Francis A. Tarkenton, Donald P. Addington, Rick W. Gossett, Lee R. Fontaine, William E. Hammersla, III, Eladio Alvarez and Edward Welch

SECURITIES AND EXCHANGE COMMISSION

Litigation Release No. 16417 / January 24, 2000

Accounting and Auditing Enforcement
Release No. 1218 / January 24, 2000

SECURITIES AND EXCHANGE COMMISSION v. FRANCIS A. TARKENTON, DONALD P. ADDINGTON, RICK W. GOSSETT, LEE R. FONTAINE, WILLIAM E. HAMMERSLA, III, ELADIO ALVAREZ and EDWARD WELCH, Civil Action File No. 1:99-CV-2497 (N.D. Ga. September 28, 1999)

The Securities and Exchange Commission announced today that it accepted settlement offers made by the last two defendants in the civil injunctive action that the Commission filed on September 28, 1999 in federal court in Atlanta, Georgia against seven former executives of KnowledgeWare, Inc. ("KnowledgeWare"), a computer software company. The Commission's complaint alleges that the defendants carried out a multi-million dollar financial fraud scheme that materially inflated KnowledgeWare's reported earnings during KnowledgeWare's fiscal year ended June 30, 1994 ("Fiscal Year 1994"), and further alleges that two of those defendants engaged in illegal insider trading.

Five of the defendants settled the Commission's charges on the same day that the federal court action was filed, and four other former KnowledgeWare executives settled administrative proceedings also commenced that day by the Commission.

The two remaining defendants in the federal court action are:

Eladio Alvarez ("Alvarez"), age 42, was a District Sales Manager in KnowledgeWare's Direct Sales Group.

Edward Welch ("Welch"), age 56, was a District Sales Manager in KnowledgeWare's Reseller Channel Sales group.

The Commission's complaint alleges that the defendants engaged in a fraudulent scheme to inflate KnowledgeWare's financial results to meet sales and earnings projections. In all, KnowledgeWare reported at least $8 million in revenue from sham software sales. KnowledgeWare "parked" inventory with software resellers and other supposed customers that were given the right not to pay for the software, either orally or in "side letters" that were kept separate from the other sales documents. Alvarez and Welch implemented the fraudulent scheme by using "side letters" to create some of these sham software sales and received excess incentive compensation as a result of the sham sales. In addition, Alvarez engaged in illegal insider trading by using material nonpublic information regarding the status of KnowledgeWare's prospective acquisition by Sterling Software, Inc. when he sold all his shares of KnowledgeWare stock in August 1994.

In his settlement offer, Alvarez consented, without admitting or denying the allegations in the complaint, to the issuance of a final judgment permanently enjoining him from (i) committing securities fraud in violation of Section 17(a) of the Securities Act of 1933 or Section 10(b) of the Securities Exchange Act of 1934 ("Exchange Act") and Rule 10b-5; and (ii) falsifying corporate books and records or engaging in other conduct in violation of Section 13(b)(5) of the Exchange Act or Rule 13b2-1. Alvarez also agreed to disgorge, and pay prejudgment interest on, the following two amounts: (i) $42,354, representing the incentive compensation he received as a result of his violative conduct in connection with the financial fraud scheme; and (ii) $16,368, representing the losses he avoided by illegally selling KnowledgeWare stock. In addition, Alvarez agreed to pay civil money penalties totaling $26,368, consisting of a $10,000 penalty in connection with his financial fraud violations and a $16,368 penalty in connection with his insider trading violations.

The settlement with Welch involved the institution of administrative proceedings against Welch in lieu of the federal court action. Pursuant to Welch's settlement offer, the Commission dismissed the federal court action as to Welch and instead issued an administrative order finding that Welch violated Sections 10(b) and 13(b)(5) of the Exchange Act and Rules 10b-5 and 13b2-1, and directing Welch to: (i) cease and desist from committing or causing violations of Sections 10(b) and 13(b)(5) of the Exchange Act and Rules 10b-5 and 13b2-1; and (ii) disgorge and pay prejudgment interest on $16,158, which amount represents the excess incentive compensation that Welch received as a result of his violative conduct. Welch consented to the issuance of this order without admitting or denying the Commission's findings. See Securities Exchange Act Release No. 34-42355.