Tuesday February 5 7:58 PM ET
Critical Path, Ex-Officers Settle SEC Fraud Case
By John Poirier
WASHINGTON (Reuters) - Critical Path Inc., once a high-flying Internet company whose stock soared 175 percent after it went public in March 1999, and two former executives settled allegations of fraudulent accounting that led to overstating earnings by $10.8 million in two straight quarters during fiscal 2000, U.S. regulators said on Tuesday.
The Securities and Exchange Commission (news - web sites) said it instituted an administrative proceeding against the San Francisco-based company, which provides messaging solutions for wireless and land-line, or regular telephone, carriers.
Critical Path, its former president, David Thatcher, and former vice president of sales, Timothy Ganley, each settled with the SEC, without admitting or denying any allegations of wrongdoing, the SEC said.
In a separate case, federal prosecutors filed criminal charges against Thatcher, of Rancho Santa Fe, California, and Ganley, of Aptos, California.
If found guilty, Ganley faces up to 10 years in prison and a $1 million fine, while Thatcher faces a maximum of five years in prison and a $250,00 fine, the U.S. Attorney's Office in San Francisco said in a statement.
MANAGEMENT'S ROLE 'UNUSUAL,' SEC SAYS
In the SEC case, Thatcher agreed to pay a $110,000 fine and accepted a five-year ban on taking a job as an officer or director of a public company.
Thatcher, as the acting chief financial officer, allegedly played a role in improper accounting involving eight fictitious, contingent or backdated transactions in the third and fourth quarters of fiscal 2000, the SEC said.
Ganley was accused of participating in one of the eight transactions and selling 1,300 Critical Path shares he held while knowing of the alleged securities fraud. He agreed to pay $105,900, which includes fines and losses he avoided by engaging in insider trading, according to the SEC.
``The involvement of senior management and the president in this kind of revenue-recognition fraud is unusual and unfortunate because the conduct is particularly egregious,'' William Baker, an SEC enforcement attorney, said.
``They knew the sales should not have been booked, that some of the sales were not real.''
No fine was assessed against the company, which last April disclosed in an annual filing with the SEC a formal investigation into its accounting practices by the SEC.
Attorneys representing Thatcher, Ganley and Critical Path did not immediately return telephone calls seeking comment.
SEC'S INVESTIGATION STILL ALIVE
Baker added that the SEC's accounting investigation involving other unnamed individuals is continuing. In a civil lawsuit filed in federal court in San Francisco, the SEC said Thatcher and ``other persons'' engaged in a scheme to inflate the company's revenue and earnings.
The company, which was accused of issuing a press release in early 2001 for 2000 results with improperly recorded revenue, consented to an order finding the company violated reporting, books and records, and internal control provisions of the U.S. securities laws.
AN IPO MOONSHOT
On Tuesday, Critical Path shares fell 34 cents, or more than 11 percent, to close at $2.58 on the Nasdaq. Its stock closed as high as $116.75 per share on March 9, 2000.
In 1999, during the San Francisco gold rush of Internet companies going public, On March 29, 1999, Critical Path's stock was priced at $24 a share and closed its first day of trading at $65.875 -- up 174.5 percent from its offering price -- qualifying the IPO as a moonshot in Wall Street's vernacular. In April 1999, the stock flew as high as $150.25 a share.
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