UNITED STATES OF AMERICA
Before the
SECURITIES AND EXCHANGE COMMISSION
Securities Exchange Act of 1934
Release No. 41926 / September 28, 1999
Accounting and Auditing Enforcement
Release No. 1177 / September 28, 1999
Administrative Proceeding
File No. 3-10037
________________________
:
In the Matter of : ORDER INSTITUTING PUBLIC
: PROCEEDINGS PURSUANT TO
Robert S. Chamberlain, : SECTION 21C OF THE
: SECURITIES EXCHANGE ACT OF 1934,
: MAKING FINDINGS, AND IMPOSING
Respondent. : CEASE-AND-DESIST ORDER AND
: ORDER OF DISGORGEMENT
________________________:
I.
The Securities and Exchange Commission ("Commission") deems it
appropriate and in the public interest that public administrative proceedings
be, and hereby are, instituted pursuant to Section 21C of the Securities
Exchange Act of 1934 ("Exchange Act") against Robert S. Chamberlain
("Chamberlain").
II.
In anticipation of the institution of these administrative proceedings,
Chamberlain has submitted an Offer of Settlement ("Offer"), which the
Commission has determined to accept. Solely for the purpose of this proceeding
and any other proceeding brought by or on behalf of the Commission or to which
the Commission is a party, and without admitting or denying the findings
contained herein, except as to the Commission's finding of jurisdiction over him
and the subject matter of this proceeding, which Chamberlain admits, Chamberlain
consents to the issuance of this Order Instituting Proceedings
("Order") and to the entry of the findings and the imposition of
relief set forth below.
III.
FINDINGS
On the basis of this Order and the Offer submitted by Chamberlain, the
Commission finds1 that:
Summary
A. During the period described below, KnowledgeWare, Inc.
("KnowledgeWare"), a company engaged in the business of, among other
things, marketing computer software products, and certain of its executive
officers and employees engaged in a financial fraud that violated the antifraud,
periodic reporting, books and records, and internal controls provisions of the
federal securities laws. Specifically, from at least July 1, 1993 through June
30, 1994 ("FY 1994"), KnowledgeWare and certain of its executive
officers and employees artificially inflated KnowledgeWare's revenue and net
income on its books and records and in its public filings with the Commission by
fraudulently recognizing sales revenue in connection with transactions that did
not constitute bona fide sales. As a result, KnowledgeWare's books
and records were inaccurate and its interim reports on Forms 10-Q for the
quarters ended September 30, 1993, December 31, 1993 and March 31, 1994 were
materially false and misleading.
The Respondent
B. Chamberlain, age 41, was employed during the year ended June 30, 1994 as
an Area Vice President at KnowledgeWare.
The Issuer
C. During FY 1994, KnowledgeWare was a Georgia corporation with principal
offices located in Atlanta, Georgia. At all times relevant hereto,
KnowledgeWare's common stock was registered with the Commission pursuant to
Section 12(g) of the Exchange Act. Knowledgeware common stock was quoted on the
NASDAQ National Market System.
Chamberlain's Role In The Financial Fraud
D. KnowledgeWare filed materially false and misleading interim reports on
Forms 10-Q with the Commission for the quarters ended September 30, 1993,
December 31, 1993 and March 31, 1994. Specifically, KnowledgeWare materially
overstated revenue and net income in each of those quarterly reports. In
addition, KnowledgeWare falsely reported a profit for both the quarter and the
nine months ended March 31, 1994 when, in fact, KnowledgeWare incurred a loss in
both periods.
E. The foregoing misstatements resulted in part from conduct in which
Chamberlain engaged. Specifically:
1. In negotiating purported sales transactions with resellers of computer
software products ("Resellers"), Chamberlain granted, or authorized
his subordinates to grant, the resellers the unconditional right to return the
purportedly purchased products to KnowledgeWare ("Return Rights") and
agreed, or authorized his subordinates to agree, that the resellers were not
obligated to pay KnowledgeWare for such products unless and until the resellers
had resold those products to others ("Contingent Payment Terms").
2. Chamberlain obtained, or authorized his subordinates to obtain, from such
Resellers executed purchase order documents for KnowledgeWare products
("Order Letters") that omitted the Return Rights and Contingent
Payment Terms that KnowledgeWare had granted to the Resellers. Instead, the
Order Letters set forth an unconditional commitment to pay KnowledgeWare for the
ordered products. Chamberlain sent, or authorized his subordinates to send, the
Order Letters to KnowledgeWare's order administration department, where they
were used to initiate the recognition of sales revenue on KnowledgeWare's books
and records.
