Governance

SEC Charges Five with Lies at Veritas

Former CFO Kenneth Lonchar, who quit over an ethical lapse, is fighting SEC charges that he participated in an accounting fraud involving AOL deals.
Alan RappeportJuly 3, 2007

For former Veritas Software Corp. CFO Kenneth Lonchar, the trouble started in the fall of 2002. That’s when it was discovered that he never actually obtained his MBA from Stanford University, as his resume said. Now Lonchar, who resigned after the disclosure of the faked credential, is in more trouble.

Along with four other former top executives of Veritas — which is Latin for truth, by the way — Lonchar faces charges in an Securities and Exchange Commission that they were responsible for Veritas filing “false and misleading” financial statements between 2000 and 2002 in connection with transactions involving America Online Inc. In 2005, software company Veritas was purchased by Cupertino, Calif.-based Symantec Corp.

The SEC settled its lawsuit with former Veritas controller Michael Cully and former assistant controller Douglas Newton, who agreed to return money and face fines. The complaint against Lonchar, along with former Veritas chairman and CEO Mark Leslie, and former head of sales Paul Sallaberry, seeks the return of ill-gotten gains with interest and fines, and the barring of the three from serving as company officers or directors in the future.

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According to the charges, in the 2000 fourth quarter Veritas artificially inflated its reported revenues in connection with a $20 million transaction with AOL and two smaller transactions with two other Internet companies. All three were “round-trip” transactions, the SEC alleged; Veritas agreed to “buy” online advertising in exchange for the customer’s agreement to purchase software from Veritas at inflated prices.

In February, Veritas agreed to pay a $30 million civil penalty, which the SEC will distribute to harmed investors under the “fair funds” provision of Sarbanes-Oxley. The company also agreed to an injunction against further violations of securities laws.

For his part, Lonchar seems ready to fight. “We certainly feel like the charges lack foundation,” Susan Resley, Lonchar’s attorney, told CFO.com, explaining that the SEC’s complaint charges that her client both inflated revenues and tried to reduce or understate revenues. “It is our view that they are having trouble making up their mind as to what Mr. Lonchar did.” The complaint says that Veritas improperly managed its professional service revenues — by suppressing them — to make for a higher and more desirable ratio of software license-to-service revenue.

Douglas Young, the attorney who represents Leslie, said in a statement that “An overly zealous SEC enforcement division casts an overly broad net only to ensnare an entirely innocent individual.” He argues that Leslie’s role in the complaint only involves two transactions with a single customer and financial statements from six years ago. “We are confident that Mr. Leslie will be fully vindicated,” he said. An attorney for Sallaberry could not be reached for comment.

But Resley expressed confidence that Lonchar’s name would be cleared. As for his previous ethical lapse, on his resume, she noted that there was nothing in the complaint mentioning the issue with his resume. “He has apologized and recognized it was a mistake,” Resley said.