Source: https://www.sec.gov/litigation/complaints/complr17524.htm
Timestamp: 2019-04-25 20:21:47+00:00

Document:
NOTE: The Securities and Exchange Commission announced that on June 10, 2004, following a seven-day trial, a jury in San Jose, California, returned a verdict in favor of the defendant, David Malmstedt.
1. Beginning as early as May 1999 and continuing through January 2000, Legato Systems, Inc. ("Legato" or the "Company"), a Silicon Valley software company, fraudulently recorded millions of dollars in revenue and income from transactions arranged by senior sales executives. David Malmstedt, Legato's former Executive Vice President of Sales, and Mark Huetteman, Legato's former Vice President of North American Sales, perpetrated that fraud. Defendants caused Legato to recognize revenue on unconsummated "sales" through, among other things: orders that were contingent on the reseller's sale to an end customer; orders that were contingent on customers' rights to "rotate" or exchange software for other software products; orders with the right of return; stocking orders; orders that were subject to extended payment terms; and an order that was cancelable within 30 days. Malmstedt and Huetteman were aware of the terms and circumstances of these transactions and knew or were reckless in not knowing these terms and circumstances made it improper for Legato to record and recognize revenue on the transactions under Legato's own revenue recognition policy, generally accepted accounting principles (also known as "GAAP"), or both. In essence, the terms negotiated or approved by Malmstedt and Huetteman meant that Legato's could not collect payments from the customers in a timely fashion. Absent that right, Legato could not record revenue from such transactions.
2. Malmstedt and Huetteman knew that they were required to inform Legato's finance department of all material terms and circumstances for each transaction. They also knew or were reckless in not knowing that their failure to disclose all material terms and circumstances to that department would cause Legato to record and recognize current revenue for each transaction upon receipt of a purchase order from the reseller, in violation of GAAP and Legato's own policies. Malmstedt and Huetteman further knew or were reckless in not knowing that their failure to disclose all material terms and circumstances to Legato's finance department would cause Legato to issue false and misleading financial statements in its quarterly reports filed with the Commission (know as Form 10-Qs) and disclosed to the investing public and in a January 19, 2000 press release announcing Legato's 1999 annual results.
3. As a result of the defendants' fraudulent conduct, Legato filed reports on Form 10-Q containing materially inflated revenue and net income for the quarters ended June 30, 1999 and September 30, 1999, and issued a press release on January 19, 2000 containing materially inflated revenue and net income for the fourth quarter and year ended December 31, 1999. After the fraud was uncovered, Legato issued corrected financial statements (also known as a "restatement") that sharply reduced its revenue and income. For the quarter ended June 30, 1999, Legato restated net income from $4,438,000 to a loss of $1,093,000 (a downward revision of 125% for a net loss) . For the quarter ended September 30, 1999, the Company restated net income from $3,438,000 to $1,396,000 (an overstatement of 146%). For the quarter ended December 31, 1999, the Company reported a net loss of $359,000, as opposed to net income of $3,052,000 originally reported in the January 19, 2000 press release (a downward revision of 112% for a net loss).
4. During the second half of 1999, Legato's stock price rose from under $30 to nearly $80 per share on an historic (pre-split) basis. In April 2000, the fraud was finally revealed to the public and the stock price plunged to under $20 per share on an historic (pre-split) basis. Between August 20, 1999 and August 23, 1999, Malmstedt exercised options and sold 22,173 shares of Legato common stock, receiving net proceeds of approximately $667,476. Between July 26, 1999 and November 29, 1999, Huetteman exercised options and sold 42,748 shares of Legato common stock, receiving net proceeds of approximately $1,845,662. The proceeds received by the defendants from selling these shares were a likely motive for their misconduct. A reasonable person in defendants' position would have known that the proceeds would be significantly inflated by the excessive revenue and net income that Legato reported to the public during the second half of 1999 following defendants' fraudulent sales practices.
