U.S. SECURITIES AND EXCHANGE COMMISSION
Litigation Release No. 19630 / March 29, 2006
Accounting and Auditing Enforcement Release No. 2404 / March 29, 2006
SEC v. Thomas A. Skoulis, Peter M. Frankl, Alan B. Lefkof and William D. Baker, Case No. C 06-2239-JF (N.D. CA filed on March 29, 2006)
SEC Charges Executives of Northern California Internet Equipment Company With Improperly Inflating Revenue
The Securities and Exchange Commission today charged two former sales executives of Emeryville, California-based Netopia, Inc. with fraudulently boosting the company's revenue. The Commission also filed, and simultaneously settled, charges against Chief Executive Officer Alan B. Lefkof and former Chief Financial Officer William D. Baker, alleging that the executives later learned of a side agreement yet failed to take timely corrective action.
The Commission's complaint, filed in the Northern District of California, alleges that Netopia's former head of worldwide sales, Thomas A. Skoulis (of Menlo Park, CA) and former head of software sales, Peter M. Frankl (of Addison, TX) entered into two secret side deals in 2002 and 2003, each for approximately $750,000. Pursuant to the side deals, Netopia's customer, which had limited resources, would only have to pay Netopia if and when it successfully resold the software to an end-user. It was improper to record revenue for the transactions because payment was contingent on future events. Skoulis and Frankl concealed the deal terms from Netopia's finance department. In connection with the 2002 deal, the Commission alleges that Frankl directed that contingency language be physically "whited out" from the face of the customer's purchase order. For the 2003 deal, Skoulis directed Frankl to hide a copy of the customer's side letter that set forth the contingency. Their actions caused Netopia to report fraudulently inflated software revenue to the investing public, and for the fourth quarter ended September 30, 2003, allowed the company to report its first profitable quarter in three years.
The complaint also alleges that Baker (of Fremont, CA), and later Lefkof (of Tiburon, CA), learned of the payment contingency associated with the 2003 transaction but failed to take immediate corrective action. In April 2004, while trying to collect payment from the customer, Baker learned that the customer had no obligation to pay because of the previously hidden payment contingency. Rather than take corrective action, Baker concealed the side agreement from Netopia's Audit Committee, including requesting that the customer delete references to the deal in communications with Netopia. Later, on July 2, 2004, Lefkof obtained a copy of the side agreement containing the payment contingency for the 2003 deal. Notwithstanding their knowledge of the side agreement, Lefkof and Baker allowed Netopia to issue a misleading press release on July 6, 2004, that incorrectly treated the outstanding order as merely an uncollectible bad debt. In actuality, the Commission alleges, the sale should never have been recorded as revenue, and Netopia should have restated its 2003 financial statements.
The complaint charges Skoulis, Frankl and Baker with securities fraud (Section 10(b) of the Securities Exchange Act of 1934 ("Exchange Act") and Rule 10b-5 thereunder; and Section 17(a) of the Securities Act of 1933 ("Securities Act") as to Baker alone), and also charges Lefkof with violating the antifraud provisions (Section 17(a)(2) and (3) of the Securities Act). The complaint also charges Skoulis, Frankl, Baker and Lefkof with causing Netopia to report false financial information to the Commission (Section 13(a) of the Exchange Act and the related Rules). The complaint additionally charges all of the defendants with causing Netopia's failure to maintain accurate books and records (Section 13(b)(2)(A) of the Exchange Act), and charges Lefkof and Baker with causing the company's failure to maintain adequate internal controls (Section 13(b)(2)(B) of the Exchange Act). The complaint also charges Skoulis, Frankl and Baker with circumventing internal accounting controls (Section 13(b)(5) of the Exchange Act) and charges Skoulis, Frankl, Baker and Lefkof with falsifying the company's books and records (Rule 13b2-1 under the Exchange Act). Baker, in the complaint, is further charged with lying to accountants (Rule 13b2-2 under the Exchange Act) and falsely certifying Netopia's financial statements (Rule 13a-14 under the Exchange Act).
Simultaneously with the filing of the complaint, Baker and Lefkof have agreed to settle the charges, without admitting or denying the Commission's allegations. Among other things, they have consented to orders requiring them to pay civil penalties of $35,000 each, while Baker also has consented to the entry of an order barring him from serving as an officer or director of a public company for five years, and an order prohibiting him from practicing before the Commission as an accountant for five years under SEC Rule of Practice 102(e). From the remaining defendants in the litigation, Skoulis and Frankl, the Commission seeks disgorgement, civil monetary penalties, and injunctive relief, as well as an order barring Skoulis from serving as an officer or director of a public company.
In a related proceeding, today the Commission instituted and simultaneously settled administrative cease-and-desist proceedings against Netopia. Without admitting or denying the Commission's findings, Netopia agreed to cease and desist from future violations of the corporate reporting, books and records and internal controls provisions of the federal securities laws (Sections 13(a), 13(b)(2)(A) and 13(b)(2)(B) of the Exchange Act and Rules 12b-20, 13a-1, 13a-11 and 13a-13 thereunder).