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October 15, 2004
FORMER CYLINK CFO PLEADS GUILTY TO CONSPIRACY TO FALSIFY ACCOUNTING RECORDS AND SECURITIES FRAUD
The United States Attorney's Office for the Northern District of California announced that John Howard Daws, former Chief Financial Officer of Santa Clara-based Cylink Corporation, pled guilty yesterday to charges of conspiracy to falsify accounting records and securities fraud. Mr. Daws is the second defendant to plead guilty in federal court following an investigation into conduct at Cylink. Thomas Butler, Cylink's former Vice-President of Sales, pled guilty on February 9, 2004, to conspiring with Mr. Daws to falsify Cylink's accounting records. Cylink was forced to substantially restate its earnings for the fourth quarter of 1997 and the first and second quarters of 1998.
Mr. Daws, 60, of Walnut Creek, California, pled guilty before United States District Court Judge James Ware to a two-count criminal Information filed on August 23, 2004. 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.
Fraudulently Recorded $903,000 Transaction from Federal Data Corporation:
In pleading guilty, Mr. Daws admitted that he agreed with Cylink's then-Vice President of Sales 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 June 1998 purchase order from FDC included an "out letter" that permitted FDC to cancel the purchase if it did not receive by September 30, 1998, an order for the products from its end-user. Mr. Daws conceded that he knew, as a result of the terms in the "out letter," that the transaction could not be recorded as revenue for the second quarter because FDC had not made a firm commitment to purchase the product. Nonetheless, Mr. Daws admitted that he caused the FDC order to be booked and recorded as revenue and that he did so, in part, because the transaction allowed Cylink to meet its sales goal for that second quarter.
Fraudulently Recorded $3.7 Million Transaction from Data Processing Systems:
Mr. Daws admitted that he 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. Mr. Daws conceded that this transaction should not have been recorded under Generally Accepted Accounting Principles (GAAP) because Cylink had not yet received a required letter of credit from DPS guaranteeing payment for the order. In his plea agreement, Mr. Daws admitted that he intentionally and fraudulently hid from Cylink's outside auditors both that a letter of credit was required and that it had not been received.
Mr. Daws is scheduled to be sentenced on February 28, 2005, by Judge Ware. Mr. Daws faces a maximum penalty of five years in prison and a fine of $250,000 for conspiracy to falsify accounting records, and a maximum penalty of ten years in prison and a $250,000 fine for securities fraud. The actual sentence, however, will be dictated by the Federal Sentencing Guidelines, which take into account a number of factors, and will be imposed at the discretion of the Court. In the plea agreement, the parties agreed on the applicable guideline range and that the Court should sentence the defendant within that range.
The prosecution is the result of a two-year investigation by the Federal Bureau of Investigation and the U.S. Attorney's Office in cooperation with the Securities and Exchange Commission. David Callaway is the Assistant U.S. Attorney who prosecuted the case.
A copy of this press release and related court filings 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.psc.uscourts.gov/.
All press inquiries to the U.S. Attorney's Office should be directed to Luke Macaulay at (415) 436-6757 or by email at Luke.Macaulay3@usdoj.gov. |