5. The Commission seeks to enjoin defendants from future violations of the federal securities laws, obtain disgorgement of all benefits received by defendants from their violations of the securities laws, and obtain civil monetary penalties for the violations.
6. The Commission brings this action pursuant to Sections 21(d), 21(e), and 21A of the Securities Exchange Act of 1934 (the "Exchange Act") [15 U.S.C. §§ 78u(d), 78u(e), and 78u-1(a)]. This Court has jurisdiction over this action pursuant to Sections 21(e) and 27 of the Exchange Act [15 U.S.C. §§ 78u(e) and 78aa].
7. Malmstedt and Huetteman, directly or indirectly, each made use of the means and instrumentalities of interstate commerce, of the mails, or of the facilities of a national securities exchange, in connection with the acts, practices, and courses of business and transactions alleged herein.
8. This district is an appropriate venue for this action under Section 27 of the Exchange Act [15 U.S.C. §78aa]. Certain of the transactions, acts, practices and courses of business constituting the violations alleged herein occurred within the Northern District of California.
9. Assignment to the San Jose Division is appropriate pursuant to Civil Local Rule 3-2(e) because a substantial part of the events that give rise to the Commission's claims occurred in Santa Clara County, California, where Legato is headquartered.
10. David Malmstedt, age 46, of Manhattan Beach, California, was Legato's Executive Vice President of Worldwide Sales from April 1999 to April 2000. In that position, Malmstedt was responsible for supervising all of Legato's sales personnel and ensuring that corporate sales targets were achieved. Malmstedt was eligible to receive a cash bonus based upon targets relating to analyst estimates of Legato's quarterly and annual earnings per share. Malmstedt also received 300,000 stock options when he joined Legato.
11. Mark Huetteman, age 39, of Hinsdale, Illinois, was Legato's Vice President of North American Sales from January 1999 to April 2000. In that capacity, Huetteman was responsible for managing all sales operations within North America and for closing large transactions with customers and resellers. Huetteman was eligible to receive a cash bonus if he met quarterly sales quotas. From October 1997 to December 1999, Huetteman was Legato's Vice President of Enterprise Sales.
12. Legato is a Delaware corporation, with its principal executive offices in Mountain View, California. Legato develops, markets and supports software for managing the data-storage functions of computer networks. At all times relevant to this action, Legato's common stock was registered with the Commission pursuant to Section 12(g) of the Exchange Act and was quoted on the NASDAQ National Market System.
13. In order to sell its common stock and other securities to members of the public and maintain public trading of its securities, Legato was required to comply with Commission regulations designed to ensure that the company's financial information was accurately recorded and disclosed to the investing public. Under these regulations, Legato had a duty to, among other things: (a) make and keep books, records and accounts which, in reasonable detail, accurately and fairly reflected its transactions and dispositions of assets; (b) devise and maintain a system of internal accounting controls; and (c) file with the Commission on Form 10-Q quarterly updates of its financial statements that disclose its financial condition; and results of business operations. Legato used a calendar year as its fiscal year. In 1999, Legato's first quarter ended March 31, 1999; its second quarter ended June 30, 1999; its third quarter ended September 30, 1999 and its fourth quarter ended December 31, 1999.
14. Under GAAP, the Commission rules and regulations, and Legato's own publicly stated accounting policies, Legato's sales revenue and income were recorded and reported for specific periods - that is, the end of each quarter and the end of its fiscal year. Legato could recognize revenue from the sale of software during a particular reporting period only if there was a persuasive evidence of a sales arrangement with a customer, delivery of the software had occurred, the price for the software was fixed or determinable, collectibility of the sales price was reasonably assured and Legato had substantially performed all of its obligations to the customers.
15. GAAP does not permit companies to recognize revenue for a contingent sale. As used herein, a "contingent sale" refers to a sale in which the reseller does not in fact have a binding obligation to pay for the software purchased. A contingent sale may arise where a reseller is informally assured that it has the right to cancel a sale before any payment is made, or to exchange software that was originally purchased for other software products, or to delay payment until a final sale is made to an end-user. Under GAAP, contingent sales may not be recognized as revenue because collectibility of the sales price is not probable.
