On Thursday the SEC brought and settled administrative reporting charges against the Vienna, Va.-based software company and settled civil accounting fraud charges against its executive officers, Michael Saylor, co-founder and chief executive; Sanjeev Bansal, co-founder and chief operating officer; and Mark Lynch, former chief financial officer. According to the Commission, the executives overstated the company's revenues and earnings.

Although the officers did not admit or deny guilt, they agreed to disgorge a total of about $10 million, the SEC said. The officers also consented to fraud injunctions and agreed to each pay $350,000 in penalties. Lynch consented to an administrative order barring him from practicing before the Commission as an accountant, with a right to reapply after three years.

In addition, the company is required to make substantial changes in the areas of corporate governance, management and compliance. The company must create an internal audit department, appoint an independent director with experience in public company financial reporting and adopt detail contract approval and execution policies designed to prevent improper revenue recognition, the Commission stated.

According to the Commission, on March 20 the company announced that it intended to restate its financial results for the fiscal years 1998 and 1999. The company's stock, which had recently reached a high of $333 per share, dropped more than 60 percent of its value in one day, going from $260 per share to $86 per share on March 20.

The stock price continued to plummet in the following weeks and by April 13, after the company announced that it would also restate its fiscal 1997 financial results, the company's stock closed at $33 per share.

The company's restatement reduced revenues over the three-year period by about $66 million of the $365 million reported. About $54 million, or 80 percent, of these restated revenues were in 1999, the Commission reported.

The Commission alleges that from the time of its initial public offering in June 1998 to March 2000, MicroStrategy overstated its revenues and earnings from the sale of software and services contrary to Generally Accepted Accounting Principles. The company's public financial reports during this time showed positive net income, however, the Commission alleges that MicroStrategy should have reported net losses from 1997 through the present.

Two MicroStrategy employees also consented to cease-and-desist orders for reporting and record keeping violations, the SEC stated.

-- SmartPros News Staff

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