Source: https://www.sec.gov/litigation/complaints/comp17718.htm
Timestamp: 2019-04-19 12:48:09+00:00

Document:
From at least March 2001 until July 2002, HPL Technologies, Inc. ("HPL" or the "Company"), a Silicon Valley software manufacturer, reported false financial results to its shareholders, the Commission and the public. The false financial reports were the direct result of fraud perpetrated by Yervant David Lepejian ("Lepejian"), HPL's former Chairman, Chief Executive Officer ("CEO") and President.
In order to bolster HPL's financial picture for the Company's July 2001 initial public offering of stock to investors ("IPO"), Lepejian began documenting non-existent sales. Following the IPO, Lepejian created the illusion of a rapidly growing company by repeatedly fabricating sales. On numerous occasions, Lepejian forged customer purchase orders and related sales documents, ultimately creating over $28 million in fictitious sales. As a result of Lepejian's fraud, about 80% of the revenue reported to the public by HPL for fiscal 2002 did not exist.
In an effort to conceal his fraud and mislead HPL's finance personnel and auditors, Lepejian created evidence purporting to show that the sales were legitimate. Among other things, Lepejian altered bank records to make it appear that customers had paid for the products they had supposedly purchased. Lepejian also forged responses to letters sent by the Company's auditors to HPL customers confirming the purchases, at one point arranging a conference call between the auditors and a friend posing as an HPL customer.
Lepejian's fraud led HPL to overstate its reported revenue in Commission filings and press releases for five consecutive quarters. The quarterly revenue overstatements ranged from 57% to 1067%, with the Company overstating its annual revenue for the fiscal year ended March 31, 2002, by 328%.
The Commission seeks a court order enjoining Lepejian from future violations of the federal securities laws; prohibiting him from serving as an officer or director of any publicly traded company; compelling him to disgorge all benefits he received as a result of his fraud; and imposing civil monetary penalties.
The Commission brings this action pursuant to Section 20(b) of the Securities Act of 1933 ("Securities Act") [15 U.S.C. § 77t(b)] and Sections 21(d) and 21(e) of the Securities Exchange Act of 1934 ("Exchange Act") [U.S.C. §§ 78u(d) and 78u(e)]. This Court has jurisdiction over this action pursuant to Section 22(a) of the Securities Act [15 U.S.C. § 77v(a)] and Sections 21(e) and 27 of the Exchange Act [15 U.S.C. §§ 78u(e) and 78aa].
Lepejian 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.
This district is an appropriate venue for this action under Section 22(a) of the Securities Act [15 U.S.C. § 77v(a)] and 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.
Assignment to the San Jose Division is appropriate pursuant to Civil Local Rule 3-2(c) because a substantial part of the events that give rise to the claims herein occurred in Santa Clara County, California.
Yervant David Lepejian, age 41, was a resident of Palo Alto, California during the relevant period, and currently resides in San Jose, California. Lepejian co-founded HPL in 1987 and served as its President, CEO and Chairman. On July 19, 2002, HPL announced that it had terminated Lepejian.
HPL Technologies, Inc., is a Delaware corporation headquartered in San Jose, California. The Company designs software for use in the semiconductor and flat screen industries. The Company conducted an IPO on July 31, 2001, grossing $75.9 million in proceeds from investors. The Company's common stock is registered with the Commission pursuant to Section 12(g) of the Exchange Act and was quoted on the Nasdaq National Market until Nasdaq halted trading on July 19, 2002.
I. As A Public Company, HPL Was Required To Accurately Report Its Financial Condition and Results To The Commission And To Investors.
In order for a company to sell its securities to members of the public, it must first file a registration statement with the Commission accurately disclosing the company's financial condition and results. Similarly, following the public offering, the company must file quarterly and annual reports with the Commission disclosing current financial information. The federal securities laws further require a publicly-held company to, among other things, maintain financial records that accurately reflect its transactions and assets, and to maintain a system of internal accounting controls sufficient to provide reasonable assurances that the company's financial statements are prepared in conformity with generally accepted accounting principles (also known as "GAAP"). The laws require the company's registration statement and annual reports to include financial statements that have been certified by the company's outside auditors.
