TWO FINANCIAL FRAUD CASES, ONE COMPANY
The SEC filed two cases yesterday stemming from an alleged financial fraud at Tvia, Inc., a Silicon Valley semiconductor company. One was against Benjamin Silva, III, the former Vice President of World Wide Sales at the company. SEV v. Silva, Case No. 09-5395 (N.D. Cal. Filed Nov. 17, 2009). This case is in litigation. The second named as a defendant Diane Bjorkstrom, former CFO of the company. SEC v. Bjorkstrom, Case No. 09-5394 (N.D. Cal. Filed Nov. 17, 2009). This case settled.
The action against Mr. Silva alleged that he caused the company to falsify its financial books and records in two ways. First, over a period of almost two years beginning in September 2005, he caused the company to improperly report millions of dollars in revenue on sales. That revenue should not have been reported because the sales had side agreements in which the customer was promised extended payment terms. Those agreements also obligated Tvia to find a buyer for any product the customer was unable to sell.
Second, Mr. Silva had the company misapply about $300,000 in payments from new customers. Those payments were used to pay down the past due accounts of existing customers. Mr. Silva was seeking to avoid the reversal of previously recognized revenue by misleading the auditors.
As a result, Tvia materially overstated revenue for the second and third quarters of fiscal 2006 and for fiscal year end 2006. In addition, revenue was materially overstated for the first quarter of fiscal 2007.
Mr. Silva’s misconduct permitted him to meet his revenue goals, according to the SEC. He also was awarded stock options to acquire 70,000 shares of Tvia stock. Before the misconduct was discovered, those options were exercised and the stock was sold. Mr. Silva netted over $300,000.
The complaint alleges violations of Exchange Act Section 10(b) and Securities Act Section 17(a). In addition, it asserts false statements to the auditors and aiding and abetting violations of the books and records and internal controls provisions.
The action against Ms. Bjorkstrom alleges that she participated in the misconduct at the company in two ways. First, she caused the company to improperly recognize $325,000 in revenue on a sale on the last day of the fiscal year. Recognition was improper because the customer had not agreed to accept delivery for several weeks.
Second, Ms. Bjorkstrom failed to “stand up” to efforts by Mr. Silva when he manipulated the accounting records to deceive the outside auditors, according to the complaint. In at least two instances Mr. Bjorkstrom did not “challenge Silva’s dubious explanations” when he asked her and others to apply funds from one customer to the past due payments of another customer. These acts contributed to the overstatement of revenue for the fiscal year end 2006 financial statements and the first quarter of the next year.
The Commission’s complaint alleged violations of Securities Act, Sections 17(a)(2)&(3) and aiding and abetting violations of the books and records and internal control provisions. It also claims that she signed false CFO certifications.
To settle with the Commission, Ms. Bjorkstrom consented to the entry of a permanent injunction prohibiting future violations of the sections alleged in the complaint. She also agreed to pay a civil penalty of $20,000 and to the entry of an order barring her from appearing or practicing before the Commission as an account for two years. See also Litig. Rel. 21302 (Nov. 17, 2009).