Reza Mikailli, Gary F. Pado and Unify Corporation

Litigation Release No. 17522 / May 20, 2002

SECURITIES AND EXCHANGE COMMISSION v. REZA MIKAILLI, GARY F. PADO AND UNIFY CORPORATION, No. C022426 RS

SEC BRINGS FINANCIAL FRAUD CHARGES AGAINST FORMER EXECUTIVES OF UNIFY CORPORATION

The Securities and Exchange Commission today announced that it has filed a complaint in the United States District Court for the Northern District of California against two former executives of Unify Corporation, a software company now based in Sacramento, California, that manufactures and sells database management software. The Commission's complaint alleges fraud and other violations against former Unify CEO Gholamreza (Reza) Mikailli, 49, of Saratoga, Calif., and former CFO Gary L. Pado, 38, of Sacramento, Calif.

The complaint alleges that from May 1999 through May 2000, Mikailli and Pado caused Unify to recognize revenue fraudulently on transactions that they knew were subject to contingencies (including rights of return or cancellation), or involved barter transactions. Under generally accepted accounting principles (known as "GAAP"), it was improper for Unify to recognize revenue on contingent transactions so long as the contingencies existed and, thus, could nullify or impair the sale. Also under GAAP, it was improper for Unify to recognize revenue on barter transactions because Unify's revenue was contingent on Unify's performance of its obligation to the customer.

In several instances Mikailli and Pado engaged in "roundtripping," by causing Unify to provide funds its customers needed to buy Unify products, with no reasonable expectation that the customers would ever repay the funds. In some instances, Unify made an investment in another company, which then used most or all of the invested funds to purchase Unify product. In others, Unify contracted for services from other companies through so-called Funded Development Agreements. However, the companies provided no such services, and simply used funds from Unify to buy Unify product.

As a result of the fraud, Unify overstated its revenue over four fiscal quarters in amounts ranging from 61% to 150% per quarter. During the course of the fraud, Mikailli sold all of his shares of Unify stock and received gross proceeds of approximately $8.2 million. Mikailli illegally failed to file any reports with the Commission disclosing his stock sales during this period.

The complaint charges Mikailli and Pado with violating the antifraud, corporate reporting and books and records provisions of the federal securities laws and with lying to Unify's outside auditors (Sections 10(b), 13(a) and 13(b)(2)(A) of the Securities Exchange Act of 1934 ("Exchange Act") and Rules 10b-5, 12b-20, 13a-13, 13b2-1 and 13b2-2 thereunder). It also charges Mikailli with insider trading and failing to file required reports relating to sales of shares by insiders (Sections 10(b) and 16(a) of the Exchange Act and Rules 10b-5 and 16a-3 thereunder). The complaint seeks injunctions, monetary penalties and officer and director bars against Mikailli and Pado. In addition, the complaint seeks disgorgement from Mikailli of all amounts he received as a result of the fraud, including losses avoided by his stock sales, sales commissions he received on fraudulent transactions, and bonuses.

Also named in the complaint was Unify, for violations of the corporate reporting and bookkeeping provisions of the federal securities laws (Sections 13(a) and 13(b)(2)(A) of the Exchange Act and Rules 12b-20 and 13-a13 thereunder). The complaint seeks a permanent injunction against future violations, but does not allege fraud violations against Unify.

In addition, the U.S. Attorney's Office for the Northern District of California today announced that it has charged Mikailli and Pado with criminal securities fraud, based on the fraud at Unify.