SECURITIES AND EXCHANGE COMMISSION<
Litigation Release No. 16306 / September 28, 1999
Accounting and Auditing Enforcement
Release No. 1179
SECURITIES AND EXCHANGE COMMISSION v. FRANCIS A. TARKENTON, DONALD P.
ADDINGTON, RICK W. GOSSETT, LEE R. FONTAINE, WILLIAM E. HAMMERSLA, III, ELADIO
ALVAREZ and EDWARD WELCH,
Civil Action File No. 1:99-CV-2497 (N.D. Ga. September 28, 1999)
The Securities and Exchange Commission announced today that it filed a civil
injunctive action in federal court in Atlanta, Georgia charging seven former
executives of a computer software company, KnowledgeWare, Inc.
("KnowledgeWare"), with carrying out a multi-million dollar financial
fraud scheme that materially inflated KnowledgeWare's reported earnings during
KnowledgeWare's fiscal year ended June 30, 1994 ("Fiscal Year 1994"),
and charging two of those defendants with also committing illegal insider
trading.
Named in the Commission's complaint were:
Francis A. Tarkenton ("Tarkenton"), age 59, was Chief
Executive Officer and Chairman of the Board of Directors of KnowledgeWare.
Donald P. Addington ("Addington"), age 48, was
President and Chief Operating Officer of KnowledgeWare.
Rick W. Gossett ("Gossett"), age 47, is a certified
public accountant and was Chief Financial Officer of KnowledgeWare.
Lee R. Fontaine ("Fontaine"), age 34, is a certified
public accountant and was Manager of Financial Reporting at KnowledgeWare.
William E. Hammersla, III ("Hammersla"), age 45, was
KnowledgeWare's Vice President for Direct Sales in the Northeastern United
States.
Eladio Alvarez ("Alvarez"), age 41, was a District
Sales Manager in KnowledgeWare's Direct Sales Group.
Edward Welch ("Welch"), age 55, was a District Sales
Manager in KnowledgeWare's Reseller Channel Sales group.
The Commission's complaint alleges that:
Tarkenton, Addington, Gossett, Fontaine, Hammersla, Alvarez and Welch
engaged in a fraudulent scheme to inflate KnowledgeWare's financial results to
meet sales and earnings projections. In all, KnowledgeWare reported at least $8
million in revenue from sham software sales. KnowledgeWare "parked"
inventory with software resellers and other supposed customers that were given
the right not to pay for the software, either orally or in "side
letters" that were kept separate from the other sales documents. As a
result of this scheme, KnowledgeWare falsely reported record sales revenue and
dramatic increases in earnings in press releases and in quarterly reports filed
with the Commission and disseminated to the public in 1993 and 1994
("Quarterly Reports").
Even when KnowledgeWare later restated those quarterly results, KnowledgeWare
continued to mislead the investing public by claiming, in its annual report for
Fiscal Year 1994 and other public documents, that the restatement resulted from
a problem with the "collectibility" of reseller receivables -- without
disclosing that KnowledgeWare had created the problem by "selling"
software and simultaneously granting the "purchaser" the right not to
pay for it.
Tarkenton, Addington and Gossett directed the fraudulent
scheme and made materially false and misleading statements to purchasers of
KnowledgeWare stock. Gossett also made materially false and misleading
statements to KnowledgeWare's auditors. Hammersla, Alvarez and Welch
implemented the fraudulent scheme by creating the sham software sales. Fontaine
further implemented the fraudulent scheme by helping prepare the financial
statements and other materially false and misleading portions of the Quarterly
Reports. With the exception of Fontaine, each defendant received excess
incentive compensation as a result of the scheme.
In addition, Hammersla and Alvarez engaged in illegal insider
trading by using material nonpublic information regarding the status of
KnowledgeWare's prospective acquisition by Sterling Software, Inc. when they
sold all their shares of KnowledgeWare stock in late August 1994.
In the complaint, the Commission seeks: permanent injunctions and civil
penalties against all defendants; and disgorgement and prejudgment interest from
all defendants other than Fontaine.
Simultaneous with the filing of the complaint, Tarkenton, Addington,
Gossett, Fontaine, and Hammersla consented, without admitting or
denying the allegations in the complaint, to the following relief:
* Tarkenton consented to the issuance of a final judgment permanently
enjoining him from (i) committing securities fraud in violation of Section 17(a)
of the Securities Act of 1933 ("Securities Act") or Section 10(b) of
the Securities Exchange Act of 1934 ("Exchange Act") and Rule 10b-5;
(ii) falsifying corporate books and records or engaging in other conduct in
violation of Section 13(b)(5) of the Exchange Act or Rule 13b2-1; and (iii) from
engaging in conduct as a controlling person that would render him liable
pursuant to Section 20(a) of the Exchange Act for violations of corporate
reporting, recordkeeping and internal control provisions of the Exchange Act
(Sections 13(a) and 13(b)(2) and Rules 12b-20, 13a-1 and 13a-13). Tarkenton also
agreed to pay a civil money penalty of $100,000 and disgorge $54,187, the amount
of the incentive compensation he received in Fiscal Year 1994 on the basis of
KnowledgeWare's materially overstated quarterly earnings, plus prejudgment
interest thereon.
