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SEC Issues Administrative Ruling on Babak ('Bobby') Yazdani(Targeted News Service Via Acquire Media NewsEdge) WASHINGTON, Sept. 24 -- The Securities & Exchange Commission issued the following administrative proceeding: In the Matter of BABAK ("BOBBY") YAZDANI Respondent. ORDER INSTITUTING CEASE-AND- DESIST PROCEEDINGS PURSUANT TO SECTION 21C OF THE SECURITIES EXCHANGE ACT OF 1934, MAKING FINDINGS, AND IMPOSING A CEASE- AND-DESIST ORDER I. The Securities and Exchange Commission ("Commission") deems it appropriate that cease- and-desist proceedings be, and hereby are, instituted pursuant to Section 21C of the Securities Exchange Act of 1934 ("Exchange Act") against Bobby Yazdani ("Respondent"). II. In anticipation of the institution of these proceedings, the Respondent has submitted an Offer of Settlement (the "Offer") that the Commission has determined to accept. Solely for the purpose of these proceedings and any other proceedings brought by or on behalf of the Commission, or to which the Commission is a party, and without admitting or denying the findings herein, except as to the Commission's jurisdiction over each and over the subject matter of these proceedings, which are admitted, Respondent consents to the entry of this Order Instituting Cease- and-Desist Proceedings Pursuant to Section 21C of the Securities Exchange Act of 1934, Making Findings, and Imposing a Cease-and-Desist Order ("Order"), as set forth below. III. On the basis of this Order and Respondent's Offer, the Commission finds1 that: Summary 1. This matter involves misstated revenues in the professional services organization at Saba Software, Inc. ("Saba" or "the Company"), a Silicon Valley-based enterprise software company. The misstatements were the result of the falsification of time records over a period of more than four years by professional services managers in multiple geographies directing consultants in Saba's Indian subsidiary (the India Consulting Group or "ICG") to falsify time records by either recording time in advance of performance of work or failing to record time for hours worked in order to achieve their quarterly revenue and margin targets. 2. As a result, Saba reported false financial results in its financial statements filed with the Commission over the period from October 4, 2007 through January 6, 2012. As Saba announced on August 6, 2012 and November 5, 2012, management has determined that the Company is required to restate its financial statements for fiscal years 2008 through 2011, as well as the first two quarters of fiscal 2012. The Company expects that the restatement will change the time period during which the affected revenues are recognized, generally shifting the timing of such revenues to later periods. 3. Saba's Chief Executive Officer, Bobby Yazdani, received bonuses and incentive- and equity-based compensation from Saba, and also realized Saba stock-sale profits, during the 12- month periods following the filings containing financial results that Saba is required to restate. Yazdani has not, to date, reimbursed Saba for those amounts. Respondent and Related Entity 4. Bobby Yazdani, age 49, has a primary residence in Potomac, Maryland and a condominium in Redwood Shores, California. He founded Saba in April 1997 and served as CEO from then until 2002 and again from 2003 to March 2013. He served as Chairman of the Board from April 1997 until March 2013. He resigned both positions in March 2013. Yazdani is currently self-employed. 5. Saba Software, Inc. ("Saba" or "the Company") is a Delaware corporation headquartered in Redwood Shores, California. The software company provides cloud-based enterprise learning, talent management and social networking tools to businesses and large organizations. At all relevant times, Saba's common stock has been registered pursuant to Section 12 of the Exchange Act. From its IPO in April 2000 until July 31, 2006, its common stock was registered pursuant to Section 12(g). Thereafter, until June 2013, it was registered pursuant to Section 12(b). It traded on the Nasdaq Global Market until it was suspended on April 9, 2013, and then it was delisted effective June 17, 2013 for failure to remain compliant with its SEC reporting obligations. Upon its delisting and deregistration from Section 12(b), it reverted to its previous Section 12(g) registration. Its common stock is currently registered pursuant to Section 12(g) and traded on the OTC Markets. Saba has not filed any periodic reports since January 6, 2012, when it filed its Form 10-Q for the quarter ended November 30, 2011. Facts A. Saba's Falsification of Time Records 6. Saba's professional services historically has accounted for about one third of its approximately $120 million in yearly revenues. Professional services have been delivered to customers worldwide by (1) customer-facing field consultants in North America and Europe ("Field Consultants") and (2) off-shore technical development services provided to the Field Consultants by the Company's India Consulting Group ("ICG Consultants"). ICG is an organization within Saba's Indian subsidiary designed to help the Company deliver professional services to its customers at a lower cost than comparable consultants in North America and Europe. By 2011, ICG employed 50-60 consultants who generated approximately 14,000 hours of billable work per quarter, which constituted about 17% of consulting revenue and 6% of total revenue per quarter. 7. Both Field Consultants and ICG Consultants were required to record time worked on customer projects in a timesheet database. Hours input into the system by Field or ICG Consultants were approved on a weekly basis by project managers in North America and Europe, and revenue for the professional services organization was then measured based on the approved number of hours in the timesheet database. 8. Saba disclosed in its public filings that it recognized revenue for both "time and materials" and "fixed fee" contracts as the services were performed. This revenue recognition treatment was consistent with GAAP only if Saba could demonstrate that (1) its customers have historically paid a consistent rate for its services (measured by Vendor Specific Objective Evidence or "VSOE") and (2) it could accurately estimate how many hours it took to complete projects ("ability to estimate"). Therefore, Saba's finance personnel depended on accurate time records to ensure that Saba recognized revenue in accordance with GAAP. 9. From at least 2008 through the second quarter of Saba's fiscal 2012, Saba professional services employees and managers engaged in two time-keeping practices that led to its false revenue recognition. First, there were multiple incidents of ICG Consultants recording hours and billing customers for the performance of professional services in advance of performing those services in order to accelerate revenue recognition and achieve quarterly revenue targets ("pre- booking"). Second, ICG and Field Consultants regularly failed to report professional services time worked in order to conceal budget overruns from management and finance, instead recording that time to non-billable project codes or not at all ("under-booking"). 