CFO, CEO Inflated Revenue, SEC Charges

The pair of former Quovadx execs allegedly took part in a scheme to puff up software-licensing sales.
Stephen TaubJuly 19, 2007

The Securities and Exchange Commission has charged the former CFO and ex-CEO of Quovadx, a small software company, with taking part in a fraudulent scheme to overstate software licensing revenue in 2003.

The commission leveled its accusations against former company CFO Gary Scherping and former president and CEO Lorine Sweeney. The pair took part in a fraud that helped the company recognize over $11.1 million in software licensing revenue from three transactions with Infotech Network Group, an India-based IT outsourcing company, during the third and fourth quarters of 2003, the SEC charged.

As a result, Quovadx, an enterprise software maker with a $135 million market capitalization, allegedly overstated software licensing revenue by about 164 percent for the third quarter of 2003and 118 percent for the fourth quarter of that year. “Sweeney and Scherping knew or recklessly disregarded that the transactions had undisclosed material contingencies and it was not likely Quovadx would be paid,” the SEC claimed.

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Sweeney and Scherping resigned from the company 2004. At presstime, a phone call to Scherping’s home requesting comment had not been returned, and Sweeney could not be located.

In May, Scherping sued Quovadx for defamation in an Albuquerque, N.M., federal court, The Denver Business Journal reported. The former CFO charged that the company made “numerous public statements that falsely indicated [he] had engaged in improper and/or fraudulent accounting practices,” according to the publication.

In its complaint, the SEC contends that in the second quarter of 2003, Sweeney and Scherping took part in fraudulent recognition of about $570,000 in software revenue from a deal with Sourceworks LLC. The ex-executives engaged in the reporting “when they knew or recklessly disregarded” that Sourceworks’ payment was contingent upon Quovadx securing a customer for Sourceworks. This transaction overstated Quovadx’s second quarter 2003 software revenue by about 9 percent.

In the third quarter of 2003, Sweeney and Scherping engaged in a scheme to fraudulently recognize about $380,000 in software revenue from three parking transactions with MicroStar, Inc., according to the SEC’s complaint. The commission alleged that the pair knew that MicroStar was merely holding the software in its inventory until Quovadx could complete negotiations with its true customers.

When the deals failed to materialize, Quovadx “round-tripped an unrelated payment through MicroStar with Scherping’s knowledge and approval,” the regulator charged.

The SEC also alleged that in the third quarter of 2002, Sweeney and Scherping improperly accelerated about $250,000 in software revenue that stemmed from a transaction with another Quovadx customer. That acceleration led to an improper 10 percent overstatement of Quovadx’s software revenue for the quarter, according to the commission.