Federal authorities claim financial fraud at three Northern California software companies
By MICHAEL LIEDTKE
AP Business Writer
SAN FRANCISCO (AP) -- Long known as a cradle of high-tech innovation and stock market windfalls, the Silicon Valley is emerging as a hotbed of accounting trouble.
Federal authorities allege the top executives at Northern California software companies Unify Corp. (Other OTC:UNFY.PK - News), Quintus Corp. (Other OTC:QNTS.PK - News) and Legato Systems Inc. (NasdaqNM:LGTO - News) resorted to an unsavory recipe for success by cooking the books during the high-tech boom of the 1990s.
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The legal actions filed against the software companies Monday follow the criminal convictions earlier this year of two former executives at Critical Path Inc. (NasdaqNM:CPTH - News), a San Francisco-based e-mail provider whose stock plummeted after the company admitted to fabricating sales in 2000.
Unify was based in San Jose during the period of its alleged misconduct though its headquarters is now in Sacramento. Quintus was based in Dublin until it went bankrupt in February 2001 and Legato Systems is based in Mountain View.
Although the cases were unrelated, they shared a common theme -- allegations of brazen deceit driven by the executives' desire to create a bright financial outlook that would make their holdings in their companies worth a fortune.
The charges include allegations of forgery, self-dealing and elaborate cover-ups.
The U.S. Attorney's office Monday filed criminal securities fraud charges against two former chief executives, Gholamreza Mikailli of Unify and Alan K. Anderson of Quintus, as well as the former chief financial officer Gary Pado of Unify.
The Securities and Exchange Commission also filed civil complaints against the same three men, as well as two former Legato Systems Inc. sales executives, David Malmstedt and Mark Huetteman.
The allegations against Mikailli and Anderson "can only be described as shocking" said Helane L. Morrison, district administrator for the SEC's San Francisco office.
Both Mikailli, 50, and Anderson, 40, are accused of fabricating millions in bogus sales as part of elaborate schemes carried out over several months.
Mikailli, known as "Reza," also faces charges of pocketing $4 million in illegal trades of Unify stock.
Efforts to reach Mikailli, Anderson and their attorneys were unsuccessful Monday.
If convicted, Mikailli and Anderson each face maximum sentences of 10 years in federal prison and fines of up to $1 million. Mikailli also faces conspiracy charges that carry a maximum penalty of five years in prison and a $250,000 fine.
Pado pleaded guilty to securities fraud last week as part of an agreement that requires him to cooperate in the government's case against Mikailli.
Federal authorities say they are aggressively pursuing allegations of financial misconduct to help restore investor confidence amid a series of accounting scandals headlined by the collapse of Enron, once the energy's largest energy trader.
The alleged chicanery at Quintus and Unify decimated the companies' stocks.
As part of its bankruptcy, Quintus agreed to sell its assets to Basking Ridge, New Jersey-based Avaya Inc. (NYSE:AV - News) for $30 million cash. When its stock peaked at $56.50 in late 1999, Quintus had a market value of $1.9 billion.
Unify got rid of both Mikailli and Pado after uncovering the accounting problems in July 2000 and eventually wiped $18.4 million in revenue off its books, authorities said. Most of Unify's sales team also left the company.
The fallout destroyed Unify's shares, which peaked at $34.22 on the Nasdaq Stock Market. Nasdaq delisted Unify's stock in late 2000. The shares, which now trade on over-the-counter market, closed at 71 cents Monday.
In the civil case against the former sales executives of Mountain View-based Legato, the SEC alleges Malmstedt and Huetteman conspired in a scheme that caused the company to record millions of dollars in improper revenue.
Legato acknowledged the accounting trouble in May 2000 when it lowered its previously reported 1999 revenue by $23 million.
Legato's shares fell 49 cents to close at $6.38 Monday on the Nasdaq Stock Market. The company's stock closed as high as $67.75 in early 2000. |
