UNITED STATES SECURITIES AND EXCHANGE COMMISSION Litigation Release No. 14992 / July 30, 1996 Accounting and Auditing Enforcement Release No. 806 / July 30, 1996 United States v. Bernard F. Bradstreet, et al. (D. Mass., No. 95-CR-10228-RGS) The Commission announced that, on May 14, 1996, after a four-week trial before the Honorable Richard G. Stearns of the District of Massachusetts, Defendants Bernard F. Bradstreet ("Bradstreet"), and Thomas E. Campbell ("Campbell") former members of senior management of Kurzweil Applied Intelligence, Inc. ("Kurzweil"), were found guilty by a jury of five counts of conspiracy, securities fraud and falsification of corporate books and records in violation of Sections 10(b) and 13(b)(5) of the Exchange Act and Rule 10b-5 thereunder and 18 U.S.C.  2 and 371. A third defendant, David R. Earl ("Earl"), who was charged with a single count of conspiracy to falsify books and records in violation of Section 13(b)(5) of the Exchange Act, was acquitted. Bradstreet and Campbell are scheduled to be sentenced on September 11, 1996. In addition, in a related matter, on June 20, 1996, Debra J. Murray ("Murray"), Kurzweil's former Treasurer, was sentenced by the Honorable Reginald C. Lindsay of the United States District Court for the District of Massachusetts to three years probation and to perform 200 hours of community service (U.S. v. Murray, No. 95-CR-10039-RCL). Murray had previously pled guilty, on January 27, 1995, to a two count information alleging conspiracy to commit securities fraud in violation of Section 10(b) of the Exchange Act and Rule 10b-5 thereunder and 18 U.S.C.  2 and 371. Murray testified at the criminal trial pursuant to a cooperation agreement with the government. On July 26, 1995, simultaneously with the U.S. Attorney's announcement of the indictment of Bradstreet, Campbell and Earl, the Commission filed a complaint in the U. S. District Court for the District of Massachusetts seeking to permanently enjoin Bradstreet, Campbell, Earl and Murray from violating the antifraud provisions of the federal securities laws and those provisions relating to the falsification of an issuer's books and records and the making of false statements to auditors (SEC v. Bradstreet, et al., No. 95-11647-DPW) (the "Complaint"). In addition, the Complaint sought an order from the court permanently barring the defendants from serving as officers or directors of any public company, requiring defendants Bradstreet and Campbell to disgorge the sums of $90,000 and $12,000, respectively, representing losses avoided from their unlawful sales of Kurzweil securities and, in addition, requiring Defendant Bradstreet to disgorge the sum of $80,000, representing an unlawful bonus, plus prejudgment interest. The Complaint also - 2 - sought an order requiring that all defendants pay appropriate civil money penalties. The Complaint alleged that, from at least January 1992 through May 1994, the defendants engaged in a fraudulent revenue recognition scheme which inflated Kurzweil's revenues and earnings as reported by the company in financial statements filed with the Commission and disseminated publicly. The Complaint further alleged that Bradstreet, Kurzweil's former President and Co-Chief Executive Officer, and Campbell, Kurzweil's former Vice President of Sales, each offered and sold equity securities in Kurzweil's initial public offering, knowing that the company's financial statements were materially false and that, in 1993, Bradstreet received an $80,000 bonus advance based on the then expected financial results of operations for the fiscal year ended January 31, 1994. The Complaint alleged that the scheme affected the registration statement and periodic reports filed by Kurzweil containing financial statements for its fiscal year ended January 31, 1993 and the first three quarters of fiscal year 1994. The Commission's litigation is continuing. In a related administrative proceeding, the Commission, on July 25, 1995, instituted and simultaneously settled, by consent, a cease-and-desist proceeding against Kurzweil (Kurzweil Applied Intelligence, Inc., Exchange Act Rel. No. 36021). The Commission's Order found that, as a result of the scheme, Kurzweil filed a fraudulent registration statement and periodic reports with the Commission and issued false press releases which materially overstated its revenue and earnings during the fiscal year ended January 31, 1993 and the first three quarters of fiscal 1994. The order required Kurzweil to cease-and-desist from future violations of the antifraud, periodic reporting and issuer books and records and internal controls provisions of the federal securities laws. Also on July 25, 1995, the Commission announced the entry of a cease-and-desist order, by consent, against Tracy Spadaro Maynard, Norma A. Leger and Catherine A. Ackley, who at relevant times were employed in accounting positions at Kurzweil (Tracy S. Maynard, et al., Exchange Act Rel. No. 36022). The Commission found that the respondents removed and shredded documents to conceal the existence of fraudulent transactions from Kurzweil's auditors in preparation for, or during the course of, the annual audit of the Kurzweil financial statements for the year ended January 31, 1994. For further information, see Litigation Release No. 14571 and Exchange Act Release Nos. 36021 and 36022.