II. Between March 2001 And March 2002, Lepejian Fabricated $28 Million in Non-Existent Sales.
A. Lepejian's Fraud Began in Anticipation of the Company's IPO.
In early 2001, HPL was in the process of preparing for its initial offering of securities to the investing public. In or about March 2001, in order to meet financial forecasts provided to the underwriters of the IPO, Lepejian fabricated two purchase orders for $320,000 and $1.5 million. These fake orders were supposedly issued by Canon Sales Company ("Canon"), one of HPL's largest customers and HPL's exclusive distributor in Japan.
Both here and in subsequent quarters, Lepejian would create a purported Canon purchase order on his office computer, print the order, and paste signatures from real Canon orders onto the document. Lepejian would then program an HPL fax machine to identify Canon as the sender and transmit the fake order to another HPL fax machine. Lepejian would also draft an electronic mail message purporting to confirm that the software had been shipped to the customer. Lepejian provided the fake purchase orders and shipping documents to HPL's finance personnel for use in preparing HPL's financial statements for the quarter and fiscal year ended March 31, 2001.
In July 2001, HPL filed with the Commission its final registration statement, as well as a copy of the Company's prospectus that had been delivered to potential investors. Lepejian signed both the registration statement and prospectus. These documents reported $4.4 million in revenue for the quarter ended March 31, 2001, and $13.4 million in revenue for the fiscal year. As a result of the fake sales created by Lepejian, these results were overstated by 57% and 14%, respectively.
B. In the First Quarter of Fiscal 2002, Lepejian Created $4.4 Million in False Revenue.
In or about June 2001, the last month of HPL's first quarter for fiscal 2002, Lepejian created four fake purchase orders, of which three were supposedly issued by Canon and one by ST Microelectronics, another HPL customer. The fake purchase orders totaled over $4.4 million.
Lepejian pasted the signatures of Canon and ST Microelectronics employees onto the fake purchase orders, and generated fake shipping documents to create the illusion that HPL had delivered the software to the customers. Lepejian provided the fake purchase orders and shipping documents to HPL's finance personnel for use in preparing HPL's financial statements for the quarter ended June 30, 2001.
On August 27, 2001, HPL issued a press release, which Lepejian edited and approved. The press release reported financial results materially inflated by Lepejian's phony sales. The press release quoted Lepejian as saying, "HPL continues to generate strong revenue growth while improving its track record of maintaining a high margin operating model and profitability." Lepejian's statement was false because HPL's "strong revenue growth" was an illusion created by the fake sales.
On or about September 13, 2001, HPL filed with the Commission its quarterly report (known as a "Form 10-Q") for the quarter ended June 30, 2001. Lepejian signed the Form 10-Q. The Form 10-Q included financial statements reporting $5.6 million in revenue for the quarter, a sum overstated by 367% as a result of Lepejian's fraudulent conduct.
C. In the Second Quarter of Fiscal 2002, Lepejian Created $6.4 Million in False Revenue.
In or about September 2001, the last month of HPL's second quarter for fiscal 2002, Lepejian created eight fake purchase orders, of which seven were supposedly issued by Canon and one by ST Microelectronics. The fake purchase orders resulted in false revenue of $6.4 million.
Lepejian pasted the signatures of Canon and ST Microelectronics employees onto the fake purchase orders, and generated fake shipping documents to create the illusion that HPL had delivered the software to the customers. Lepejian provided the fake purchase orders and shipping documents to HPL's finance personnel for use in preparing HPL's financial statements for the quarter ended September 30, 2001.
On or about October 2, 2001, HPL issued a press release, which Lepejian edited and approved. The press release quoted Lepejian as stating that "we are pleased to announce that we expect to exceed the consensus revenue and earnings estimates for the second quarter and continue to improve upon our account receivables." Lepejian's statement was false because without his fake sales, HPL would not have attained (much less exceeded) the financial expectations of securities analysts.
