The U.S. Securities and Exchange Commission (SEC) today said MicroStrategy Inc.'s top two executives and its former chief financial officer have agreed to pay a total of $11 million to settle civil accounting fraud charges related to a restatement of the software vendor's financial results last March.
The SEC filed the charges today and then immediately reached the settlement deal with the three executives. The commission also settled administrative reporting charges against MicroStrategy itself without requiring the Vienna, Va.-based company to pay any penalties.
However, the SEC said MicroStrategy did agree to a cease-and-desist order and promised to make "significant" internal changes in order to ensure that it complies with securities laws in the future. In addition, the company's corporate controller and accounting manager agreed to individual cease-and-desist orders for reporting and recordkeeping violations.
Taking personal financial hits as part of the settlement with the SEC are MicroStrategy CEO Michael Saylor as well as Sanju Bansal, the company's chief operating officer, and Mark Lynch, who resigned earlier this year as chief financial officer at the developer of data analysis software.
The three executives didn't admit or deny the accounting fraud charges, according to the SEC. But the commission said they agreed to pay $350,000 apiece in civil penalties and to "disgorge" a combined total of $10 million more, with Saylor accounting for $8.3 million of that amount. Lynch also consented to an order barring him from accounting jobs for at least three years.
In a separate announcement, MicroStrategy said the $10 million will consist of shares in the company that the executives are contributing as part of a resolution of shareholder suits filed after the restatement -- an action that was detailed in October.
Like Saylor and the other two executives, MicroStrategy said it "concluded the SEC matter without admitting or denying wrongdoing." The SEC launched its inquiry in the wake of a March revelation that MicroStrategy had overstated its revenue and earnings for the last two years and would need to restate the financial results (see story).
Richard Walker, the SEC's director of enforcement, said in a statement that the MicroStrategy case "illustrates how critical it is for all companies -- and especially for companies new to the public [stock] markets -- to implement effective internal controls and to strictly adhere to the letter and the spirit of the accounting rules for revenue recognition."
The SEC charged that MicroStrategy "materially overstated its revenues and earnings" after going public in mid-1998. Because of premature recognition of revenue from software sales, the commission said, MicroStrategy reported profits through the end of last year when it actually was losing money.
That helped push the price of the company's stock as high as $333 a share. But after the restatement announcement, the stock lost more than 60% of its value in just one day. The stock has continued to fall since then and was trading for about $14 earlier today.
Greg Bruch, an assistant director in the SEC's division of enforcement, said in an interview that illegally frontloading the revenue on software contracts is a common practice among vendors. Many vendors have failed to keep up with new and more complex government accounting rules as they try to puff themselves up in an economy "that's incredibly sensitive to earnings," Bruch added.
MicroStrategy officals "were signing these big, multi-level deals and they got the accounting spectacularly wrong," he said. "The temptation and the danger is to frontload the revenue before you've collected it."
In a statement, Saylor said MicroStrategy has "worked hard to put in place numerous organizational and business measures to safeguard the integrity of our finances" in the wake of the SEC's inquiry. With the matter now resolved, he added, the company "can turn with renewed energy and dedication to the marketplace."
Another step still to be taken is the addition of an independent director with finance expertise to the audit committee of MicroStrategy's board. But the company said the resolution with the SEC, along with the October settlement of the shareholder suits, brings to a close all pending legal and regulatory matters related to the March restatement.
MicroStrategy last month announced several management changes, including the removal of functions such as internal controls and contract administration from Saylor's responsibilities (see story). That followed a summer layoff of about 10% of the workers at the once high-flying company (see story).
But Peter Urban, an analyst at AMR Research Inc. in Boston, said MicroStrategy should be able to weather the financial storm. "I don't think this is a company that's going to be ruined by this," Urban said.
He added that MicroStrategy has changed its pricing to go after mid-sized companies and small businesses and plans to expand into the market for customer relationship management software.
Related stories:
- Study: Most intelligence software falls short of expectations, Nov. 27, 2000
- MicroStrategy gets cash infusion for wireless data access, Oct. 23, 2000
- Oracle: More than just the database these days, Oct. 16, 2000