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A federal jury yesterday convicted two former executives of Kurzweil Applied Intelligence Inc. of fraudulently covering up $2.3 million in losses before the company's 1993 sale of stock to the public.
In a verdict that prosecutors said sends a message white-collar crimes won't be tolerated, Kurzweil's former cochief executive, Bernard F. Bradstreet, and former vice president of sales, Thomas E. Campbell, were found guilty on all five counts contained in the government's case against them. A third executive, David R. Earl, vice president of operations, was acquitted.
The trial lasted more than three weeks as jurors considered a complex set of paper trails and other evidence of financial fraud. The case was viewed by lawyers and investment experts as a test case for the US government in its efforts to prosecute fraud at high-flying technology companies.
Testimony by one former Kurzweil executive, treasurer Debra J. Murray, who agreed to cooperate in the government's case against her former coworkers, was key to winning the case, officials said.
The jury verdict ``is a major victory,'' said Mark Pearlstein, chief of the economic crimes unit of the US attorney's office in Boston, which prosecuted the case. ``I believe this is the first successful prosecution of a revenue-recognition scheme in the country.''
The company, which was founded by Raymond C. Kurzweil, makes speech-recognition systems for computers. The company is still repairing the damage caused by the scheme, which sent its stock price soaring above the $20 mark and later, when investors recognized the firm's true condition, plunging below $5 a share.
Kurzweil's stock closed yesterday at 4, unchanged.
The jury found that Bradstreet, 51, who lives in Sudbury, and Campbell, 63, of Acton, conspired in a complex scheme to make Kurzweil's stock attractive to potential investors by recording revenues for bogus sales from early 1992 through mid-1994.
In its prospectus for new investors, the company said its revenues were $13.9 million in the fiscal year ending Jan. 31, 1993, a period in which it actually brought in $11.1 million. The inflated revenues allowed Kurzweil to report a $153,855 profit that year, masking losses of $2.3 million, the government charged in July 1995.
One method of inflating revenues involved recording sales for potential customers who had not yet signed final sales agreements, according to court documents. A second one involved shipping equipment to a warehouse and booking the shipments as sales.
``They said they were selling to a particular customer, but the customer never received the goods,'' said Jonathan Kotlier, an assistant US attorney who prosecuted the case in US District Court in Boston.
The scheme made the company appear to earn a slim profit in the months before its first public stock sale in August 1993 when, in fact, it was losing money, the government charged.
Bradstreet, who was a well-established figure in the high-tech community, and Campbell resigned abruptly in 1994 after the financial problems surfaced. Earl was fired.
New management, headed by Thomas E. Brew Jr., was installed at the company to deal with the fallout of the fraud and investor lawsuits.
Evan Slavitt, who represented Earl in the case, said his client's acquittal yesterday ``wasn't a case where he got off on a technicality.'' The verdict shows that Earl ``got caught up in a case that quite clearly had nothing to do with him,'' Slavitt said.
``For those of us who represented the company and conducted the investigation, it has been an extremely painful experience,'' said Jeffrey Rudman, a partner at Hale & Dorr who represented the company and its board. ``And I'm glad it's over.''
Sentencing for Bradstreet and Campbell is scheduled for Sept. 11, the government said. Their attorneys yesterday did not return calls seeking comment on the verdict.
The company is also being investigated by the US Securities and Exchange Commission. That case is still pending, said one person familiar with it.
This story ran on page 43 of the Boston Globe on 05/15/96.
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