SEC Brings Civil Charges Against MicroStrategy, Three Executive Officers for Accounting Violations
FOR IMMEDIATE RELEASE
Settled Actions Yield $10 Million in Disgorgement, $1 Million in Penalties, and Corporate Governance Reforms
Washington, D.C., December 14, 2000 The Securities and Exchange Commission today brought and settled administrative reporting charges against MicroStrategy, Inc. and settled civil accounting fraud charges against its executive officers, Michael Saylor (co-founder and chief executive officer), Sanjeev Bansal (co-founder and chief operating officer) and Mark Lynch (former chief financial officer) for overstating the company's revenue and earnings. Without admitting or denying the charges, the officers agreed to disgorge a total of approximately $10 million (Saylor $8,280,000, Bansal $1,630,000, and Lynch $138,000) and consent to fraud injunctions, and to each pay $350,000 in penalties. The company agreed to a cease-and-desist order and to undertake significant corporate governance changes to ensure future compliance with the securities laws. Two MicroStrategy accounting employees also consented to cease-and-desist orders for reporting and recordkeeping violations.
SEC Director of Enforcement Richard H. Walker said, "This case illustrates how critical it is for all companies and especially for companies new to the public markets to implement effective internal controls and to strictly adhere to the letter and the spirit of the accounting rules for revenue recognition, and shows that the Commission will hold the executive officers responsible for a company's failure to do so. Shareholders will directly benefit from this swift and creative settlement, which requires the company to implement meaningful corporate governance and compliance reforms. This case demonstrates our commitment to use all necessary enforcement resources to respond quickly and decisively to future public company accounting failures that harm investors."
On March 20, 2000, MicroStrategy announced that it intended to restate its financial results for the fiscal years 1998 and 1999. MicroStrategy stock, which had recently reached a high of $333 per share, dropped more than 60 percent of its value in one day, going from $260 per share to close at $86 per share on March 20, 2000. The stock price continued to drop in the following weeks. By April 13, 2000, after MicroStrategy announced that it would also restate its fiscal 1997 financial results, the company's stock closed at $33 per share. The company's restatement reduced revenues over the three-year period by approximately $66 million of the $365 million reported. Approximately $54 million, or 80 percent, of these restated revenues were in 1999.
The Commission alleges that from the time of its initial public offering in June 1998 through March 2000, MicroStrategy, a Vienna, Virginia-based software company, materially overstated its revenues and earnings from the sale of software and services contrary to Generally Accepted Accounting Principles. The company's public financial reports during this time showed positive net income. In fact, the Commission alleges, MicroStrategy should have reported net losses from 1997 through the present.
The Commission alleges that the company's reporting failures primarily derived from its premature recognition of revenue. AICPA Statement of Position 97-2 allows revenue to be recognized from software sales if persuasive evidence of a sale agreement exists, delivery has occurred, the vendor's fee is fixed and determinable, and collectibility is probable. If the sale contains other elements (such as software upgrades, enhancements, or consulting services) that are integral to the functionality of the software license, the company must delay revenue recognition until those services are performed or products provided by the seller. The Commission alleges that in connection with certain multiple element deals in which significant services or future products to be provided by MicroStrategy were not separable from the sale of software license, MicroStrategy improperly recognized material amounts of revenue up front. Additional reporting failures resulted from MicroStrategy's recognition of revenue on contracts that had not been properly executed contracts in the same fiscal period that revenue was recorded.
The incorrect financial results were reported in various periodic reports filed with the Commission and disseminated to the investing public from the fourth quarter of 1998 through year-end 1999, and in registration statements filed in connection with a June 1998 initial public offering and a pending public offering filed in February 2000 that was subsequently withdrawn.
The Commission alleges that Lynch, the company's chief financial officer, was principally responsible for ensuring the veracity of MicroStrategy's financial reporting and signed the company's periodic reports. Saylor, the company's founder, controlling shareholder, and top executive officer, signed the periodic reports and participated in the negotiation of several of the largest restated deals. Bansal, the company's co-founder, participated in the negotiation of several of the restated deals and signed numerous contracts on which revenue was improperly recognized.
Without admitting or denying the Commission's allegations, Saylor, Bansal, and Lynch consented to the entry of a final judgment permanently enjoining each of them from violating the antifraud and record-keeping provisions of the federal securities laws, ordering them to pay disgorgement totaling $10 million and ordering each to pay a $350,000 civil penalty. Lynch, the former chief financial officer, also consented to the entry of an administrative order barring him from practicing before the Commission as an accountant, with a right to reapply after three years. (SEC v. Michael Jerry Saylor, Sanjeev Kumar Bansal and Mark Steven Lynch, Civ. Action No. 1:00CV02995 (D.D.C.) (filed Dec. 14, 2000)).
MicroStrategy consented to the entry of an administrative proceeding ordering the company to cease and desist from violating the reporting, books and records, and internal controls provisions of the federal securities laws. The Commission's order requires MicroStrategy to make substantial changes in the areas of corporate governance, management, and compliance that are designed to protect investors by strengthening the company's financial reporting and accounting processes, including creating an internal audit department, appointing an independent director with experience in public company financial reporting, and adopting detailed contract approval and execution policies designed to prevent improper revenue recognition. (In the Matter of MicroStrategy, Inc., Admin. Proc. No. 3-10388 (Dec. 14, 2000)).
The Commission also instituted a settled order against MicroStrategy's corporate controller and accounting manager in which the respondents each consented to the entry of a cease-and-desist order prohibiting violations the reporting and recordkeeping provisions. (In the Matter of Antoinette A. Parsons and Stacy L. Hamm, Admin. Proc. No. 3-10389 (Dec. 14, 2000)).
The investigation is continuing as to other parties.
Contact: Greg Bruch at (202) 942-4548
Additional Materials Available on This Topic
SEC v. Michael Jerry Saylor, Sanjeev Kumar Bansal and Mark Steven Lynch (Litigation Release 16829)
In re Microstrategy, Inc. (Release No. 34-73724)
In re Antoinette A. Parsons and Stacy L. Hamm (Release No. 34-43725)