Accounting & Tax

Side Deals No Secret at Netopia

SEC settles with CEO and former CFO regarding side agreements with a customer that fraudulently boosted the company's revenues.
Stephen TaubMarch 30, 2006

The Securities and Exchange Commission has settled charges against Netopia, a maker of broadband networking equipment, as well as CEO Alan Lefkof and former CFO William Baker, regarding side agreements with a customer that fraudulently boosted the company’s revenues, according to the SEC.

The commission also brought charges against former head of worldwide sales Thomas Skoulis and former head of software sales Peter Frankl. According to the SEC complaint, Skoulis and Frankl entered into two secret side deals in 2002 and 2003 with Interface Computer Communications (ICC), each for approximately $750,000. The secret arrangements stipulated that ICC, which had limited resources, would have to pay Netopia only if and when it successfully resold the software to an end user.

“It was improper to record revenue for the transactions because payment was contingent on future events,” the regulator elaborated, adding that Skoulis and Frankl concealed the terms of the deal from Netopia’s finance department.

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The complaint further alleged that in April 2004, while trying to collect payment from ICC for the 2003 transaction, Baker learned that the customer had no obligation to pay because of the previously hidden contingency. Rather than take corrective action, wrote the regulator, Baker concealed the side agreement from Netopia’s audit committee and requested that ICC delete references to the secret deal in communications with Netopia.

That July, continued the SEC, Lefkof obtained a copy of the 2003 side agreement, yet later that month, Lefkof and Baker allowed Netopia to issue a misleading press release that incorrectly treated the outstanding order as merely an uncollectible bad debt.

The SEC asserted that the sale should never have been recorded as revenue and that Netopia should have restated its 2003 financials.

Baker, the former CFO, was charged with securities fraud; falsifying the company’s books and records; causing the company’s failure to maintain accurate books and records; circumventing internal accounting controls; causing the company’s failure to maintain adequate internal controls; lying to accountants; causing the company to report false financial information to the SEC; and falsely certifying the company’s financial statements.

Without admitting or denying the allegations, Baker agreed to pay a civil penalty of $35,000, to be barred from serving as an officer or director of a public company for five years, and to be barred from practicing before the commission as an accountant for five years.

Lefkof, the CEO, was charged with violating antifraud provisions; falsifying the company’s books and records; causing the company’s failure to maintain accurate books and records; causing the company’s failure to maintain adequate internal controls; and causing the company to report false financial information to the commission. Without admitting or denying the allegations, he agreed to pay a civil penalty of $35,000.

Skoulis and Frankl were charged with securities fraud; falsifying the company’s books and records; circumventing internal accounting controls; causing the company to report false financial information to the commission; and causing the company’s failure to maintain accurate books and records. Those charges are pending.

In a related proceeding, without admitting or denying the commission’s findings, Netopia agreed to cease and desist from future violations of the corporate reporting, books and records, and internal controls provisions of the federal securities laws.