* Addington consented to the issuance of a final judgment permanently
enjoining him from (i) committing securities fraud in violation of Section 17(a)
of the Securities Act or Section 10(b) of the Exchange Act and Rule 10b-5; (ii)
falsifying corporate books and records or engaging in other conduct in violation
of Section 13(b)(5) of the Exchange Act or Rule 13b2-1; and (iii) and from
engaging in conduct as a controlling person that would render him liable
pursuant to Section 20(a) of the Exchange Act for violations of corporate
reporting, recordkeeping and internal control provisions of the Exchange Act
(Sections 13(a) and 13(b)(2) and Rules 12b-20 and 13a-13). Addington also
agreed to pay a civil money penalty of $100,000 and disgorge $54,187, the amount
of the incentive compensation he received in Fiscal Year 1994 on the basis of
KnowledgeWare's materially overstated quarterly earnings, plus prejudgment
interest thereon.
* Gossett consented to the issuance of a final judgment permanently
enjoining him from (i) committing securities fraud in violation of Section 17(a)
of the Securities Act or Section 10(b) of the Exchange Act and Rule 10b-5; (ii)
falsifying corporate books and records, misleading auditors or engaging in other
conduct in violation of Section 13(b)(5) of the Exchange Act or Rules 13b2-1 and
13b2-2; and (iii) and from engaging in conduct as a controlling person that
would render him liable pursuant to Section 20(a) of the Exchange Act for
violations of corporate reporting, recordkeeping or internal control provisions
of the Exchange Act (Sections 13(a) and 13(b)(2) and Rules 12b-20, 13a-1 and
13a-13). Gossett also agreed to pay a civil money penalty of $25,000 and
disgorge $2,812, the amount of the incentive compensation he received in Fiscal
Year 1994 on the basis of KnowledgeWare's materially overstated quarterly
earnings, plus prejudgment interest thereon.
* Fontaine consented to the issuance of a final judgment permanently
enjoining him from (i) committing securities fraud in violation of Section 10(b)
of the Exchange Act and Rule 10b-5; and (ii) falsifying corporate books and
records or engaging in other conduct in violation of Section 13(b)(5) of the
Exchange Act or Rule 13b2-1. Fontaine also agreed to pay a civil money
penalty of $10,000.
* Hammersla consented to the issuance of a final judgment permanently
enjoining him from (i) committing securities fraud in violation of Section 17(a)
of the Securities Act or Section 10(b) of the Exchange Act and Rule 10b-5; and
(ii) falsifying corporate books and records or engaging in other conduct in
violation of Section 13(b)(5) of the Exchange Act or Rule 13b2-1. Hammersla
also agreed to disgorge, and pay prejudgment interest on, the following two
amounts: (i) $39,781, representing the incentive compensation he received as a
result of his violative conduct in connection with the financial fraud scheme;
and (ii) $11,575, representing the losses he avoided by illegally selling
KnowledgeWare stock. In addition, Hammersla agreed to pay civil money
penalties totaling $21,575, consisting of a $10,000 penalty in connection with
his financial fraud violations and a $11,575 penalty in connection with his
insider trading violations.
The Commission further announced today that it instituted administrative
proceedings against four former KnowledgeWare sales executives who were also
charged with participating in the financial fraud scheme:
Laura M. Drews ("Drews"), age 35, was the
Vice-President in charge of KnowledgeWare's Reseller Channel Sales group during
Fiscal Year 1994.
Stephen J. Pace ("Pace"), age 39, was KnowledgeWare's
Vice-President of Direct Sales for the Southern and Mid-Western United States
during Fiscal Year 1994.
Robert S. Chamberlain ("Chamberlain") , age 41, was
KnowledgeWare's Vice President for Direct Sales in the Western United States.
Joseph A. Mathes ("Mathes"), age 38, was a District
Sales Manager in KnowledgeWare's Reseller Channel Sales group during Fiscal Year
1994.
Simultaneous with the institution of these proceedings, the Commission
accepted settlement offers made by Drews, Pace, Chamberlain
and Mathes, who settled the proceedings without admitting or denying the
Commission's findings. Pursuant to their settlement offers, the Commission
ordered Drews, Pace, Chamberlain, and Mathes to
cease and desist from committing or causing violations of Sections 10(b) and
13(b)(5) of the Exchange Act and Rules 10b-5 and 13b2-1. The Commission also
ordered them to disgorge the following amounts, together with prejudgment
interest thereon: Drews $31,824, Pace $6,728, Chamberlain $14,529,
and Mathes $10,959. These amounts represent the excess incentive
compensation that they received as a result of their violative conduct.
The litigation against Alvarez and Welch is pending.
http://www.sec.gov/litigation/litreleases/lr16306.htm