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Jury: Ex-Applix CFO Broke Securities Laws

Federal jurors in Massachusetts find that he falsified records using improper revenue recognition, as the SEC had claimed.
Stephen TaubMarch 3, 2008

Clarification:
This story has been updated to reflect that in the case of civil charges, a jury does not find guilt, but rather agrees or disagrees that prosecutors have established liability for law violations.

A jury found that the former top financial executive of internet software company Applix Inc., facing civil charges in connection with an allegedly fraudulent revenue recognition scheme, violated securities laws.

Walter T. Hilger, former CFO and treasurer of Westborough, Mass.-based Applix, was found liable for fraudulent conduct, including falsification of books and records, according to the Securities and Exchange Commission, which had initiated the complaint. The jury found former Applix CEO Alan C. Goldsworthy to be not liable for any securities law violations.

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A consent judgment was entered against a third former executive.

Applix later was acquired by Cognos, which itself became part of IBM in January.

The verdict followed a four-week trial in U. S. District Court for the District of Massachusetts. The SEC’s complaint, filed in January 2006, alleged that Goldsworthy, Hilger, and the former Applix director of world-wide operations, Mark E. Sullivan, participated in two fraudulent revenue recognition schemes that had caused Applix to report inflated revenue and to understate net loss figures for the 2001 and for the quarter ended June 30, 2002.

Hilger was found to have falsified Applix’s books and records and to have knowingly aided and abetted Applix’s filing of a false form 8-K. The Court will determine the appropriate penalties for Hilger at a later date, according to the SEC.

The court had previously entered a final judgment against Sullivan on Jan. 9, ordering him to pay a $25,000 civil penalty. Sullivan consented to the judgment without admitting or denying the allegations in the SEC’s complaint. Sullivan also agreed, without admitting or denying the findings, to an order suspending him from appearing or practicing before the commission as an accountant for three years. Sullivan was an inactive CPA at the time.

Earlier, in a related administrative proceeding, the SEC found that Applix materially overstated net income in the two reports and a registration statement filed with the Commission. Applix, while neither admitting nor denying the Order’s findings, agreed to certain actions, including the hiring of an independent Financial Policies Consultant to review the company’s internal controls, board oversight and business practices.

According to the SEC’s initial complaint, the three individuals allegedly engaged in two separate schemes to inflate revenue reported in Applix’s publicly-filed financial statements and press releases.

In the first scheme, Applix prematurely recognized $898,000 in revenue in its 2001 annual report, enabling the company to meet its publicly announced year-end revenue goal of $40 million.

In the second scheme, the trio allegedly caused Applix to report improperly $341,000 in revenue from a transaction with a German customer in its June 30 quarterly report.

The complaint alleged that the individuals did so even though they knew that the customer had a six-month right to return the software product and that no revenue should have been recorded until the customer had definitively accepted the product. By reporting this revenue, Applix was able to falsely trumpet a “74 percent improvement in net loss,” according to the SEC.

In each instance, Goldsworthy and Hilger allegedly received bonuses based on the false revenue figures, according to the Commission.

An attorney for Hilger noted that he is challenging the findings of the jury that he falsified Applix’s records and abetted the filing of a false 8-K, and a motion is being submitted asking the court to overturn the findings because insufficient evidence was presented at trial. The attorney said that the court had found, prior to trial, that there was insufficient evidence to support the SEC’s allegation that Hilger participated in the alleged scheme to recognize revenue prematurely in the 2001 annual report. The attorney said that the jury found at trial that Hilger did not participate in the second scheme alleged in the SEC’s complaint, relating to the transaction with a German customer.