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Department of Justice Logo 

U.S. Department of Justice

United States Attorney
Northern District of California

 

11th Floor, Federal Building
450 Golden Gate Avenue, Box 36055
San Francisco, California  94102

FOR IMMEDIATE RELEASE
 

 

Tel: (415) 436-7200
Fax: (415) 436-7234

 

September 29, 2004

The United States Attorney's Office for the Northern District of California announced that the former Chief Operating Officer of Liberate Technologies, Inc., a software company involved in the high-tech television industry, was indicted late yesterday on securities fraud charges based on allegations that he illegally manipulated the revenue of Liberate.  The indictment alleges that investors lost more than $40 million as a result of the defendant's manipulations of Liberate's revenues. 

Donald Fitzpatrick, age 48, was indicted yesterday afternoon by a San Francisco grand jury in a four-count indictment.  He is charged with conspiracy to commit securities fraud, securities fraud, making false statements to auditors, and falsifying the books and records of Liberate.  Mr. Fitizpatrick, a British citizen, left the United States after he was terminated by Liberate for cause and is believed to be in Australia. 

In a related action, the San Francisco Office of the Securities and Exchange Commission announced today that it had filed a civil complaint alleging securities fraud against Mr. Fitzpatrick.  It also announced a settlement with one other individual who was a sales vice president.

Liberate's principal offices are in San Carlos, California.  Previously known as Network Computers, Inc., the company became Liberate in May 1999.  Among Liberate's major investors were Lucent Technologies and Cisco Systems, Inc., which invested $12.5 million and $100 million respectively in private placements.  The company manufactured and sold software and services for interactive television, including enhanced and interactive television, on-demand video and voice and high-speed data communications.

According to the Indictment, Mr. Fitzpatrick was the head of Worldwide Sales for Liberate and the Chief Operating Officer.  The indictment focuses on two transactions.  In the first, with a British television company called Telewest Broadband, Mr. Fitzpatrick is accused of entering into an illegal side agreement to grant Telewest concessions, a promise that was made in order to induce Telewest to sign an extension of a previously executed licensing agreement.  The side agreement was not disclosed to auditors, the investing public or the Finance and Legal Departments of Liberate.

The second transaction described in the Indictment involved a company called Global Business Services/Global Interactive Technologies A6 ("GBS/GiT") based in Europe and the Middle East.  It is alleged that, in order to convince GBS/GiT to pay money owed to Liberate, Mr. Fitzpatrick authorized a subordinate to execute side agreements that obligated Liberate to hire GBS/GiT to do consulting services for Liberate.  Had the side agreements been disclosed, they would have prevented Liberate from recognizing some of the GBS/GiT licensing revenue on its books and records.  One of the side agreements–a purchase order–was hand written by the subordinate so that it would not appear in Liberate's Oracle database where the Legal and Finance Departments might have been able to discover it.  According to the indictment, the defendant instructed his co-conspirators to keep the side agreements secret from the Legal and Finance Departments and encouraged them to "stick together."

Mr. Fitzpatrick is also have alleged to have signed false letters to Liberate's outside auditor, PriceWaterhouseCoopers, stating that he had told them about all aspects of the transactions.  In addition, he lied to investors on a conference call, lied to lawyers conducting an internal investigation of the company's finances, and lied to the Chief Financial Officer in a series of emails. 

These actions came about primarily in August and September of 2002 as the company was failing to meet its projected revenues by a wide margin.  After Liberate announced on October 15, 2002 that its previous earnings statements were suspect, its stock fell dramatically and Nasdaq informed the company of an intent to de-list it.  Approximately a year later, in September 2003, Liberate formally restated its earnings.  Liberate is no longer a publicly traded company. 

U.S. Attorney Kevin Ryan said, "Those who commit accounting fraud through manipulation of company books and public records undermine investors' confidence in our financial markets.  Directors and officers of public companies should now know that the U.S. Attorney's Office and the Department of Justice will work cooperatively with the FBI and the SEC to bring to justice those who commit securities fraud."

FBI Special Agent in Charge Mark Mershon said, "This indictment represents the FBI's continuing commitment to aggressively investigate fraud by corporate executives.  Mr. Fitzpatrick is charged with abusing his position and defrauding the investing public.  The FBI will continue to work closely with the U.S. Attorney's Office and the Securities and Exchange Commission to ensure that individuals who commit corporate fraud are held accountable regardless of where they reside."

This case was investigated by agents of the San Francisco division of the FBI.  The U.S. Attorney's Office and the FBI also worked closely with the San Francisco District Office of the SEC, which also conducted an investigation. This case was prosecuted by Assistant U.S. Attorney Matthew J. Jacobs.

A copy of this press release may be found on the U.S. Attorney's Office's website at www.usdoj.gov/usao/can.  Related court documents and information may be found on the District Court website at www.cand.uscourts.gov or on http://pacer.cand.uscourts/gov.

All press inquiries to the U.S. Attorney's Office should be directed to Luke McCauley at (415) 436-6757.