10. These improper time-keeping practices precluded the time records from serving as reliable evidence under GAAP to recognize revenue in the manner that Saba did. As such, Saba management has concluded that Saba cannot demonstrate VSOE for the period from 2008 through the second quarter of fiscal 2012. Over that period, therefore, Saba was required to recognize professional services revenues on a completed contract basis, which would have required it to defer substantially all of its professional services revenue and much of its license revenue (where software licenses were bundled with professional services) until the contract was completed. Accordingly, virtually all of Saba's professional services revenue was misstated over the relevant time period because revenue was recognized earlier than it should have been under the applicable accounting principles. 11. The practices of pre-booking and under-booking were directed by and known to numerous individuals in the professional services organization and ICG, including the two most senior Saba employees overseeing the professional services organization in North America over the relevant time period. Those senior Saba employees were told on multiple occasions by the finance department that the Company's accountants and auditors needed to understand exactly how many hours were being worked and when (regardless of whether or not they were billed to the customer) in order to ensure that revenue was recognized accurately, and they understood that inaccurate time-keeping would lead to misstatements in Saba's reported professional services revenue and violate the Company's policies regarding financial reporting, including the Code of Business Conduct and the Revenue Recognition Policy. B. Scope and Impact of the Fraud 12. Saba's professional services revenues, gross margins and income were materially overstated in its periodic filings from October 4, 2007 through January 6, 2012 as a result of the time-reporting misconduct. 13. The practices of pre-booking and under-booking, and the fundamental inaccuracy in Saba's time records revealed by these practices, have led Saba management to conclude that it can no longer rely on its calculation of VSOE of fair value for professional services. In this circumstance, ASC 985-605 (Certain Revenue Arrangements That Include Software Elements) and ASC 605-35 (Revenue Recognition) require that the Company defer to the point where services are complete, rather than recognize over the period where services are performed, standalone services revenue and revenue on software license and cloud services agreements that contain bundled professional services. Accordingly, Saba has determined and announced that it is required to restate its financial statements for the years 2008, 2009, 2010 and 2011, and the first two quarters of 2012, due to its material non-compliance with GAAP. Although Saba has not yet filed its required restatement, the cumulative impact of this alternative revenue recognition treatment is approximately $70 million over the period from 2008 through the second fiscal quarter of 2012. The Company expects that the restatement will change the time period during which the affected revenues are recognized, generally shifting the timing of such revenues to later periods. 14. These misstatements are material. First, based on the Company's own estimates, the restated financials will reflect overstatements of gross revenue and profit of more than 5% in each year for the period 2008 through 2011. Second, the effect of the inflated revenue was that Saba met analyst expectations for EPS in certain quarters and reversed at least one year (2010) from a net income to a net loss for the year. C. Saba's Required Restatement 15. On August 6, 2012, Saba announced that, following an internal accounting review, management had determined that its annual financial results for fiscal years 2011 and 2010, as well as the first and second quarters of fiscal year 2012, should be restated as a result of instances of improper time-recording that it had identified in the Company's professional services business. On November 5, 2012, Saba announced that management had determined that the Company's annual financial results for fiscal years 2009 and 2008 would also need to be restated. D. Compensation of CEO Yazdani 16. During the 12-month periods that followed the filing of the periodic reports requiring restatement, Yazdani received cash incentive awards and bonuses and also realized profits from sales of Saba stock. 17. Yazdani has not reimbursed those amounts to Saba. Violations 18. Section 304 of the Sarbanes-Oxley Act of 2002 requires the chief executive officer of any issuer required to prepare an accounting restatement due to material noncompliance with the securities laws as a result of misconduct to reimburse the issuer for (i) any bonus or incentive-based or equity-based compensation received by that person from the issuer during the 12-month periods following the false filings, and (ii) any profits realized from the sale of securities of the issuer during those 12-month periods. Section 304 does not require that a chief executive officer engage in misconduct to trigger the reimbursement requirement. Yazdani received bonuses and incentive- and equity-based compensation from Saba, and also realized Saba stock-sale profits, during the 12-month periods following the filings containing financial results that Saba is required to restate. He has not, to date, reimbursed the Company for those amounts. IV. In view of the foregoing, the Commission deems it appropriate to impose the sanctions agreed to in Respondent's Offer. Accordingly, it is hereby ORDERED, pursuant to Section 21C of the Exchange Act, that: A. Respondent Yazdani cease and desist from committing or causing any violations and any future violations of Section 304 of the Sarbanes-Oxley Act. B. Respondent Yazdani shall, within 30 days of the entry of this Order, reimburse Saba for a total of $2,570,596 in Saba bonuses, other incentive-based or equity-based Saba compensation, and Saba stock sale profits pursuant to Section 304(a) of SOX. Respondent shall simultaneously deliver proof of satisfying this reimbursement obligation to Erin Schneider, Division of Enforcement, Securities and Exchange Commission, 44 Montgomery Street, Suite 2800, San Francisco, California 94104. By the Commission. Brent J. Fields Secretary This document has footnote and may be found at the following URL: (http://www.sec.gov/litigation/admin/2014/34-73201.pdf) TNS 24KuanRap-140925-30FurigayJane-4875123 30FurigayJane (c) 2014 Targeted News Service |