The Securities and Exchange Commission charged four former finance executives at former voice-recognition companies Speechworks International Inc. and Intervoice Inc. with participating in a fraudulent scheme to inflate the financials of the companies.
Richard J. Westelman and Steven Forman, the former CFO and controller, respectively, of Boston-based Speechworks, were accused of inflating that company’s revenues and misstating other important financial metrics, deceiving investors about its true financial condition.
The SEC also charged Arthur Haberman, Speechworks’ former director of finance, with violating and aiding and abetting Speechworks’ violations of various books and records provisions of the federal securities laws.
Westelman and Haberman agreed to settle without admitting to or denying the allegations, and were enjoined from future violations of the antifraud and books and records provisions of the securities laws. Westelman’s settlement also imposes a permanent officer and director bar, and requires payment of a $100,000 civil penalty. Haberman’s calls for a $25,000 civil penalty.
In a related civil injunctive proceeding, Rob Roy J. Graham, former CFO of Dallas-based Intervoice, settled the commission’s claims that he had engaged in a fraudulent scheme to inflate Intervoice’s revenues and misstate other metrics to deceive investors. Without admitting to or denying the allegations, Graham was enjoined from future violations of securities laws, was permanently barred from being a company officer or director, and required to pay more than $200,000 in civil penalties and disgorgement.
The commission said its action against Forman is pending in the U.S. District Court for the District of Massachusetts. It is seeking injunctions, an officer and director bar, and a civil penalty against Forman. A call to Forman’s home seeking comment on the complaint was not immediately returned.
The commission’s complaint alleges that from at least 2001 through at least 2003, Westelman and Forman engaged in a fraudulent scheme to inflate Speechworks’ revenues and misstate other key financial information. According to the complaint, Westelman negotiated and approved a series of transactions between Speechworks, now a part of Nuance Inc., and one of its key resellers, Intervoice, calling for the reseller to make royalty payments prior to its shipment of software to end customers.
For one transaction, the complaint alleges Westelman requested that Intervoice provide falsified documents that allowed him to improperly recognize as revenue a $900,000 cash payment that Intervoice made in return for amending a warrant that Speechworks had previously issued to Intervoice.
For another transaction, the complaint alleges that Westelman and Forman schemed to recognize as revenue $2 million in prepayments to Speechworks, even though they knew that the deal was not properly documented, and did not otherwise qualify for revenue recognition under Speechworks’ policies and generally accepted accounting principles.
The complaint also claims that Westelman and Forman intentionally misled Speechworks’ external auditors about the terms of the deal and, among other things, permitted the auditors to rely on documents that they knew to be false and misleading.
The SEC also alleges that Westelman helped Intervoice improperly recognize revenue, and that Haberman improperly recorded Intervoice’s royalty prepayments as revenue in the company’s books and records.