16. In 1999, Legato's management attempted to increase the company's income by boosting the sale of enterprise license agreements ("ELAs") to large business customers. An ELA allowed a business to install Legato software on its computer systems on a company-wide basis without regard to the number of individual users. ELAs had a higher profit margin and generated more revenue for Legato by bundling together software products for an entire company as opposed to sales of one product to a single division.
17. In order to meet their ever-increasing sales targets, Malmstedt and Huetteman arranged what they called "pre-buy" transactions with established resellers. In a typical "pre-buy" transaction, a reseller issued a purchase order for Legato's software products or an ELA before the reseller received a firm order from an end-user, and thus before the reseller had a legitimate need to submit a binding order for the software or ELA. The reseller understood, however, that such transactions exposed them to the risk that an end-user order would not materialize or that the end-user would not pay the reseller for an extended period. To protect themselves from such risks, resellers demanded - and Malmstedt and Huetteman agreed - to provide resellers with a right of return or rotation and/or extended payment terms for the software and ELAs sold pursuant to each pre-buy transaction. Malmstedt and Huetteman authorized or transmitted "side letters" (i.e., agreements that contained terms not included in the purchase orders) to resellers to memorialize these non-standard payment terms and rights of return or rotation. The use of side letters rendered the sales contingent in character so as to preclude Legato's ability to recognize revenue on the "sale."
18. Because they knew the side letters would preclude immediate recognition of revenue for these pre-buy transactions, defendants withheld the side letters from Legato's finance department. Instead, the finance department received "clean" purchase orders from the resellers, which did not contain any contingencies or non-standard payment terms. Legato's finance department then improperly recorded revenue for each of the "pre-buy" transactions based upon the available documentation. Huetteman received credit towards his sales quota for each transaction, enhancing the likelihood that he would receive a bonus that was dependent upon achieving the sales quota.
19. On August 12, 1999, Legato filed with the Commission its Form 10-Q for the second quarter ended June 30, 1999. In the financial statements included in the filing, the Company reported total revenue of $62,008,000 and net income of $4,438,000 for the quarter. In May 2000, Legato restated the financial statements included in the Form 10-Q for the quarter ended June 30, 1999. The restatement reduced total revenue to $51,564,000. Thus, revenue was overstated by 20%. In addition, the restatement revealed a net loss of $1,093,000.
A. Malmstedt and Huetteman Caused Legato to Improperly Record Revenue on Vanguard Transactions Totaling $3,313,500.
21. In late June 1999, Malmstedt and Huetteman arranged for Vanguard Technology ("Vanguard"), a Legato reseller, to "pre-buy" five ELA deals that Vanguard was unable to close with the prospective end customers before the end of the second quarter. In "pre-buying" these deals, Vanguard agreed to submit purchase orders for the product on the understanding that Vanguard would receive extended payment terms and the right to return the product in the event Vanguard was unable to close the prospective ELA deals with its end-users.
22. In late June 1999, Malmstedt and Huetteman participated in a telephone conference call with Vanguard executives in which they discussed the terms for the five pre-buy deals. During the call, Malmstedt orally approved the extended payment and right of return terms that Vanguard requested.
23. After the call, Legato's finance department received five "clean" purchase orders (i.e., orders that excluded the extended payment and right of return terms) from Vanguard for the five pre-buy transactions. Legato then recorded $3,313,500 in second quarter revenue from these deals, and Huetteman received credit for the sale towards his sales quota.
24. It was improper for Legato to recognize revenue on the Vanguard transactions in June 1999 because the transactions failed to comply with the requirements for revenue recognition under GAAP due to the contingent payment terms and return rights.
