U.S. SECURITIES AND EXCHANGE COMMISSION

Litigation Release No. 17524 / May 21, 2002

Accounting and Auditing Enforcement Release No. 1561 / May 21, 2002

SECURITIES AND EXCHANGE COMMISSION v. DAVID MALMSTEDT AND MARK HUETTEMAN, No. C022427 JW PVT

COMMISSION FILES FRAUD CHARGES AGAINST TWO FORMER SALES EXECUTIVES OF LEGATO SYSTEMS, INC.

The Commission announced that it has filed an action in the United States District Court for the Northern District of California against former sales executives of Legato Systems, Inc., a Mountain View, Calif. developer of data storage software. In its Complaint, the Commission alleges fraud violations by former Legato executive vice president of worldwide sales David Malmstedt, 46, of Manhattan Beach, Calif., and former vice president of North American sales Mark Huetteman, 39, of Hinsdale, Illinois. The complaint alleges that from May 1999 through December 2000, Malmstedt and Huetteman caused Legato fraudulently to record millions of dollars in revenue on orders that were contingent on resellers' ability to sell the product to an end customer, or on customers' rights of exchange, return or cancellation. As a result of the fraud, Legato overstated its revenue over three fiscal quarters in amounts ranging from 6% to 20% per quarter.

In one instance, Malmstedt and Huetteman caused Legato to recognize revenue on a $7 million purchase order that was contingent on further successful negotiations between the parties. Pursuant to this arrangement, if the negotiations broke down, the customer had the right to cancel the purchase order. The cancellation right was set forth in a separate side letter, drafted by Huetteman, which stated in part: "This contingency may not be expressly stated in the order letter, because of the impact on revenue recognition. However, you have my assurance that in the event that we can not [sic] reach terms we will not hold you to the commitment to pay referenced in the order letter."

The complaint charges Malmstedt and Huetteman with violating the antifraud, corporate reporting and books and records provisions of the federal securities laws, and seeks injunctions, disgorgement of losses avoided on sales of Legato stock by Malmstedt and Huetteman during the course of the fraud, and monetary penalties. In particular, the Commission asserts claims against defendants for violations of Sections 10(b), 13(a), 13(b)(2)(A) and 13(b)(5) of the Securities Exchange Act of 1934 ("Exchange Act") and Rules 10b-5, 12b-20, 13a-13 and 13b2-1 thereunder.

In a related matter, the Commission issued an order instituting and simultaneously settling cease-and-desist proceedings against Legato and its former CFO, Steven Wise, 47, of Mountain View, Calif. Legato and Wise consented to the issuance of the Commission order without admitting or denying any of its findings. The order found that Legato violated the corporate reporting, books and records and internal controls provisions of the federal securities laws. (Sections 13(a), 13(b)(2)(A) and 13(b)(2)(B) of the Exchange Act and Rules 12b-20 and 13a-13 thereunder.) In addition, the order found that Wise caused Legato's violations of these provisions, and that Wise knowingly failed to implement adequate internal accounting controls at the company. (Section 13(b)(5) of the Exchange Act.) The order requires Legato and Wise to cease and desist from future violations of these provisions.

SEC Complaint in this matter.