On or about October 24, 2001, HPL issued a press release, which Lepejian edited and approved. The press release reported revenue for the quarter ended September 30, 2002, materially inflated by Lepejian's fraudulent sales. In addition, Lepejian was quoted in the press release as saying, "we delivered yet another outstanding quarter, [sic] this marks the Company's 6th consecutive profitable quarter." Lepejian's statement was false because without his fake sales, HPL would not have enjoyed a profitable quarter.
On or about November 14, 2001, HPL filed with the Commission its Form 10-Q for the quarter ended September 30, 2001. Lepejian signed the Form 10-Q. The Form 10-Q included financial statements reporting $7 million in revenue for the quarter, a sum overstated by 1067% as a result of Lepejian's fraudulent conduct.
D. In the Third Quarter of Fiscal 2002, Lepejian Fraudulently Inflated HPL's Revenue By Nearly $8 Million.
In November and December 2001, Lepejian created six fake purchase orders supposedly issued by Canon. The fake purchase orders resulted in false revenue of $6.6 million for the third quarter of HPL's 2002 fiscal year.
Lepejian pasted the signatures of Canon employees onto the fake purchase orders, and generated fake shipping documents to create the illusion that HPL had delivered the software to Canon. Lepejian provided the fake purchase orders and shipping documents to HPL's finance personnel for use in preparing HPL's financial statements for the quarter ended December 31, 2001.
In addition, Lepejian caused HPL's finance personnel to fraudulently recognize over $1 million in additional revenue. HPL had previously sold certain demonstration software to Canon. HPL's auditors had determined that revenue on sales of demonstration products should be recognized on a gradual basis over several years, but accelerated in the event the software was resold to an end-user customer. In December 2001, Lepejian drafted a phony letter from Canon representing that Canon had resold the software, when, in fact, it had not. Based on this letter, which Lepejian provided to HPL finance personnel, the Company improperly reported an additional $1 million in third quarter revenue.
On or about January 29, 2002, HPL issued a press release, which Lepejian edited and approved. The press release reported financial results materially inflated by Lepejian's fraud. The press release quoted Lepejian as stating, "HPL continues to gain momentum, as we posted another record quarter and have surpassed the $10 million quarterly revenue level." Lepejian's statement was false because without his fake sales and improperly accelerated revenue, HPL would not have posted another record quarter or surpassed the $10 million mark.
On or about February 14, 2002, HPL filed with the Commission its Form 10-Q for the quarter ended December 31, 2001. Lepejian signed the Form 10-Q. The Form 10-Q included financial statements reporting $10.9 million in revenue for the quarter, a sum overstated by 241% as a result of Lepejian's fraudulent conduct.
In or about March 2002, the last month of HPL's 2002 fiscal year, Lepejian created 13 fake purchase orders supposedly issued by Canon. The fake purchase orders resulted in false revenue of $11.3 million for the fourth quarter.
Lepejian pasted the signatures of Canon employees onto the fake purchase orders, and generated fake shipping documents to create the illusion that HPL had delivered the software to Canon. Lepejian provided the fake purchase orders and shipping documents to HPL's finance personnel for use in preparing HPL's financial statements for fiscal year ended March 31, 2002.
On or about May 9, 2002, HPL issued a press release, which Lepejian edited and approved. The press release reported financial results materially inflated by Lepejian's fraud. In addition, the press release quoted Lepejian as stating, "we are pleased to report fourth quarter results that reflect our track record of profitable growth � we believe that our record revenue and earnings are a direct result of the ongoing need for the solutions we provide." Lepejian's statements were false because HPL's strong financial results were largely the result of the fictitious sales created by Lepejian.
On or about June 24, 2002, HPL filed with the Commission its Form 10-K for the fiscal year ended March 31, 2002. Lepejian signed the Form 10-K. The Form 10-K reported $13.7 million in revenue for the quarter ended March 31, 2002, and $37.2 million in revenue for the fiscal year. As a result of Lepejian's fraudulent conduct, these results were overstated by 478% and 328%, respectively.
