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Posted on Tue, Sep. 10, 2002
Ex-chief charged with fraud
80 PERCENT OF HPL'S SALES FALSE, ACCUSERS SAY
By Mary Anne Ostrom
Mercury News
Federal authorities filed criminal and civil fraud charges Tuesday against the former chief executive of HPL Technologies, alleging that he faked company sales by forging customer signatures, electronically altering bank statements and, in one case, having a friend pose as a satisfied customer.
In court documents and interviews, federal officials said that for more than a year David Lepejian went to extreme lengths to pull off a massive fraud, fabricating 80 percent of the software company's annual sales -- far more than HPL executives first made public in mid-July.
Authorities called HPL co-founder Lepejian, 41, a desperate man who ``created the illusion of a successful company almost out of whole cloth.''
Lepejian, the authorities alleged, orchestrated a brazen, yearlong coverup by forging purchase orders, shipping documents and letters to auditors. The scheme to make HPL seem like a fast-growing company started several months before it held a successful initial public offering last summer. In the quarter of the IPO, 91 percent of the company's sales were bogus, authorities charged.
Before he was caught and fired by HPL in mid-July, Lepejian created at least $28 million in non-existent sales, leading HPL to overstate revenues for fiscal 2002, which ended in March, by 328 percent.
``This case goes far beyond the sort of cooking the books that has become all too familiar to today's investors,'' Helane L. Morrison, administrator for the SEC's San Francisco District Office. The SEC is continuing its investigation.
Prison and fine
The U.S. Attorney's Office in San Francisco charged Lepejian with one criminal count of wire fraud that carries a maximum five years in prison and a fine of $250,000 plus restitution. Also on Tuesday, Lepejian settled eight civil charges filed by the SEC, neither admitting nor denying fault. The SEC is seeking a court order that Lepejian be fined and return profits gained by actions that artificially inflated the company's stock price. He also agreed to never serve again as an officer or director of a public company.
Lepejian attorney Michael Tubach said Tuesday that his client had spent 15 years building HPL and called his activities ``terribly misguided efforts to make HPL succeed rather than a desire for personal profit.''
Underscoring Lepejian's desperation after successfully convincing investors, auditors and underwriters that HPL was a profitable business, Lepejian borrowed $3.2 million from his own brokerage accounts, secured by his personal HPL stock holdings, and funneled the money to HPL accounts in an attempt to cover for fake sales, authorities alleged.
SEC spokesman Robert Mitchell said coverup attempts by Lepejian were the act of a man ``desperate enough to even borrow money from his own brokerage accounts.''
Legal observers said the scope of the fraud confounded them. ``This is fraud with a capital `F,' '' said Lee Altschuler, former branch chief for the U.S. Attorney in San Jose.
As far as the chances of success for the restitution claims of authorities and investors who have filed several dozen shareholder lawsuits, Altschuler predicted they will be ``lucky to get pennies on the dollar.''
Most of Lepejian's assets are tied up in HPL stock, Tubach said. The shares have plummeted 70 percent after the fraud was revealed and trading has been halted since mid-July. Tubach suggested there was little to no profit from Lepejian's activities for him to return. He said Lepejian has sold none of his own stock, although his wife, an HPL employee, has sold a small amount and the two currently own 35 percent of the company. Lepejian also is co-owner of a Palo Alto home, but he no longer lives there, his attorney said.
Executives of HPL, which makes software for semiconductor makers, refused to comment.
Federal authorities said Tuesday that they have seldom seen a scheme so meticulously carried out and involving such a significant part of one company's revenue.
``His mindset is something we don't fully understand,'' said SEC staff attorney Kashya Shei.
Here's how the scheme allegedly worked:
In advance of the July 2001 initial public offering, Lepejian fabricated six purchase orders totaling $6.2 million, in part to justify financial forecasts he had provided the company's underwriters.
By July 2002, Lepejian had forged a total of 33 orders worth more than $28 million, often pasting signatures of purported customers onto fake purchase orders.
In an attempt to conceal the fraud, Lepejian scanned in bank statements, which he then electronically altered to make it appear customers had paid for products they never ordered.
Funds funneled
Lepejian also funneled $3.2 million in loans from UBS Paine Webber secured by his HPL stock, HPL's own funds, and $1 million from an unidentified friend to company accounts to appear as customer payments.
Lepejian faxed phony purchase confirmations to PricewaterhouseCoopers, HPL's outside auditors. He even reprogrammed HPL fax machines to make it appear the confirmations came from customers. In one case, he set up a conference call between the auditors and a friend who, posing as a customer, confirmed the purchases.
He also doctored real purchase orders, using redacting tape to hide certain unfavorable terms.
The fraud scheme nearly unraveled in early 2002, when Canon Sales, HPL's Japanese distributor, refused to confirm all but $621,000 of $11.8 million in supposed purchases. Lepejian convinced HPL's chief financial officer and auditors with a forged letter appearing to come from Canon that the initial response had been sent by a Canon employee unfamiliar with the HPL account.
But in mid-July, after HPL filed its annual report, lawyers for Canon Sales contacted the company's auditors, PwC, to report the sales had never occurred. They also wanted to know why the auditors had failed to respond to their original letter denying the existence of the sales.
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