Inside Informix' Demise
Here's the story behind Informix' revenue restatements, why former CEO Phil White did it and what today's executives can learn from the experience.
By Steve W. Martin
Jul. 21, 2005
Long before former WorldCom CEO Bernie Ebbers received 25 years in prison, Phil White resigned from Informix Software amid speculation of accounting fraud. As head of the database software company, White's decisions were fueled by a combination of corporate pressure and personal ambition. His story - and that of Informix - serves as a cautionary tale for today's technology executives.
In 1997, Phil White was the president, CEO, and chairman of Informix Software. But his importance went far beyond what these titles convey. He was the leader, visionary, guiding force, and patriarch of Informix. In one sense, Informix and Phil White were one and the same. Even though the company had tens of thousands of shareholders and thousands of employees, Informix was his company.
When White, a well-known hi-tech sales and marketing maven, joined Informix in 1989 the company was struggling. Over the course of the next eight years he engineered one of the most stunning success stories in Silicon Valley history; revenues grew ten-fold to a billion dollars, Informix's stock was named top five year performer by the Wall Street Journal, and White was named Financial World Magazine CEO of the year twice.
Just as Phil engineered Informix's success, his single-minded obsession with Oracle and his desire to upstage its founder and CEO, Larry Ellison, eventually drove the company to ruin. Informix shocked its investors in the spring of 1997 when it reported an unexpected first-quarter loss of $140 million. Revenues were half those of the preceding quarter. As a result, White, the man who once said, "I don't think I have to fight Oracle," resigned as president and CEO on July 22, 1997. He was dismissed from the board of directors a week later when accounting irregularities were brought to the board's attention.
The SEC Investigates
The Securities and Exchange Commission (SEC) subsequently began an investigation and ultimately concluded that White signed financial statements knowing they were inaccurate. The SEC charged that White had inappropriately included revenue from contracts where side letters existed (secret agreements that enable customers to cancel contracts and receive their money back) and engaged in barter transactions with computer manufacturers where reciprocal purchases of hardware for software were made. At the SEC's urging, the Department of Justice began a criminal investigation that would go on for years.
On November 18, 1997, Phil White's successor at Informix, former 3Com executive Robert Finocchio Jr. made the "the mother of all financial announcements": $311 million of revenues for the preceding three years had been overstated, and the company would restate revenues for 1994 through 1996.
Informix's revenue restatement was by no means an isolated incident in the business world. The United States General Accounting Office reported that one of every ten publicly held companies restated their financial statements between 1997 and 2002 because of accounting irregularities that skewed financial results. As is usually the case, most of these restatements were lower than the original statements. In a total of 919 restatements, these companies lost an estimated $100 billion in market capitalization as a result.
Furthermore, the Informix restatement was nowhere near the biggest in the high-technology industry. The table below taken from United States Securities and Exchange Commission databases shows a few of the recent restatements.
Widespread Impact
Revenue restatements are more than just accounting reversals. Their impact affects a company in every possible way. Customers are hesitant to purchase products, investors watch stock prices free-fall, employee morale is ruined (along with the value of employees' stock options), and flurries of class-action lawsuits are filed by lawyers eager to capitalize on misfortune. It's a devastating experience that almost always results in a management change and sometimes in bankruptcy. As I2's CEO and chairman said about the company's recent restatement, "Surely, the audit was no fun for us or our customers, and our customers were asked a lot of questions internally by their own people."
If these restatements are "no fun," then why are they commonplace today? John Coffee Jr., professor of law at Columbia University, offers the following reasons: "First, there is intensifying or weakening of a particular company's stock, which usually occurs during a stock market bubble. Second, there is an overall decline in business morality and in the words of Federal Reserve Chairman an atmosphere of 'Infectious greed.' Third, the company has a weak board of directors who are not independent from senior management. Finally and most importantly, it's gatekeeper failure--the failure of the auditors, securities analysts, and securities attorneys, who prepare, review or analyze disclosure documents."
When a restatement occurs, almost everyone loses, and Informix's auditor, Ernst and Young, was one of the biggest losers of Informix's 1997 restatement. In one of the largest securities fraud settlements in the history of Silicon Valley, Ernst and Young paid the majority of the cash portion of the $142 million required to settle the dozens of class-action lawsuits filed against Informix in 1999.
