A federal judge entered permanent injunctions in a civil action brought by the Securities and Exchange Commission against two former finance executives, three other former officers, and one former employee of Riverstone Networks. The injunctions against the employees of Riverstone, a former maker of communications routers, stem from an illegal revenue recognition scheme, according to the commission.
Former Riverstone CFO Robert B. Stanton and former vice president of finance William F. McFarland were among the individuals who were alleged by the SEC to have inflated revenues through improper revenue recognition on contingent sales from June 2001 through June 2002. In consenting to the orders, the individuals neither admitted to nor denied the allegations.
Stanton was ordered to disgorge $175,000 and pay a civil penalty of $75,000. He also is prohibited from acting as an officer or director of a publicly-traded company for five years. McFarland was ordered to pay a $40,000 civil penalty.
The others named in the SEC complaint were former CEO Romulus S. Pereira, former executive vice president of sales L. John Kern, and former vice president of marketing Andrew D. Feldman. The former Riverstone employee was Lori H. Cornmesser, director of sales operations.
According to the SEC’s original complaint, Riverstone improperly recognized revenues on sales transactions that involved side agreements with purchasers. The agreements made the customer’s payment for Riverstone product contingent upon resale, or granted the purchaser full return, exchange, or cancellation rights. Due to the actions and omissions of the six individuals, the side agreements were concealed from Riverstone’s outside auditors, according to the SEC.
The SEC said that Riverstone reported almost $30 million of fraudulent revenues as a result of these contingent sales, causing revenue overstatements in four fiscal quarters ranging between 14.3 and 23.1 percent. In addition, the individuals circumvented Riverstone’s internal accounting controls, falsified Riverstone’s accounting records, and lied to Riverstone’s outside auditors, according to the complaint.
In related criminal cases, Kern and Feldman pleaded guilty to one felony count each of violating the internal accounting controls of a public company. In December, each was sentenced to three years of probation and fined $5,000.