1 March 2005 – LAWFUEL – The Law News Network – The United States Attorney’s Office for the Northern District of California announced that John Howard Daws, a former Chief Financial Officer of Santa Clara-based Cylink Corporation, was sentenced today to serve three years of probation following his conviction of conspiracy to falsify accounting records and securities fraud. As a condition of probation, Mr. Daws was ordered to serve six months of home confinement under an electronic home monitoring program. The sentence was imposed by United States District Judge James Ware in San Jose.
Mr. Daws, 60, of Walnut Creek, was originally charged on August 23, 2004. He pled guilty before United States District Judge James Ware on October 14, 2004, to a two-count information. Mr. Daws is the second defendant to be convicted in federal court following an investigation into conduct at Cylink. Thomas Butler, Cylink’s former Vice-President of Sales, was sentenced on July 12, 2004, after pleading guilty to conspiring with Mr. Daws to falsify Cylink’s accounting records. Cylink, a publicly traded corporation based in Santa Clara, developed and sold network security products. Cylink was forced to substantially restate its earnings for the fourth quarter of 1997 and the first and second quarters of 1998. (Cylink was acquired by another company in February 2003.)
Fraudulently Recorded $3.7 Million Transaction from Data Processing Systems
Mr. Daws also admitted that he fraudulently recorded as revenue for the fourth quarter of 1997 a $3.7 million purchase order from Data Processing Systems (DPS), a small distributor based in the Middle East. Mr. Daws conceded that this transaction should not have been recorded under Generally Accepted Accounting Principles (GAAP) because Cylink had not yet received a required letter of credit from DPS guaranteeing payment for the order. In his plea agreement, Mr. Daws admitted that he intentionally and fraudulently hid from Cylink’s outside auditors both that a letter of credit was required and that it had not been received.
Fraudulently Recorded $903,000 Transaction from Federal Data Corporation
In pleading guilty last year, Mr. Daws admitted that he agreed with Cylink’s then-Vice President of Sales to record as revenue for the second quarter of 1998 a $903,000 transaction between Cylink and Federal Data Corporation (FDC) that should not have been recorded. The June 1998 purchase order from FDC included an “out letter” that permitted FDC to cancel the purchase if it did not receive by September 30, 1998, an order for the products from its end-user. Mr. Daws conceded that he knew, as a result of the terms in the “out letter,” that the transaction could not be recorded as revenue for the second quarter because FDC had not made a firm commitment to purchase the product. Nonetheless, Mr. Daws admitted that he caused the FDC order to be booked and recorded as revenue and that he did so, in part, because the transaction allowed Cylink to meet its sales goal for that second quarter.
The prosecution is the result of a two-year investigation by the Federal Bureau of Investigation along with the U.S. Attorney’s Office, and in cooperation with the Securities and Exchange Commission. Dave Callaway is the Assistant U.S. Attorney who is prosecuting the case.
Mr. Daws was sentenced for his violation of a two-count criminal information charging him with conspiracy to falsify accounting records, in violation of Title 18, United States Code, Section 371, Title 15, United States Code, Section 78m(b)(5), and Title 17, Code of Federal Regulations, Section 240.13b2-1; and with securities fraud, in violation of 15 U.S.C. Sections 78j(b) and 78ff, and 17 Code of Federal Regulations, Section 240.10b-5.
A copy of this press release and related court filings may be found on the U.S. Attorney’s Office’s website at www.usdoj.gov/usao/can . Related court documents and information may be found on the District Court website at www.cand.uscourts.gov or on .
All press inquiries to the U.S. Attorney’s Office should be directed to Luke Macaulay at (415) 436-6757 or by e-mail at [email protected] .