25. Malmstedt and Huetteman each knew or was reckless in not knowing that the failure to inform Legato's finance department about the extended payment and right of return terms would cause the Vanguard transactions to be recorded improperly on Legato's books and records, which in turn would cause material misrepresentations in the company's Form 10-Q for the quarter ended June 30, 1999.
B. Huetteman Caused Legato to Improperly Record $345,322 in Revenue for Transactions with ADS.
26. During the second quarter of 1999, a subordinate told Huetteman about two contingent sales transactions that he had negotiated with Applied Digital Systems ("ADS"), a Legato reseller. Huetteman knew that the subordinate sent a side letter providing ADS with a right to return or rotate the software, but did not forward the side letter to the finance department. After Huetteman approved the transactions, Legato received "clean" purchase orders from ADS for the transactions. Legato then recorded $345,322 in second quarter revenue for these transactions. Huetteman received credit for the sale towards his sales quota for North America.
27. Because the transactions were contingent on the ability of ADS to return the software, it was improper for Legato to recognize revenue on ADS transactions in June 1999 under GAAP.
28. Huetteman knew, or was reckless in not knowing, that his failure to inform Legato's finance department about the extended payment and right of return terms would cause that department to record transactions improperly on Legato's books and records, which in turn would cause the company to make material misrepresentations in its Form 10-Q for the quarter ended June 30, 1999.
29. On November 10, 1999, Legato filed with the Commission its Form 10-Q for the quarter ended September 30, 1999. In the financial statements included in Legato's Form 10-Q, the Company reported total revenue and net income of $71,688,000 and $3,438,000, respectively. In May 2000, Legato restated the financial statements included in the Form 10-Q for the quarter ended September 30, 1999. The restatement reduced total revenue to $67,931,000 and net income to $1,396,000. Thus, revenue and net income were overstated by 6% and 146%, respectively.
30. As described below, during the third quarter of 1999, Malmstedt and Huetteman caused Legato fraudulently to recognize revenue on one transaction that accounted for a significant portion of the falsely reported revenue and income. As a result of their involvement in this transaction, Malmstedt and Huetteman each knew, or was reckless in not knowing, that the financial statements in Legato's original Form 10-Q for the quarter ended September 30, 1999 were materially false and misleading at the time the Form 10-Q was filed with the Commission.
A. Malmstedt and Huetteman Caused Legato to Improperly Recognize Revenue on a $7 Million Order from Logicon.
31. During the summer of 1999, Legato approached Logicon with a proposal to sell a large quantity of software to the U.S. Air Force. Logicon was a software reseller that had a pre-existing relationship with the Air Force that would permit Legato to expedite the transaction (which required compliance with government procurement regulations).
32. In mid-September 1999, Huetteman sent a proposal to Logicon. Under the terms of the proposal, Logicon would buy $7 million worth of software and services from Legato; in return, Logicon would receive a sizeable commission and become the exclusive reseller of Legato products for the Air Force. The proposal required Logicon to place an order by September 30, 1999, the last day of Legato's quarter. The proposal was to be reflected in an "order letter" that Logicon would issue to Legato in lieu of a standard purchase order.
33. The deal hit a stumbling block in September when one of Logicon's in-house attorneys refused to sign the order letter because it did not grant Logicon the right to cancel its obligation to pay Legato the $7 million due under the agreement if Legato and Logicon did not negotiate a mutually acceptable reseller agreement within 30 days (the reseller agreement was still being negotiated). In other words, Logicon wanted to make it a consignment order.
34. Malmstedt and Huetteman knew that the Logicon transaction would be jeopardized if the order letter contained any contingencies, because Legato's General Counsel had previously rejected an amendment to a draft order letter that contained a right of return. Malmstedt instructed Huetteman to provide Logicon with a side letter providing a right to cancel the transaction if the parties were unable to negotiate a more definitive agreement.
36. On September 29, 1999, Huetteman signed the side letter and sent it by email and facsimile to Logicon. Huetteman also emailed a copy of the side letter to Malmstedt, but did not forward it to Legato's legal or finance departments.
