ECURITIES AND EXCHANGE COMMISSION

Litigation Release No. 16516 / April 13 , 2000

Accounting and Auditing Enforcement
Release No. 1246 / April 13, 2000

SEC v. ALLEN K. DEARY AND DENNIS A. FICHTER, U.S. District Court for the District of Massachusetts, No. (April , 2000)

SEC CHARGES FORMER CFO OF PERITUS SOFTWARE SERVICES, INC. WITH FINANCIAL FRAUD

The Securities and Exchange Commission announced today that it filed a civil fraud action against Allen K. Deary and Dennis A. Fichter for conducting a scheme to falsely inflate Peritus Software Services, Inc.'s second quarter 1998 revenues. Peritus, based in Westborough, Massachusetts, sells, among other things, Year 2000 software licenses and services. Deary is a resident of Carlisle, Massachusetts, and Fichter resides in Easton, Pennsylvania. Deary and Fichter consented to an injunction and an order requiring them to pay $25,000 and $10,000 in penalties, respectively.

According to the complaint, Deary, who at the time was Peritus' CFO, caused Peritus to book improperly over $1 million in revenue, which falsely inflated the company's second quarter 1998 revenue by 10% and enabled it to meet analyst estimates. In order to substantiate Peritus' claim to the revenue, Deary falsely told Peritus' director of finance and its controller that AT&T Corp. had purchased a software license pursuant to a $1.9 million purchase order, and that Peritus had delivered the software to AT&T. However, Peritus had not sold a software license to AT&T.

The complaint also alleges that Deary made the same false statements to Peritus' outside auditors, and received substantial assistance in his scheme from Defendant Fichter, a Peritus account manager. On July 22, 1998, the evening before Peritus was to announce its second quarter financial results, Peritus' outside auditors informed Deary that the documents did not establish that a sale of a software license to AT&T had occurred. In response, Deary promptly prepared a letter for the signature of an AT&T official, which purported to document a license agreement between Peritus and AT&T. Instead of sending the letter to the AT&T official, Deary faxed the letter to Fichter, a former AT&T employee who had just accepted a job at Peritus as an account manager. The complaint alleges that Fichter forged the signature of the AT&T official and returned the letter to Deary, who faxed it to Peritus' auditors. As a result, the auditors approved recognition of the revenue.

According to the complaint, Peritus issued a press release announcing the falsely inflated revenue the next day. Peritus also included the false financial results in a quarterly report on Form 10-Q filed with the Commission. The complaint alleges that Deary approved the press release before it was issued, and he signed the quarterly report as CFO. Deary, who was promoted to president and CEO of Peritus on August 17, 1998, and had been a director since 1991, resigned as an officer and director on November 3, 1998. Fichter resigned on December 10, 1998.

The complaint also alleges that Deary failed to establish an adequate system of internal controls for recording revenue. As a result, during the third and fourth quarters of 1997, Peritus improperly recorded $1.8 million in revenue for two sales of software licenses before delivery of the software.

Deary consented to a final judgment permanently enjoining him from violating Sections 10(b) and 13(b)(5) of the Securities Exchange Act of 1934 and Rules 10b-5, 13b2-1 and 13b2-2 thereunder, and from aiding and abetting Peritus' violations of Sections 13(a), 13(b)(2)(A) and 13(b)(2)(B) of the Exchange Act and Rules 13a-13 and 12b-20, and ordering him to pay a $25,000 penalty. Fichter consented to a final judgment permanently enjoining him from aiding and abetting Deary's violations of Sections 10(b) and 13(b)(5) of the Exchange Act and Rules 10b-5 and 13b2-1, and ordering him to pay a $10,000 penalty.

The Commission also announced that, in a related matter, it instituted a settled administrative cease-and-desist proceeding against Peritus. Peritus consented to an Order of the Commission finding that, as a result of the conduct described above, Peritus improperly overstated its revenue by $1.085 million for the second quarter of 1998, and understated its pre-tax loss by the same amount. The Commission also found that Peritus' internal controls did not ensure that software had been delivered before recognizing revenue on the sale of a software license. As a result, as stated above, Peritus improperly recorded $1.8 million in revenue during the third and fourth quarters of 1997 for two sales of software licenses before delivery of the software. Further, due to incorrect accounting, Peritus overstated its revenues by $717,000 for the first quarter of 1998 for one sale of a software license conditioned on the customer's acceptance, and for two combined software license and service transactions. In October and November 1998, Peritus restated its financial results for the first and second quarters of 1998, the third quarter of 1997, and the year ended December 31, 1997. The Order requires Peritus to cease and desist from committing future violations of the public company reporting, record-keeping and internal controls provisions of the Exchange Act [Sections 13(a), 13(b)(2)(A) and 13(b)(2)(B) of the Exchange Act and Rules 13a-1, 13a-13 and 12b-20 thereunder].

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