Securities and Exchange Commission charges two Netopia executives with fraud

By Jeff Shuttleworth, Bay City News Service

March 30, 2006

SAN FRANCISCO(BCN) - The U.S. Securities and Exchange Commission Wednesday charged two former sales executives of Emeryville-based software company Netopia Inc. with fraudulently boosting the company's revenue.

The commission also filed, and simultaneously settled, charges against chief executive Alan Lefkof and former chief financial officer William D. Baker, alleging that the executives later learned of a side agreement yet failed to take timely corrective action.

The Commission's complaint, filed in U.S. District Court, alleges that Netopia's former head of worldwide sales, Thomas Skoulis of Menlo Park, and former head of software sales, Peter Frankl of Addison, Texas, entered into two secret side deals in 2002 and 2003, each for about $750,000.

According to the SEC, Netopia's customer had limited resources and under the side agreement it would only have to pay Netopia if and when it successfully resold the software to an end-user. SEC officials said it was improper to record revenue for the transactions because payment was contingent on future events.

They said Skoulis and Frankl concealed the deal terms from Netopia's finance department.

The SEC said their actions caused Netopia to report fraudulently inflated software revenue to the investing public, and for the fourth quarter ended September 30, 2003, allowed the company to report its first profitable quarter in three years.

The complaint also alleges that Baker, of Fremont, and later Lefkof, of Tiburon, learned of the payment contingency associated with the 2003 transaction but failed to take immediate corrective action.

SEC officials said that even though Lefkof and Baker knew about the side agreement, they allowed Netopia to issue a misleading press release on July 6, 2004, that incorrectly treated the outstanding order as merely an uncollectible bad debt.

The commission alleges the sale should never have been recorded as revenue and Netopia should have restated its 2003 financial statements.

In a statement, Helane Morrison, district administrator for the SEC's San Francisco office, said, "Even if they don't participate in the underlying financial fraud, senior executives confronted with evidence calling into question the accuracy of the company's financial statements must take immediate steps to investigate and to cease further misrepresentations to the investing public."

The commission's complaint charges Skoulis, Frankl, Baker and Lefkof with violations of the antifraud and other provisions of the federal securities laws.

Simultaneously with the filing of the complaint, Baker and Lefkof have agreed to settle the charges, without admitting or denying the allegations.

According to the SEC, among other things, Baker and Lefkof have consented to orders requiring them to pay civil penalties of $35,000 each.

Baker also has consented to the entry of an order barring him from serving as an officer or director of a public company for five years and an order prohibiting him from practicing before the commission as an accountant for five years.

For the remaining defendants in the litigation, Skoulis and Frankl, the commission seeks disgorgement, civil monetary penalties, and injunctive relief, as well as an order barring Skoulis from serving as an officer or director of a public company.

Also Wednesday, the commission instituted and simultaneously settled administrative cease-and-desist proceedings against Netopia.

The SEC said that without admitting or denying the commission's findings, Netopia agreed to cease and desist from future violations of the corporate reporting, books and records and internal controls provisions of the federal securities laws.

Netopia said that the settlement is consistent with its announcement last July 22 that it had submitted an offer of settlement to the SEC to resolve the investigation.

In a statement, Netopia vice president and chief financial officer Charles Constanti said, "Netopia is pleased that the SEC now has approved the officers of settlement made by Netopia and Mr. Lefkof in July 2005."

Constanti said, "Netopia believes that these settlements are an important step in putting behind us the events related to the restatement of financial statements for prior years."

Constanti said, "Netopia and Mr. Lefkof now can devote full attention to providing industry-leading broadband equipment and software to telcos worldwide."

Netopia says it makes "high-performance broadband customer premises networking equipment and carrier-class software for the remote management of broadband services and equipment."

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