Securing sales

Cylink, which is located in Silicon Valley, operates in the computer network security industry. The SEC complaint against John Daws, its former chief financial officer, Thomas Butler, ex-vice president of sales, and Mark Folit, head of North American sales, alleges that they caused the company to account for revenue on a large number of transactions in a manner that contravened Cylink’s internal accounting policies or Generally Accepted Accounting Principles, or both. They are said to have recognised revenue on cancelled orders, on orders from a distributor who was not creditworthy and on orders which allowed the buyer to exchange the software for hardware. After the fraud was discovered, Cylink restated its numbers for the first quarter of 1998. As a consequence, revenue for the three months fell from US$15.8 million to US$8 million and net income of US$1.1 million from continuing operations was transformed into a net loss of US$3.4 million. Figures for subsequent quarters were also restated. All the defendants have been charged with “securities fraud, knowingly circumventing Cylink’s internal controls, falsifying Cylink’s internal records, and aiding and abetting Cylink’s violations of the periodic reporting and record-keeping provisions of the federal securities laws.” The SEC aims to secure a permanent injunction, recovery of each party’s quarterly bonus and a civil penalty.