## Facts

- Informix Corporation was a public company whose common stock was registered under Exchange Act § 12(g) and traded on NASDAQ.
- From 1994 through the first quarter of 1997, Informix employees engaged in fraudulent and improper accounting practices that overstated annual and quarterly revenue and earnings, contrary to GAAP.
- Informix reported the overstated results in SEC filings and other public disclosures without disclosing the practices that produced those results.
- The improper practices included backdating software license agreements so revenue could be recorded in earlier reporting periods.
- Employees entered side agreements with customers that granted refunds or other concessions, while Informix recorded revenue as if the original sales terms were final.
- Informix recognized revenue on transactions involving reseller customers even when collectibility was not reasonably assured, including circumstances where resellers were not creditworthy.
- Informix improperly classified amounts due under software maintenance arrangements as software license revenue.
- Informix recorded revenue based on disputed claims against customers, despite the uncertainty over the amounts allegedly owed.
- In numerous reseller transactions, revenue was recorded even though the earnings process was not complete because of side agreements, lack of a fixed or determinable fee, or lack of reasonable assurance of collectibility.
- After a new management team learned of these practices, Informix restated its financial statements in November 1997 for fiscal years 1994–1996 and the fiscal quarter ended March 30, 1997.
- The SEC instituted a public administrative proceeding under Securities Act § 8A and Exchange Act § 21C.
- Informix submitted an Offer of Settlement and consented to the SEC’s findings and order without admitting or denying the findings (except as to jurisdiction).

## Issues

1. Whether Informix’s undisclosed revenue-recognition practices and resulting misstatements in SEC filings constituted violations of Securities Act § 17(a) and Exchange Act § 10(b) and Rule 10b-5.
2. Whether Informix violated Exchange Act § 13(a) and related reporting rules by filing periodic reports that materially misstated revenues and earnings and omitted material information necessary to make required statements not misleading.
3. Whether Informix violated Exchange Act § 13(b)(2)(A) and § 13(b)(2)(B) by failing to keep accurate books and records and failing to maintain internal accounting controls sufficient to produce GAAP-compliant financial statements.
4. Whether a cease-and-desist order was an appropriate remedy under Securities Act § 8A and Exchange Act § 21C based on the past violations described in the SEC’s order.

## Decision

- The SEC accepted Informix’s Offer of Settlement and issued an administrative cease-and-desist order.
- The SEC found that Informix violated Securities Act § 17(a).
- The SEC found that Informix violated Exchange Act § 10(b) and Rule 10b-5.
- The SEC found that Informix violated Exchange Act § 13(a) and related rules governing periodic reporting, including Rules 13a-1, 13a-13, and 12b-20.
- The SEC found that Informix violated Exchange Act § 13(b)(2)(A) (books and records) and § 13(b)(2)(B) (internal accounting controls).
- The SEC ordered Informix to cease and desist from committing or causing violations and any future violations of the cited Securities Act and Exchange Act provisions and rules.

## Legal Principles

- Under GAAP, revenue may not be recognized unless the earnings process is complete and the recorded amount is supported by enforceable terms, including a fixed or determinable fee and reasonable assurance of collectibility.
- Undisclosed side agreements granting customers refund rights or concessions can prevent revenue from being properly recognized and can make reported revenue and earnings materially misleading.
- Recording revenue from reseller arrangements is improper when collectibility is not reasonably assured or when other conditions for completion of the earnings process are not met.
- Exchange Act § 13(a) and related rules require issuers’ periodic reports to be accurate and to include material information needed to prevent required statements from being misleading.
- Exchange Act § 13(b)(2)(A) requires an issuer to keep books, records, and accounts that accurately and fairly reflect transactions and dispositions of assets.
- Exchange Act § 13(b)(2)(B) requires internal accounting controls that provide reasonable assurances that transactions are recorded as necessary to permit preparation of financial statements in conformity with GAAP.
- In an SEC administrative proceeding, the Commission may impose a cease-and-desist order under Securities Act § 8A and Exchange Act § 21C where the respondent has violated, or caused violations of, the federal securities laws; settlement orders may be entered on a consent basis without admissions (other than jurisdiction).

## Conclusion

In this SEC administrative proceeding, the Commission found that Informix overstated revenues and earnings from 1994 through the first quarter of 1997 by using improper revenue-recognition practices—including backdated contracts, undisclosed side agreements, recognition of revenue despite collectibility problems, misclassification of maintenance amounts as license revenue, and recording disputed claims as revenue—leading to materially misleading SEC filings and failures in books, records, and internal controls; after Informix restated its financials, the matter was resolved through a consent cease-and-desist order under Securities Act § 8A and Exchange Act § 21C.


In re Informix Corp., No. 99-323 (2000)