Former Critical Path Execs Face Charges Involving Financial Irregularities
The Securities and Exchange Commission filed civil charges yesterday against David Thatcher, Critical Path's former president, and Timothy Ganley, the company's former vice president of sales, charging them with "participating in a scheme to inflate the company's earnings for fiscal 2000."
The legal actions stem from Critical Path's reporting on Jan. 18, 2001, an unexpected loss of $11.5 million for the fourth quarter. Revenue for the quarter was $52 million, up more than 500 percent from $8.2 million posted a year earlier. The company later said the results may have been materially misstated and that its actual figures were to be restated $6.5 million to $8 million lower than previously announced. The company also said that $4.2 million of that amount involved transactions that did not result in revenue.
Thatcher and Ganley simultaneously settled the charges as they were filed against them, the SEC said. Thatcher agreed to pay a penalty of $110,000 and is banned from acting as an officer or director of a public company for five years. Ganley was fined $105,900 in penalties.
For its part in the financial irregularities, Critical Path consented to an SEC order finding it in violation of the periodic reporting, books and records and internal controls provisions of the Securities Exchange Act of 1934.
Critical Path, San Francisco, said in a statement that it consented to the SEC's charges, but did not admit any wrongdoing.
"The former members of management involved in the events leading to the restatement are no longer associated with the company," the statement said. "In settling with the SEC, the company has consented, without admitting or denying the SEC's findings, to the entry of an administrative order regarding the 'books and records' provisions of the federal securities laws."
Neither Thatcher nor Ganley could be reached for comment.
Critical Path fired the two executives, and also William Rinehart, vice president of worldwide sales, for their involvement. The SEC and the California Treasury Department did not name Rinehart in the legal actions.
Separately, the U.S. attorney's office for the Northern District of California this week filed criminal securities fraud charges against Thatcher and Ganley.
Thatcher was charged with conspiracy to commit securities fraud and could face five years in prison, a fine of $250,000 and three years of supervised release. Ganley is charged with insider trading and could face 10 years in prison, a $1 million fine and three years of supervised release.
Both men are scheduled to be arraigned Feb. 12.
The state attorney's office complaint charges Critical Path with improperly recognizing revenue during the third quarter of 2000 in transactions with software manufacturer Peregrine Systems Inc., International Computers Ltd. and StarMedia Network Inc. It also charges the company with improperly recognizing revenue from transactions with Bestseats Inc., Storerunner Network Inc. and Educational Networks of America in the fourth quarter of 2000.
The charges allege that Critical Path, "under pressure to meet its public predictions of revenue and earnings," negotiated side agreements to hide the true nature of its transactions with the companies. It also charges the company with backdating contracts so revenue could be recognized before it had been received.
"In an effort to falsely inflate revenues, Critical Path entered into barter agreements, issued side letters and backdated sales contracts," the complaint alleged. "In each case, the purpose and effect of the misconduct was to hide the company's true financial situation."