Feds charge three Northern California software companies with fraud

By Michael Liedtke The Associated Press
Tuesday May 21, 2002


SAN FRANCISCO — Federal authorities on Monday accused the executives at three Northern California software companies of cooking the books to dupe investors and prop up stock prices during the high-tech boom of the 1990s. 

The U.S. Attorney’s office filed criminal charges of securities fraud against two former chief executives, Gholamreza Mikailli of Sacramento-based Unify Corp. and Alan K. Anderson of the now-defunct Quintus Corp., as well as former chief financial officer Gary Pado of Unify. 

The Securities and Exchange Commission also filed civil complaints against the same three men, as well as two former Legato Systems Inc. sales executives, David Malmstedt and Mark Huetteman. 

Although the cases were unrelated, they shared a common theme — allegations of brazen deceit driven by a desire to create a bright financial outlook that would make their holdings in their companies worth a fortune. 

The charges include allegations of forgery, self-dealing and elaborate cover-ups. 

The allegations against Mikailli and Anderson “can only be described as shocking” said Helane L. Morrison, district administrator for the SEC’s San Francisco office. 

Both Mikailli, 50, and Anderson, 40, are accused of fabricating millions in bogus sales as part of elaborate schemes carried out over several months. 

Mikailli, known as “Reza,” also faces charges of pocketing $4 million in illegal trades of Unify stock. 

Efforts to reach Mikailli, Anderson and their attorneys were unsuccessful Monday. Authorities said they arrested Mikailli at his Saratoga home Monday morning after a federal grand jury indicted him last week. The indictment against Mikailli had been sealed until Monday. 

If convicted, Mikailli and Anderson each face maximum sentences of 10 years in federal prison and fines of up to $1 million. Mikailli also faces conspiracy charges that carry a maximum penalty of five years in prison and a $250,000 fine. 

Pado pleaded guilty to securities fraud last week as part of an agreement that requires him to cooperate in the government’s case against Mikailli. 

Federal authorities say they are aggressively pursuing allegations of financial misconduct to help restore investor confidence amid a series of accounting scandals headlined by the collapse of Enron, once the country's largest energy trader. 

The Silicon Valley — home to hundreds of publicly held tech companies that created incredible wealth during the 1990s — is emerging as a hotbed of accounting trouble. 

Last year, San Francisco-based Critical Path Inc. rocked investors by acknowledging it fabricated some of its sales, resulting in criminal convictions of two former executives in one of the biggest securities fraud cases filed by authorities this year. The FBI’s investigation into the alleged misconduct of former Critical Path executives is continuing. 

Quintus was based in Dublin before going bankrupt in February 2001 and negotiating a sale of its assets to Basking Ridge, N.J.-based Avaya Inc. for $30 million cash. When its stock peaked at $56.50 in late 1999, Quintus had a market value of $1.9 billion. 

Although its headquarters is currently in Sacramento, Unify was based in San Jose while Mikailli and Pado engaged in their alleged shenanigans 

Unify got rid of both executives after uncovering the accounting problems in July 2000 and eventually wiped $18.4 million in revenue off its books, authorities said. Most of Unify’s sales team also left the company. 

The scandal devastated Unify’s shares, which peaked at $34.22 on the Nasdaq Stock Market. Nasdaq de-listed Unify’s stock in late 2000. The shares, which now trade on over-the-counter market, closed at 71 cents Monday. 

In the civil case against the former sales executives of Mountain View-based Legato, the SEC alleges Malmstedt and Huetteman conspired in a scheme that caused the company to record millions of dollars in improper revenue. 

Legato acknowledged the accounting trouble in May 2000 when it lowered its previously reported 1999 revenue by $23 million.