On Monday, the SEC brought charges of securities fraud against Stuart W. Fuhlendorf, former CFO of Isilon Systems. The SEC claims that Fuhlendorf allegedly cut secret side deals with Isilon customers to allow the company to report inflated sales to its shareholders, and concealed the true deal terms from Isilon’s controller, audit committee, and outside auditor. As a result, the SEC alleges, Fuhlendorf caused the company to report $4.8 million in improper revenue during 2006 and 2007.
The SEC alleges that Isilon improperly booked revenue on five transactions, including three transactions with oral side agreements between Fuhlendorf and representatives of Isilon customers; a sale in which the terms were not fixed and determinable until after Isilon’s quarter ended; and a roundtrip transaction that was essentially a circular flow of cash from Isilon to the customer and back to Isilon. The SEC alleges that Fuhlendorf lied to Isilon’s audit committee about the true nature of the deal, which was merely a sham transaction designed to artificially boost Isilon’s revenues.
The SEC also filed a separate, settled case proceeding against the company itself. The SEC acknowledged Isilon’s cooperation with the SEC staff during the investigation.