The Tragedy of MicroStrategy, Part 3, Cont'd
washingtonpost.com
Unlike many dealings between competing legal interests, SEC and private lawyers are often cooperative. A company's legal team will conduct an investigation of the firm it is representing, then present its findings to the SEC. A lawyer's credibility with the SEC is vital, especially because the attorney could be working with the agency, or for the agency, again.
Between April and June of 2000, Bruch and Ferrara oversaw parallel investigations of the company. They scrutinized several years of MicroStrategy documents – filings, contract drafts, memos and, most compellingly, e-mails. The most incriminating were from Lynch, who would use terms like "scorching the earth," often in response to pressure from Saylor to achieve "maximum results," said an SEC source who had viewed the e-mails.
In June, Ferrara and his partner John Tuttle met with Bruch to discuss their mutual findings. In the following weeks, the parties held a series of discussions about settling the case. Ferrara argued – and Bruch became convinced – that barring Saylor and Bansal from the company would probably kill it and would only hurt shareholders more. Still, Bruch was prepared for a long fight, even though it was far from certain that he could win a case against the three executives if it went to trial. PricewaterhouseCoopers' role would be a "litigation risk," he said in an interview, meaning that a jury would be likely to view the accounting firm's advice as a mitigating factor in assessing MicroStrategy's guilt.
As he negotiated with Ferrara, Bruch asked variations on the same question: "How do I get comfortable leaving these guys in here?" A recurring point of contention involved a single word: "fraud."
SEC officials believed this was a case of fraud, while Ferrara argued against including the word in the SEC's complaint. Bruch used a favorite term whenever Ferrara threatened to refuse a settlement that included a fraud charge. "If you do that, then we'll unleash the hounds," Bruch would say, meaning that the SEC would expand the scope and tone of the investigation, and that could take years.
As it turned out, Ferrara was able to avoid a charge of fraud against the company – but not Saylor, Bansal and Lynch as individuals. This was an important point for Ferrara. If the company had been cited for fraud, it would have become even more difficult for MicroStrategy to raise money. The company also agreed to add an experienced outsider to the audit committee of its board of directors – something it had said it would do before, but never had.
But before he agreed to anything, Bruch needed Saylor, Bansal and Lynch to answer detailed questions about how the accounting fiasco happened. They needed to explain the fine print of some of their contracts, what they meant by certain colorfully worded e-mails. "I need to be convinced that these guys "get it," Bruch told Ferrara.
Saylor, Bansal and Lunch each had his own counsel, his own concerns and his own grievances: Bansal felt unfairly targeted, given that his main charge at the company was to bring in deals, not record and account for them. Lynch said he felt squeezed between Saylor's ambitious revenue demands and PricewaterhouseCoopers' willingness to approve the company's numbers.
Saylor complained in various private forums about Lynch, saying things like "My CFO didn't do his job," or that Lynch was "too aggressive." But he was also worried that Bansal and Lynch could quit, breaking up their circle and opening up the possibility of lawsuits between them that could further damage the company.
Bruch insisted that Saylor, Bansal and Lynch had to sign on to the final settlement together. Lynch was the most conflicted, but in the end all three agreed. The contours of a deal were set that would allow Saylor to keep control of his company, but with a big qualifier: He would have to explain to the SEC that he understood his company's mistakes and how they had happened.
On the night before his appearance before the SEC in November 2000, Saylor went home early, around 8 p.m. He called his mother. He tried to soothe himself, sat down at his piano and played Beethoven's Moonlight Sonata.
Questioned at SEC
The next day, Pitt told lawyer jokes as he and Saylor rode in a Lincoln Town Car to the SEC. Saylor kept taking deep breaths and worried about his ability to remain disciplined and contrite over several hours. In the commission's basement hearing room, Pitt sat on Saylor's left, Ferrara on his right.
Pitt, undeterred by a "No Eating" sign, spread out a smorgasbord of Diet Cokes, bottled water, fruit, sandwiches, chips and a five-pound tin of deluxe nuts, which he offered to everyone in the room.
Across from them were the seven SEC officials who had worked on his case. Bruch sat in the middle, flanked by Laura Josephs, a seasoned investigator, and Jay Balacek, a former Harlem beat cop. Josephs, sick with pneumonia, asked general questions to start, then drilled down to the fine points of contracts and internal e-mails. Her questions came in a methodical flurry, interrupted by a hacking cough.
The interview began at 9:30 a.m. and ended at 6:30 p.m. with a 45-minute break for lunch. Sources on both sides said Saylor was deferential and earnest, admitting he had not put the "financial infrastructure" in place to manage a company growing as fast as MicroStrategy. One person in the room described him that day as "almost elfin."
Saylor recapped the story of MicroStrategy, how he always wanted it to be a force for a better civilization and how he was sorry for all the pain he had caused his shareholders. Again and again he apologized, saying that as CEO, he bore responsibility for everything that happened. He asked to be allowed to learn from his mistakes.
As he finished speaking, Saylor's voice cracked and his eyes welled with tears.
Saylor Keeps Job
It could have been an act – SEC officials were fully open to that possibility. Saylor seemed so well-prepped by his lawyers, "like a guy who needed to be trained in how to talk to people as equals," said an SEC source who was in the room. But Saylor had demonstrated the requisite contrition. He gave good answers on small points, didn't stonewall or argue. He could keep his job.
Still, the SEC's findings, issued in mid-December, provided a detailed account of how Saylor, Bansal and Lynch were complicit in manipulating MicroStrategy's financial reports. "Each knew, or was reckless in not knowing, that MicroStrategy's financial statements were materially misleading." At the end of each quarter, the SEC said, "Saylor, Bansal and Lynch discussed, within a range, the financial results they would like to report in the just-ended quarter and whether to forestall recognizing some revenue.
"To maintain maximum flexibility to achieve the desired quarterly financial results, MicroStrategy held, until after the close of the quarter, contracts that had been signed by customers but had not yet been signed by Saylor, Bansal and Lynch. Only after Saylor, Bansal and Lynch discussed the desired financial results were the unsigned contracts apportioned, between the just-ended quarter and the then-current quarter, and signed by either Bansal and Lynch and given an 'effective date.' In some instances, Bansal and Lynch signed contracts without affixing a date, allowing the company further flexibility to assign a date at a later time."
In other instances, the SEC said, Saylor, Bansal and Lynch knowingly booked revenue from deals before the contracts were signed.
Saylor, Bansal and Lynch agreed to pay fines of $350,000 to settle the SEC's charges of civil accounting fraud – the largest fines that the SEC had ever levied in a case that did not involve insider trading.
The executives also agreed to "disgorge" a combined $10 million of what the SEC labeled "ill-gotten gains" on stock sales – $8.3 million by Saylor, $1.6 million by Bansal and $138,000 by Lynch. Lynch, who had already resigned as chief financial officer to become vice president of business affairs, was barred from practicing accounting before the SEC for at least three years.
In agreeing to pay the fines, Saylor, Bansal and Lynch did not admit or deny wrongdoing. Saylor, Lynch and Bansal all declined comment on their SEC settlement.
On the day the settlement was announced, MicroStrategy's stock closed at $15.38.
Next: Aftermath. |
