Former Executives of Kendall Square Accept Sanctions to Settle SEC Charges
William M. Bulkeley
The Wall Street Journal, April 30, 1996

Two top executives of Kendall Square Research Corp. agreed to stiff sanctions to settle accounting-fraud charges by the Securities and Exchange Commission.

The SEC simultaneously filed its complaint against the defunct maker of sumpercomputers and three of its officiers, for allegedly inflating reported sales and profits in 1992 and 1993. Kendall Square , which was based in Waltham, Mass. filed for bankruptcy-court protection last year and has been liquidated.

Two of the officers consented to settlements without admitting or denying charges. Henry Burkhardt III, former president and chief executive officer, agreeded to disgorge $804,000 representing losses he avoided by selling stock, and pay an $804,000 insider-trading penalty and a civil penalty of $242,000. In addition, the 50-year-old Mr. Burkhardt, who had cofounded two other computer companies before starting Kendall Square, agreed he won't serve as a director or officier of a public company for 10 years.

Karl G. Wassmann III, former chief financial officer, agreed to disgorge $197,994, although he will pay only $40,000 based on ability to pay. Under the settlement, he is also barred from practicing as a certified public accountant before the SEC, although he can apply to be reinstated in five years.

The SEC complaint alleges that the two men and Peter Appleton Jones, Kendall Square's head of sales, sold stock while knowing "material nonpublic information" in August 1993. Shortly after that time, Kendall announced that its accountants were questioning whether it had inaccurately booked as sales computers ordered by colleges and companies that didn't have funds to pay for them. Its stock started falling from a high of $24 a share until it became worthless last year.

Mr. Appleton Jones said he intends to answer the SEC's civil complaint. Mr. Appleton Jones sold $325,000 of Kendall Square stock in August 1993, but he says he didn't have any inside information that led him to expect the stock to drop.

Kendall Square was once a company with a highflying stock and well-regarded technology that many expected would revolutionize the supercomputer industry by making high-powered computers easy to program. It as bankrolled by William Koch, scion of a Kansas oil-family who became famous for skippering the successful America 3 defense of the America's Cup in 1992.

But after its accounting problems came to light in the fall of 1993, stockholders sued, investors backed away and customers delayed purchases. Messrs. Appleton Jones, Wassmann, and later Burkhardt were forced to resign. After that it failed to produce a reliable second-generation version of its first supercomputer, leading Mr. Koch, who had invested $65 million, to end production in September 1994.

Paul Huey-Burns, assistant director for the enforcement division, said, "its a very significant penalty. They were telling investors they had a substantial stream of revenue that was fraudulent."

The SEC said in its complaint, filed in the U.S., district court in Boston, that the company and the three men had "materially overstated" Kendall Square's revenue for 1992 and 1993 by booking sales that had contingencies that made revenue recognition immproper under generally accepted accounting principles.

For example, the complaint states, in 1993's first quarter of 1993, Kendall Square reported revenue of $11.6 million, but $5 million was improperly booked. Of that total, $1.1 million came from a shipment to the University of Colorado that was contingent on the university receiving funding and $2.8 million was for a shipment to Applied Computer Systems Institute of Massachusetts that was contingent on the organization receiving funding.

In addition to other actions, Thomas J. MacCormac, formerly director of contract administration, consented to an insider-trading complaint under which he will disgorge $26,800 in avoided losses on stock he sold in August 1993 for $34,000.

See also Former Sales Chief at Defunct Kendall Settles SEC Charges, The Wall Street Journal, November 13, 1996

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