The United States Attorney's Office for the Northern District of California announced  that John Howard Daws, a former Chief Financial Officer of Santa Clara-based Cylink Corporation, was charged today with conspiracy to falsify accounting records and securities fraud.  Mr. Daws is the second defendant to be charged in federal court following an investigation into conduct at Cylink, which was forced substantially to restate its earnings substantially for the fourth quarter of 1997 and the first and second quarters of 1998. 

Mr. Daws was Cylink's Chief Financial Officer (CFO) from September 1995 to November 1998.  Cylink, a publicly traded corporation based in Santa Clara, California, developed and sold network security products. Cylink was acquired by another company in February 2003.

FDC Transaction Fraudulently Recorded as Revenue for 2Q98.  According to the Information, Mr. Daws conspired with Cylink's then-Vice President of Sales, Thomas Butler, to record as revenue for the second quarter of 1998 a $903,000 transaction between Cylink and Federal Data Corporation (FDC) that should not have been recorded.  The Information alleges that the June 1998 purchase order from FDC included an "out letter," signed by Mr. Butler, that permitted FDC to cancel the purchase if it did not receive an order for the products from its end-user by September 30, 1998.  (Mr. Butler has previously pled guilty to his role in the offense.)  According to the Information, Mr. Daws "well knew [that] this ‘out letter' meant that the FDC order, which remained contingent, could not be recorded as revenue for the second quarter" under Generally Accepted Accounting Principles (GAAP).  As CFO of Cylink, Mr. Daws caused the transaction to be recorded anyway.

DPS Transaction Fraudulently Recorded for 4Q97.  The information further alleges that Mr. Daws fraudulently recorded as revenue for the fourth quarter of 1997 a $3.7 million purchase order from Data Processing Systems (DPS), a small distributor based in the Middle East.  The Information states that, among other problems with this transaction that made revenue recognition improper under GAAP, Mr. Daws fraudulently concealed from Cylink's outside auditors the material fact that Cylink had not yet received a required letter of credit from DPS guaranteeing payment for the order. 

Mr. Daws is scheduled to be arraigned on the Information on October 14, 2004, before The Honorable Howard R. Lloyd, United States Magistrate Judge.  He faces a maximum penalty of five years in prison and a fine of $250,000  for the conspiracy count and a maximum of ten years in prison and a fine of $1 million for the securities fraud count.  The actual sentence, however, will be determined under the Federal Sentencing Guidelines, which take into account a number of factors, and will be imposed in the discretion of the Court.

The prosecution is the result of a two-year investigation by the Federal Bureau of Investigation along with the U.S. Attorney's Office, and in cooperation with the Securities and Exchange Commission.  David Callaway is the Assistant U.S. Attorney who is prosecuting the case.