Risk & Compliance

SEC Drops Case Against TenFold Execs

The commission had alleged that the software developer and four individuals had failed to disclose two ''unusual and uniquely structured transactio...
Stephen TaubDecember 19, 2005

The Securities and Exchange Commission has dropped all charges against the former CEO of software development company TenFold Corp. as well as three former finance executives, according to a press release fired off by Morrison & Foerster, the law firm representing the former chief executive.

In November 2002, the SEC alleged that the Draper, Utah-based company and four individuals — former president and chief executive officer Gary D. Kennedy, former chief financial officer Robert P. Hughes, former controller Stanley G. Hanks, and former vice president of finance Wynn K. Clayton — failed to disclose two “unusual and uniquely structured transactions” in the company’s prospectus for its 1999 initial public offering.

In one transaction, TenFold allegedly “manipulated the terms of a contract to recognize a significant portion of revenue earlier than it otherwise would have. Because of this acceleration of revenue, TenFold showed a profit rather than a loss in 1998, the year preceding its IPO.” In the second, the SEC alleged, TenFold allot an unusually large number of IPO shares to a customer, which agreed “to delete contractual language that restricted TenFold’s ability to recognize revenue. As a result, TenFold was again able to accelerate its revenue recognition and show a profit rather than a loss, this time for the first quarter of 1999, the period immediately preceding its IPO.”

The commission also charged that the company failed to disclose problems on its software projects in its 1999 annual report and in its first-quarter and second-quarter reports for 2000 and that the four executives unjustly profited from stock sales in February 2000. The SEC’s Denver office insisted there was “overwhelming” evidence that a fraud had occurred at TenFold, Morrison and Foerster pointed out.

The company subsequently entered into a consent decree with the commission, and earlier this fall, the three former finance executives negotiated potential settlements. Kennedy, the CEO, was scheduled to go on trial in January.

Late last week, however, the SEC’s five commissioners overruled the recommendation of their staff attorneys, reversed their earlier decision, and ordered the case dismissed, according to Morrison and Foerster. The law firm added that at a pretrial conference in U.S. District Court, the SEC stated that it would seek to dismiss the case with prejudice — that is, forsaking the right to bring the same charges once more — against Kennedy as well as the three former finance executives.

“The SEC enforcement staff was using an aggressive, though untested, argument as to what information must be disclosed to investors,” stated Darryl P. Rains, one of Kennedy’s two attorneys. “While the SEC trial team acted as though it had a strong case, it appears the new commissioners, including Mr. Cox and Annette Nazareth, recognized that a trial loss in this case could have hurt enforcement efforts nationally.”

SEC spokesman John Nester stated that “The decision was based on new evidence that emerged during the course of the litigation, and does not presage any new approach by the commission,” reported The New York Times.

4 Powerful Communication Strategies for Your Next Board Meeting