III. Lepejian Fraudulently Concealed the Fake Sales from HPL's Finance Personnel and Auditors.
Lepejian used a variety of means to conceal his fraud from HPL's internal finance personnel and outside auditors. Among other things, Lepejian funneled HPL's own funds, as well as money from his personal accounts, into the Company's bank account in the guise of customer payments. He also doctored bank records to make it appear that Canon had paid for its supposed purchases, and forged responses to audit confirmation letters sent to Canon and ST Microelectronics by HPL's auditors.
A. Lepejian Disguised $3.2 Million of HPL's Own Money as Supposed Customer Payments.
In or about September 2001, Lepejian worked out an elaborate mechanism to use HPL's own funds to make it appear that Canon was paying for the orders Lepejian had previously fabricated.
Lepejian arranged for Canon to place a $3.2 million purchase order with HPL, on the understanding that Canon would then resell the software with a mark-up to HPL's new Japanese subsidiary, HPL Japan. At the same time, Lepejian had $5 million wire transferred from HPL to HPL Japan's bank account, supposedly as start-up costs for the new subsidiary. Lepejian then used approximately $4 million of these funds to have HPL Japan purchase the software from Canon. Canon, in turn, paid $3.2 million to HPL for the software it was reselling to HPL Japan.
Lepejian concealed the entire circular transaction from the Company. Lepejian instead told HPL's finance personnel that the $3.2 million received from Canon was payment for four earlier Canon purchases, all of which had been fabricated by Lepejian over the prior three fiscal quarters.
To avoid detection, Lepejian scanned the bank account statements provided to him by HPL Japan into his computer, using a graphics program to delete the payment from HPL Japan to Canon and make it appear that HPL Japan's bank account still held the original $5 million in start-up funding. Lepejian similarly altered quarterly financial statements provided to him by HPL Japan. Lepejian provided the doctored records to HPL's finance personnel and outside auditors for use in preparing the Company's consolidated financial statements.
B. Lepejian Funneled $4.3 Million of Borrowed Funds Into HPL as Purported Customer Payments.
In late December 2001, Lepejian borrowed $2 million from his brokerage firm, secured by his personal HPL stock holdings. Lepejian wired the $2 million into a friend's bank account and, from there, into HPL's bank account. Lepejian subsequently doctored HPL's bank statements to conceal the source of the funds. Lepejian provided the altered records to HPL's finance personnel with an explanation that the $2 million was payment from Canon for four prior purchases fabricated by Lepejian.
In late March 2002, Lepejian borrowed approximately $1 million from a friend, ostensibly for personal use. Instead, Lepejian deposited the money into HPL's bank account. Lepejian falsely represented to HPL's finance personnel that the money had been paid by ST Microelectronics for its first quarter purchase.
In June 2002, Lepejian borrowed $1.5 million from his brokerage firm, again secured by his personal HPL stock holdings. He withdrew $1.3 million and deposited the funds into HPL's bank account. Lepejian falsely represented to HPL's finance personnel that the money had been paid by ST Microelectronics for its second quarter purchase.
C. Lepejian Altered Bank Records To Document $9.2 Million in Non-Existent Customer Payments.
In April 2002, Lepejian again used his computer to doctor bank statements provided to him by HPL Japan. Lepejian added an entry purporting to show a wire transfer of $9.2 million from Canon to HPL Japan. Lepejian similarly altered quarterly financial statements provided to him by HPL Japan. Lepejian provided the altered documents to HPL's finance personnel, directing them to apply the supposed $9.2 million payment to eight outstanding Canon invoices that were in fact phony sales created by Lepejian during the first three quarters of fiscal 2002.
Lepejian also provided the altered documents to HPL's finance personnel and outside auditors for use in preparing consolidated financial statements for the Form 10-K.
