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The former President and the former Vice-President in charge of sales of Kurzweil Applied Intelligence, Inc. ("KAI") were sentenced to prison terms for their roles in a scheme to falsely inflate the revenues of the company and in falsifying the books and records of the company.
First Assistant United States Attorney Mark W. Pearlstein, and Special Agent in Charge Richard W. Swenson of the Federal Bureau of Investigation, announced today that BERNARD F. BRADSTREET, 51, of Sudbury, Massachusetts, and THOMAS E. CAMPBELL, 63, of Acton, Massachusetts, were sentenced today by U.S. District Court Judge Richard G. Stearns.
BRADSTREET was sentenced to two years and nine months' imprisonment, two years' supervised release, and was ordered to a pay a fine of $2.3 million. CAMPBELL was sentenced to one year and six months' imprisonment to be followed by two years' supervised release.
On May 14, 1996, BRADSTREET and CAMPBELL were found guilty after a three-week trial of conspiracy, securities fraud, and falsifying the books and records of KAI, for their role in a scheme to grossly exaggerate the sales revenue figures contained in the company's public filings and press releases. KAI is a Waltham, MA based company that produces a device capable of recognizing human speech.
Pearlstein summed up the evidence as follows: "The company wanted to make its income and revenue figures look attractive to the investing public. The company did not have sufficient legitimate sales revenue to meet its projections and to be an attractive investment, so the defendants included in KAI's revenue figures transactions that were not actual sales, and in many cases, never became actual sales. So, in essence, the defendants misled the investing public into believing that the company was making a profit when, in fact, it was losing money."
Pearlstein made the following comments about the sentences: "This case represents a milestone in our continuing efforts to eradicate fraud in the securities marketplace. The sentences imposed today vividly demonstrate that this type of criminal conduct will no longer be tolerated. These defendants 'cooked the books' of the company and thereby duped investors into believing that KAI was performing much better than it really was. The defendants caused the company to make public filings that grossly overstated the actual revenues of the company during a given period. Unsuspecting investors purchased shares of KAI based on information the defendants knew to be false. The proper functioning of the securities marketplace demands honest and complete disclosure of financial information. This office will aggressively prosecute those who seek to defraud the investing public."
According to the testimony at trial, BRADSTREET, the former president, and CAMPBELL, the former vice-president in charge of sales, and other members of KAI's management conducted a scheme to overstate the company's revenue by improperly recognizing revenue from sales that had not, in fact, been finalized. Pursuant to auditing rules, the rules of the Securities and Exchange Commission ("SEC"), and its own policies, the company was not allowed to recognize the revenue from a sale until it had received a purchase order or sales quote signed by the customer and had shipped the goods to the customer. However, the company routinely included in its revenue figures sales in which the customer had not finalized the order and where the goods had not been shipped to the customer. By including such revenue in its publicly filed financial statements, the company made it appear that its products were selling far better than they really were and that it was making a profit, when, in fact, it was losing money.
As a publicly traded company, KAI was required to file year-end and quarterly reports with the SEC. The reports filed by KAI with the SEC, including the Prospectus for the company's initial public offering and subsequent quarterly reports for the quarters ending July 31, 1993 and October 31, 1993, contained false information relating to the company's revenues.
As the President and Chief Financial Officer of KAI, BRADSTREET was ultimately responsible for accurately recording and compiling the financial information of the company. He and CAMPBELL communicated with the company's sales staff at the end of each quarter and knew the status of the various potential sales. Despite knowing that a particular account was not a finalized sale, they recognized the amount of the potential sale for revenue purpose. In order to make the potential sale look like a final agreement, BRADSTREET and CAMPBELL would cause the potential customer to sign a sales quote that, on its face, did not contain any conditions. To induce the potential customer to sign the sales quote, which appeared to be binding, they issued side letters to the customers which contained conditions that rendered the agreement non-binding. The side letters were hidden from KAI auditors. In order to further make a sale look legitimate, they caused the goods to be shipped to a warehouse in Chelsea, rather than to the customer.
BRADSTREET and CAMPBELL also made misrepresentations to the company's auditors in an effort to cover up the improper recognition of revenue. As part of their effort to deceive the auditors, BRADSTREET and CAMPBELL caused the shredding of documents, falsified or caused the falsification of audit confirmations, and caused the goods initially shipped to the warehouse to be moved to other locations in order to escape detection by the auditors.
When the scheme was uncovered by the company's auditors in May 1994, KAI's Board of Directors sought and received the resignations of BRADSTREET, CAMPBELL, and the company's Treasurer, Debra J. Murray, who previously pled guilty to charges related to this scheme and who testified at the trial. Since the discovery of the scheme, the company has been cooperating with the investigating.
The jury deliberated for two days before finding the defendants BRADSTREET and CAMPBELL guilty of one count of Conspiracy to Commit Securities Fraud, three counts of Securities Fraud, and one count of falsifying the books and records of KAI.
The case was investigated by the Federal Bureau of Investigation and was prosecuted by Assistant U.S. Attorneys Jonathan L. Kotlier and John J. Falvey, Jr. of the Economic Crimes Unit of the United States Attorney's Office.
SOURCE: U.S. Attorney's Office
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