SEC Brings Civil Charges Against MicroStrategy and Three Executive Officers for Accounting Violations

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