SEC Sues Former Legato Execs for Fraud - TheStreet

Legato Systems


joined the growing ranks of software makers in trouble with the

Securities and Exchange Commission

this week when the agency announced it has brought fraud charges against two former executives.

The SEC said Monday it has sued former Legato Executive Vice President of Worldwide Sales David Malmstedt, 46, and former vice president of North American Sales Mark Huetteman, 39, in federal court in northern California.

The agency charges that the two executives caused Legato to fraudulently record millions of dollars in revenue for three quarters on orders that were contingent on resellers' ability to sell the product to an end customer, or on a customers' rights of exchange, return or cancellation.

In April 2000, Legato said a small number of sales representatives entered unauthorized side agreements that precluded revenue from being recognized for those transactions and in May, Legato restated revenue for the first three quarters of fiscal year 1999. Malmstedt and Huetteman are no longer with the company.

In one instance, Malmstedt and Huetteman caused Mountain View, Calif.-based Legato to recognize revenue on a $7 million purchase order that was contingent on further successful negotiations between the parties. If the negotiations broke down, the purchasing company had the right to cancel the order.

Accounting rules allow a software maker to recognize revenue when the fee is fixed and there are no payment contingencies in the contract.

As a result of the fraud, Legato overstated its revenue over three fiscal quarters by amounts ranging from 6% to 20%. The firm's software is used for the backup, recovery and archiving of data as well managing the performance and operation of application services and maximizing storage devices.

The SEC charges Malmstedt, of Manhattan Beach, Calif., and Huetteman, of Hinsdale, Ill., of violating antifraud, corporate reporting and bookkeeping provisions of the federal securities laws. The commission is seeking monetary penalties, injunctions, disgorgement of losses avoided on sales of Legato stock by Malmstedt and Huetteman during the course of the fraud.

The agency also issued an order and settled cease-and-desist proceedings against Legato and former CFO Steven Wise, 47, of Mountain View. In the administrative proceeding, the order found Legato violated corporate reporting, bookkeeping and internal controls provisions of the federal securities laws. It also found that Wise knowingly failed to implement adequate internal accounting controls at the company.

In the wake of the


disaster, software makers have been particularly hard hit by accounting woes. In separate matters, the SEC and U.S. attorney's office also filed civil and criminal charges Monday against executives at two other software firms, Quintus and Unify. In addition, the SEC currently is investigating software makers

Computer Associates

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Network Associates

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Shares of Legato were down 19 cents, or 3%, to $6.19 in recent trading.