37. On September 30, 1999, Logicon transmitted an order letter to Legato to purchase $7 million worth of software and support services. Legato then recognized $5.8 million from the Logicon order as revenue in the third quarter of 1999. This revenue was later reversed, and the Logicon transaction was ultimately cancelled by mutual agreement of the parties.
38. Because it was subject to the 30-day cancellation clause, it was improper for Legato to recognize revenue on this order in the third quarter of 1999.
39. Malmstedt and Huetteman knew that Logicon's order was subject to a 30-day cancellation clause that made revenue recognition in the third quarter improper. Malmstedt and Huetteman each knew or was reckless in not knowing that the failure to inform Legato's finance department about the 30-day cancellation provision would cause the Logicon transaction to be recorded improperly on Legato's books and records, which in turn would cause material misrepresentations in the company's Form 10-Q for the quarter ended September 30, 1999.
40. On January 19, 2000, Legato issued a press release announcing its results of operations for the fourth quarter and fiscal year ended December 31, 1999. In the financial statements included in Legato's press release, the Company reported $71,221,000 in revenue and $3,052,000 in net income for the fourth quarter of 1999.
41. In May 2000, after an investigation, Legato announced that the January 19, 2000 financial statements included in the press release were inaccurate. When the correct numbers were announced, total revenue was reduced to $65,127,000, and the company reported a net loss of $359,000 for the fourth quarter of 1999. Thus, revenue was overstated by 9.4%.
42. As described below, for the quarter ended December 31, 1999, Malmstedt and Huetteman each caused Legato fraudulently to recognize revenue on several transactions that accounted for a significant portion of the revisions to the revenue and income numbers that were announced in January 2000. As a result of their involvement in this transaction, Malmstedt and Huetteman each knew, or was reckless in not knowing, that the financial information in the January 19, 2000 press release was materially false and misleading at the time the press release was made public.
A. Malmstedt and Huetteman Caused Legato to Improperly Recognize Revenue on a $3,002,596 Order from Vanguard.
43. In December 1999, Huetteman approached Vanguard with another pre-buy transaction for 5 ELAs. In "pre-buying" these ELAs, Vanguard agreed to submit purchase orders for Legato software products on the understanding that Vanguard would receive extended payment terms and the right to return the products in the event Vanguard was unable to close the prospective ELA transactions with the designated end-users.
44. In December 1999, Huetteman received a spreadsheet via electronic mail from Vanguard's Vice President of Sales that memorialized the terms for the pre-buy transaction. The spreadsheet modified Legato's standard "net 30" payment terms by providing that Vanguard would pay $750,000 within 60 days, with the balance (approximately $2,250,000) due "on payment to Vangard [sic]" by the end customer.
45. Huetteman told Malmstedt about the extended payment terms for the Vanguard transaction, but did not tell the finance department or forward the spreadsheet reflecting those non-standard terms.
46. By December 31, 1999, Legato received five "clean" purchase orders (i.e., orders that excluded the extended payment and right of return terms) from Vanguard for the five ELA transactions. Legato then recorded $3,002,596 in fourth quarter revenue from these transactions.
47. Because Vanguard had the right to return the software and its payment obligation was contingent on the receipt of payment from the end customer, it was improper for Legato to recognize revenue on the Vanguard transactions in December 1999 under GAAP.
48. Malmstedt and Huetteman each knew or was reckless in not knowing that the failure to inform Legato's finance department about the extended payment and right of return terms would cause the Vanguard transactions to be recorded improperly on Legato's books and records, which in turn would cause material misrepresentations in the company's financial statements that were released to the public in a press release on January 19, 2000.
B. Malmstedt and Huetteman Caused Legato to Improperly Record $3 Million in Revenue for a Fraudulent Pre-buy Transaction with DLT.