D. Lepejian Forged Responses From HPL's Customers To The Company's Auditors Falsely Confirming The Sales.
HPL retained an outside audit firm to review the Company's quarterly financial statements for the first three quarters of the 2002 fiscal year. The audit firm also audited HPL's financial statements for the fiscal year ended March 31, 2002. As part of its procedures to verify the accuracy of HPL's financial statements, the audit firm at times sent confirmation letters to selected HPL customers asking them to verify their purchases and receivables owed to HPL.
Lepejian provided HPL's auditors with phony names and addresses for Canon and ST Microelectronics. As a result, these customers did not receive the confirmation letters. Instead, Lepejian repeatedly forged confirmation responses from these customers purporting to verify the sales that Lepejian had in fact fabricated, and used HPL's fax machine (programmed to identify Canon or ST Microelectronics as the sender) to transmit the letters to the auditors. On at least one occasion, while meeting with Canon in Japan, Lepejian used Canon's own mail facilities to mail the auditors a confirmation letter he had forged.
In addition, when HPL's auditors sought to confirm HPL Japan's bank balance in connection with the year-end audit, Lepejian provided false contact information. As a result, the bank never received the confirmation request. Instead, Lepejian drafted a response falsely verifying the bank balance and provided the fake letter to the auditors. In reality, HPL's bank balance was around $13 million lower than what was reflected in the altered bank statements as a result of Lepejian's fraudulent conduct described above.
Lepejian's fraud nearly unraveled when a copy of the 2002 fiscal year-end confirmation letter sent by HPL's auditors to the fake Canon address provided by Lepejian was nonetheless delivered to Canon's real office. Canon returned a response to HPL striking out all but $621,000 of the $11.8 million in purported fourth quarter Canon invoices listed in the letter. Canon also denied that it had made the $2 million and $9.2 million payments discussed in paragraphs 39 and 42 above.
Lepejian managed to convince HPL's chief financial officer and auditors that the letter had been sent in error. Lepejian forged a letter ostensibly from Canon agreeing to all $11.8 million in receivables and explaining that the initial response had been sent by a Canon division unfamiliar with the HPL account.
Lepejian also arranged a conference call between HPL's auditors and a friend posing as a Canon official in which the impostor confirmed that the purchases were real and that Canon had made the payments.
HPL, with the auditors' approval, ultimately determined to report $11.8 million in fourth quarter Canon sales. Accordingly, HPL's Form 10-K filed with the Commission and its press release disseminated to the public both contained the fake Canon sales in their financial disclosures.
IV. Lepejian Altered Valid Purchase Orders To Remove Contingencies.
In addition to creating wholly fictitious sales, Lepejian doctored real purchase orders to boost HPL's reported revenue. On several occasions, both before and after the Company's IPO, Lepejian deleted from customer purchase orders material terms that would have delayed or prevented HPL from recognizing revenue on the sale. For example, Lepejian used redacting tape to hide contractual provisions allowing the customer to return the software if certain performance tests were not satisfied. Lepejian then photocopied the altered purchase orders and provided copies to HPL's finance personnel, causing them to recognize revenue that should not have been recognized until a later quarter, if at all. Lepejian's fraudulent conduct caused the Company's reported financial results to have been further inflated during the relevant period.
V. HPL Discovered Lepejian's Fraud In July 2002.
On or about July 15, 2002, following HPL's filing of its Form 10-K for the fiscal year ended March 31, 2002, lawyers for Canon contacted HPL's auditors. Canon's lawyers reported that the Form 10-K improperly reported sales to Canon that had never occurred, and asked why HPL and its auditors had failed to respond to Canon's confirmation letter (referenced in paragraph 47 above) denying the existence of these sales.
HPL's auditors relayed Canon's communication to the Company's board of directors. On July 19, 2002, HPL issued a press release announcing that it had initiated an investigation into financial and accounting irregularities and had terminated Lepejian. That same day, the Nasdaq stock market halted trading in HPL common stock.
The Commission realleges and incorporates by reference Paragraphs 1 through 53 above.
