nor denying the Order's findings, consented to the entry of the Order finding that Applix violated Section 17(a) of the Securities Act and Sections 10(b), 13(a), 13(b)(2)(A) and 13(b)(2)(B) of the Exchange Act and Rules 10b-5, 12b-20, 13a-1, 13a-11,13a-13 and 13b2-1 thereunder. The company also agreed to undertakings including the hiring of an independent Financial Policies Consultant to review the company's internal controls, board oversight and business practices. (Rel. 34-53049; AAER Rel. 2359; File No. 3-12138 ).
SEC Complaint in this matter