49. In December 1999, Malmstedt held a meeting of his sales management team in Los Angeles. At that meeting, Mark Shotwell, Legato's Vice President of Sales for North America, proposed a transaction with DLT Systems, a Legato reseller, whereby DLT would place an order to pre-buy $3 million of unspecified Legato software products in return for Legato's commitment to refer future end-user orders to DLT. DLT could then fulfill these orders at a specified markup until DLT's pre-buy obligation was exhausted.
50. Malmstedt told Shotwell and Huetteman to proceed with the DLT transaction, but instructed Shotwell to inform Legato's finance department that it was an ELA transaction and to falsely designate "AT&T/Lucent" as the end-user for the ELA.
51. On December 23, 1999, DLT executed an amendment to its master reseller agreement to consummate the transaction, listing AT&T/Lucent as the end-user. However, that same day, Shotwell sent a side letter by electronic mail to DLT that explained, as the letter put it, "our intentions with regard to this order." According to the side letter, in return for DLT's agreement to pre-buy the software, over the next three quarters Legato would find end-user orders for up to $4.5 million worth of Legato software products and would place such orders through DLT, to be credited against DLT's $3 million pre-buy obligation. The side letter was never provided to Legato's accounting department.
52. On December 27, 1999, Legato received a $3 million purchase order from DLT pursuant to the amendment. The accounting department then recorded $3 million in sales revenue from the DLT transaction into Legato's books and records. Because the DLT order was contingent on Legato's promise to provide future services (i.e. to generate future sales for DLT), it was improper for Legato to record sales revenue for the DLT transaction under GAAP.
53. Malmstedt and Huetteman knew, or were reckless in not knowing, that their failure to inform Legato's finance department about the additional terms relating to the DLT transaction would cause the transactions to be recorded improperly on Legato's books and records.
C. Malmstedt and Huetteman Caused Legato to Improperly Record $429,444 in Revenue for Transactions with IMSS.
54. During the fourth quarter of 1999, Huetteman and Malmstedt were informed of two contingent sales transactions to IMSS, a Legato reseller. Huetteman knew that Mark Shotwell sent a side letter granting stock rotation rights to IMSS (i.e., the right to exchange the software for other Legato products), but Huetteman did not forward the side letter to the finance department. After Huetteman approved the transactions, Legato received "clean" purchase orders from IMSS for the transactions. Legato then recorded $429,444 in fourth quarter revenue for these transactions.
55. Because the transactions were contingent on the ability of IMSS to rotate the software, it was improper for Legato to recognize revenue on the IMSS transactions in December 1999 under GAAP.
56. Malmstedt and Huetteman knew, or were reckless in not knowing, that their failure to inform Legato's finance department about the stock rotation term would cause the transactions to be recorded improperly on Legato's books and records, which in turn would cause misrepresentations in the Company's press release announcing its results of operations for the fourth quarter and fiscal year ended December 31, 1999.
57. During the period of fraudulent conduct described above, Malmstedt and Huetteman were unjustly enriched by their fraudulent conduct at Legato. Among other things, each defendant received and exercised stock options and sold shares of Legato common stock. The proceeds received by the defendants for the shares that were sold were significantly inflated as a direct result of the inaccurate financial information that Legato reported to the public.
58. But for the fraud at Legato, in which Malmstedt and Huetteman played key roles, the Company would have reported accurate financial information to the public, and the defendants would not have received inflated proceeds for the shares that they sold during this period.
and Rule 10b-5 by all Defendants.
59. The Commission realleges and incorporates by reference Paragraphs 1 through 58 above.
(c) engaged in acts, practices, or courses of business which operated or would operate as a fraud or deceit upon other persons, including purchasers and sellers of securities.
61. Malmstedt and Huetteman violated and, unless restrained and enjoined, will continue to violate Section 10(b) of the Exchange Act [15 U.S.C. § 78j(b)] and Rule 10b-5 [17 C.F.R. § 240.10b-5].
of the Exchange Act and Rule 10b-5 by all Defendants.