(c) engaged in transactions, practices, or courses of business, which operated or would operate as a fraud or deceit upon purchasers of securities.
Lepejian has violated and, unless restrained and enjoined, will continue to violate Section 17(a) of the Securities Act [15 U.S.C. § 77q(a)].
Lepejian has 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 under the Exchange Act [17 C.F.R. §240.10b-5].
HPL filed with the Commission an annual report on Form 10-K for the fiscal year ended March 31, 2002, 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-1 under the Exchange Act [17 C.F.R. §§ 240.12b-20 and 240.13a-1].
HPL filed with the Commission quarterly reports on Form 10-Q for the quarters ended June 30, 2001, September 30, 2001, and December 31, 2001, 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 under the Exchange Act [17 C.F.R. §§ 240.12b-20 and 240.13a-13].
Lepejian 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, 13a-1 and 13a-13 under the Exchange Act [17 C.F.R. §§ 240.12b-20 and 240.13a-13].
HPL, by engaging in the conduct described above, 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)].
Lepejian 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)].
HPL, by engaging in the conduct described above, failed to devise and maintain a system of internal accounting controls sufficient to provide reasonable reassurances that: (a) transactions are executed in accordance with management's general or specific authorization, (b) transactions are recorded as necessary (i) to permit preparation of financial statements in conformity with generally accepted accounting principles or any other criteria applicable to such statements, and (ii) to maintain accountability for assets, (c) access to assets is permitted only in accordance with management's general or specific authorization; and (d) the recorded accountability for assets is compared with the existing assets at reasonable intervals and appropriate action is taken with respect to any differences.
Lepejian aided and abetted, and unless restrained and enjoined, will continue to aid and abet, violations of Section 13(b)(2)(B) of the Exchange Act [15 U.S.C. § 78m(b)(2)(B)].
By engaging in the conduct described above, Lepejian knowingly circumvented or knowingly failed to implement HPL's system of internal accounting controls or knowingly falsified HPL's books, records and accounts in violation of Section 13(b)(5) of the Exchange Act [15 U.S.C. § 78m(b)(5)].
Lepejian has 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)].
By engaging in the conduct described above, Lepejian falsified or caused to be falsified HPL's books, records and accounts in violation of Rule 13b2-1 under the Exchange Act [17 C.F.R. § 240.13b2-1].
Lepejian has violated and, unless restrained and enjoined, will continue to violate Rule 13b2-1 under the Exchange Act [17 C.F.R. § 240.13b2-1].
By engaging in the conduct described above, and in connection with an examination of the financial statements of HPL and the preparation and filing of statements and reports with the Commission, Lepejian, directly or indirectly, made or caused to be made materially false or misleading statements to accountants and omitted to state, or caused another person to omit to state to accountants, material facts necessary in order to make statements made to the accountants, in light of the circumstances under which such statements were made, not misleading.
Lepejian has violated and, unless restrained and enjoined, will continue to violate Rule 13b2-2 under the Exchange Act [17 C.F.R. §240.13b2-2].
Permanently enjoin Lepejian from violating or aiding and abetting violations of Section 17(a) of the Securities Act, Sections 10(b), 13(a), 13(b)(2)(A), 13(b)(2)(B) and 13(b)(5) of the Exchange Act and Rules 10b-5, 12b-20, 13a-1, 13a-13, 13b2-1 and 13b2-2 under the Exchange Act.
Permanently bar Lepejian from serving as an officer or director of any entity having a class of securities registered with the Commission pursuant to Section 12 of the Exchange Act [15 U.S.C. §78l] or that is required to file reports pursuant to Section 15(d) of the Exchange Act [15 U.S.C. §78o(d)].
Order Lepejian to disgorge any wrongfully obtained benefits, including prejudgment interest.
Order Lepejian to pay civil penalties pursuant to Section 20(d)(2) of the Securities Act [15 U.S.C. § 77t(d)(2)] and Section 21(d)(3) of the Exchange Act [15 U.S.C. § 78u(d)(3)].

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