3. Chamberlain authorized his subordinates to prepare and sign separate
letters to such Resellers memorializing the Return Rights and Contingent Payment
Terms that had been granted to the Resellers ("Side Letters"), but
neither Chamberlain nor his subordinates sent or otherwise disclosed the terms
of the Side Letters to KnowledgeWare's order administration personnel.
4. Chamberlain prepared, or authorized his subordinates to prepare, and
signed Transaction Approval Forms ("TAFs") with respect to certain
purported sales transactions with Resellers, but nowhere in such TAFs did
Chamberlain or his subordinates disclose the existence of the Side Letters or
the Return Rights and Contingent Payment Terms.2
In certain other instances, neither Chamberlain nor anyone else prepared the
requisite TAFs with respect to purported sales transactions with Resellers to
whom KnowledgeWare had granted Return Rights and Contingent Payment Terms.
F. Chamberlain never disclosed the Side Letters, Return Rights or Contingent
Payment Terms to KnowledgeWare's order administration personnel or to
KnowledgeWare's accounting personnel. KnowledgeWare recognized revenue on these
purported sales transactions, although the existence of the Return Rights and
Contingent Payment Terms made KnowledgeWare's recognition of revenue on such
transactions improper.
G. The Resellers to whom KnowledgeWare granted Return Rights and Contingent
Payment Terms in Side Letters executed or authorized by Chamberlain never paid
KnowledgeWare for the products which, according to the Order Letters and TAFs,
the Resellers purportedly had purchased from KnowledgeWare.
H. During July and August of 1994, KnowledgeWare reversed a total of
approximately $20 million in sales revenue that had been improperly recorded in
FY 1994, including revenue that had been recorded on the purported sales
transactions described in paragraphs III.E through III.G.
Chamberlain's Violations And Unjust Enrichment
I. By reason of the conduct and events set forth above, Chamberlain violated,
and was a cause of violations of, Sections 10(b) and 13(b)(5) of the Exchange
Act and Rules 10b-5 and 13b2-1.
J. As a result of the conduct described in paragraphs III.E through III.F,
Chamberlain improperly received excess incentive compensation for FY 1994 in the
amount of $14,529.
IV.
CEASE-AND-DESIST ORDER AND ORDER OF DISGORGEMENT
Accordingly, IT IS HEREBY ORDERED, pursuant to Section 21C(a) of the
Exchange Act, that Chamberlain cease and desist from committing or causing any
violation, and committing or causing any future violation, of Sections 10(b) and
13(b)(5) of the Exchange Act and Rules 10b-5 and 13b2-1; and
IT IS HEREBY FURTHER ORDERED, pursuant to Section 21C(e) of the
Exchange Act, that Chamberlain shall, within thirty (30) days of the date of
this Order, disgorge to the United States Treasury a total of $22,584,
representing the sum of the $14,529 in excess incentive compensation that
Chamberlain improperly received as a result of the conduct described above plus
prejudgment interest thereon of $8,055. Such payment shall be: (A) made by
United States postal money order, certified check, bank cashier's check or bank
money order payable to the "Securities and Exchange Commission"; and
(B) hand-delivered or sent by certified mail (return receipt requested) to the
Comptroller, Securities and Exchange Commission, Operations Center, 6432 General
Green Way, 450 Fifth Street, N.W., Washington, D.C. 20549-0003; and (C)
submitted under cover letter that identifies Chamberlain as the Respondent in
these proceedings, the file number of these proceedings and the Commission's
investigation number, a copy of which cover letter and the money order or check
shall be sent to Carmen J. Lawrence, Esq., Regional Director, U.S. Securities
and Exchange Commission, Northeast Regional Office, 7 World Trade Center, New
York, NY 10048, Attn: George N. Stepaniuk, Esq.
By the Commission.
Jonathan G. Katz
Secretary
Footnotes
-[1]- The findings herein are made pursuant to
Chamberlain's Offer of Settlement and are not binding on any other person or
entity in this or any other proceeding.
-[2]-2 Before entering into transactions with terms
that differed from KnowledgeWare's standard terms of sale, KnowledgeWare sales
personnel were required to obtain approval for such transactions by filling out
and submitting TAFs. KnowledgeWare required that TAFs include all proposed
deviations from KnowledgeWare's standard terms of sale and were required to be
sent to KnowledgeWare's order administration personnel along with the Order
Letters and all other relevant sales documents.
http://www.sec.gov/litigation/admin/34-41926.htm