62. The Commission realleges and incorporates by reference Paragraphs 1 through 58 above.
64. Malmstedt and Huetteman knowingly provided substantial assistance to Legato's violations of Section 10(b) of the Exchange Act [15 U.S.C. § 78j(b)] and Rule 10b-5 [17 C.F.R. § 240.10b-5].
65. Malmstedt and Huetteman aided and abetted, and unless enjoined will continue to violate and to aid and abet, violations of Section 10(b) of the Exchange Act [15 U.S.C. § 78j(b)] and Rule 10b-5 [17 C.F.R. § 240.10b-5].
66. The Commission realleges and incorporates by reference Paragraphs 1 through 58 above.
67. Malmstedt and Huetteman knowingly circumvented Legato's system of internal accounting controls and knowingly falsified or caused to be falsified Legato's books, records and accounts within the meaning of Section 13(b)(2)(A) of the Exchange Act [15 U.S.C. §78m(b)(2)(A)].
68. Malmstedt and Huetteman violated and, unless restrained and enjoined, will continue to violate Section 13(b)(5) of the Exchange Act [15 U.S.C. 78m(b)(5)] and Rule 13b2-1 [17 C.F.R. § 240.13b2-1].
69. The Commission realleges and incorporates by reference Paragraphs 1 through 58 above.
70. Legato filed with the Commission quarterly reports on Form 10-Q for the quarters ended June 30, 1999 and September 30, 1999 that contained untrue statements of material fact and omitted to state material information required to be stated therein or necessary in order to make the required statements made, in the light of the circumstances under which they were made, not misleading, in violation of Section 13(a) of the Exchange Act [15 U.S.C. §78m(a)] and Rules 12b-20 and 13a-13 thereunder [17 C.F.R. §§240.12b-20 and 240.13a-13].
71. Malmstedt and Huetteman knowingly provided substantial assistance to Legato's violation of Section 13(a) of the Exchange Act [15 U.S.C. §78m(a)] and Rules 12b-20 and 13a-13 thereunder [17 C.F.R. §§240.12b-20 and 240.13a-13].
72. Malmstedt and Huetteman aided and abetted, and unless enjoined will continue to aid and abet, violations of Section 13(a) of the Exchange Act [15 U.S.C. §78m(a)] and Rules 12b-20 and 13a-13 thereunder [17 C.F.R. §§240.12b-20 and 240.13a-13].
73. The Commission realleges and incorporates by reference Paragraphs 1 through 58 above.
74. Legato failed to make and keep books, records, and accounts which, in reasonable detail, accurately and fairly reflected the transactions and dispositions of the assets of the company, in violation of Section 13(b)(2)(A) of the Exchange Act [15 U.S.C. §78m(b)(2)(A)].
75. Malmstedt and Huetteman knowingly provided substantial assistance to Legato's violation of Section 13(b)(2)(A) of the Exchange Act [15 U.S.C. §78m(b)(2)(A)].
76. Malmstedt and Huetteman aided and abetted, and unless enjoined will continue to aid and abet, violations of Section 13(b)(2)(A) of the Exchange Act [15 U.S.C. §78m(b)(2)(A)].
Permanently enjoin defendants Malmstedt and Huetteman from violating, directly or indirectly, Sections 10(b), 13(a) and 13(b)(2)(A) of the Exchange Act and Rules 10b-5, 12b-20, 13a-13 and 13b2-1 thereunder.
Order defendants Malmstedt and Huetteman to disgorge all wrongfully obtained proceeds from the sale of Legato common stock, including prejudgment interest.
Order defendants Malmstedt and Huetteman to pay civil penalties pursuant to Section 21A of the Exchange Act [15 U.S.C. § 78u-1].
Grant such other and further relief as this Court may determine to be just and necessary.
In accordance with Rule 38(b) of the Federal Rules of Civil Procedure and Local Rule 3-6(a), Plaintiff Securities and Exchange Commission hereby demands a trial by jury of its claims against defendants.

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