Rationale for Restatement
While Professor Coffee would rightly argue that Informix's downfall was the result of greed, cronyism among the board of directors, and a gatekeeper that wasn't independent, there are four additional reasons for revenue restatements that are specific to the high-technology industry.
The Personal Cost
While customers, investors, and employees all lose during a restatement, some of the biggest losers are usually the individuals who were responsible for the error (whether a mistake or fraud) in the first place. These executives are forced to disgorge themselves of their proceeds from stock sales for the period in question, assessed penalties and fines, prevented from serving as company officers in the future, and sometimes sentenced to prison. Typical punishments handed out to high-technology executives involved in revenue manipulations are severe.
Against this background, what happened to Phil White is quite surprising.
Perhaps White's attorney spoke a little too soon when he said, "When Mr. White is ultimately cleared, we hope the public and the media will ask why an innocent man was forced to answer these baseless charges." On May 12, 2004, Phil White pled guilty to one count of false statements in a registration statement, a felony.
Legal documents show that White made $8,149,015 from the sale of Informix stock between February 7, 1995, and November 18, 1997. However, the sentence judge Charles R. Breyer, brother of Supreme Court Justice Stephen Breyer, gave him was quite astonishing. White was sentenced to a $10,000 fine, a $100 special assessment, and sixty days in prison. It seems the world's greatest salesman had closed the biggest and best deal of his life.
Informix as a company was the ultimate restatement loser, and the times that followed were not particularly kind to the company. Following White's eight-year tenure, three CEOs would occupy the corner office in three years. After a less-than-successful merger with Ardent Software, the company was renamed "Ascential." In the bitter end, Informix's database assets were sold off to IBM in 2001 in what one analyst called "a fire sale, but nobody can find the fire." As a database company, Informix no longer exists today. This is a sad statement about what was once a great company.
Lessons Learned
Today's software executives can learn from Phil White's mistakes.
In the end, even the corporate greatest leaders may not be anywhere near as great as their laurels and press clippings make them out to be.
Steve W. Martin's latest book is titled The Real Story of Informix Software and Phil White: Lessons in Business and Leadership for the Executive Team.
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In 1997, Phil White was the president, CEO, and chairman of Informix Software. But his importance went far beyond what these titles convey. He was the leader, visionary, guiding force, and patriarch of Informix. In one sense, Informix and Phil White were one and the same. Even though the company had tens of thousands of shareholders and thousands of employees, Informix was his company.
When White, a well-known hi-tech sales and marketing maven, joined Informix in 1989 the company was struggling. Over the course of the next eight years he engineered one of the most stunning success stories in Silicon Valley history; revenues grew ten-fold to a billion dollars, Informix's stock was named top five year performer by the Wall Street Journal, and White was named Financial World Magazine CEO of the year twice.
Just as Phil engineered Informix's success, his single-minded obsession with Oracle and his desire to upstage its founder and CEO, Larry Ellison, eventually drove the company to ruin. Informix shocked its investors in the spring of 1997 when it reported an unexpected first-quarter loss of $140 million. Revenues were half those of the preceding quarter. As a result, White, the man who once said, "I don't think I have to fight Oracle," resigned as president and CEO on July 22, 1997. He was dismissed from the board of directors a week later when accounting irregularities were brought to the board's attention.
The SEC Investigates
The Securities and Exchange Commission (SEC) subsequently began an investigation and ultimately concluded that White signed financial statements knowing they were inaccurate. The SEC charged that White had inappropriately included revenue from contracts where side letters existed (secret agreements that enable customers to cancel contracts and receive their money back) and engaged in barter transactions with computer manufacturers where reciprocal purchases of hardware for software were made. At the SEC's urging, the Department of Justice began a criminal investigation that would go on for years.
On November 18, 1997, Phil White's successor at Informix, former 3Com executive Robert Finocchio Jr. made the "the mother of all financial announcements": $311 million of revenues for the preceding three years had been overstated, and the company would restate revenues for 1994 through 1996.
Informix's revenue restatement was by no means an isolated incident in the business world. The United States General Accounting Office reported that one of every ten publicly held companies restated their financial statements between 1997 and 2002 because of accounting irregularities that skewed financial results. As is usually the case, most of these restatements were lower than the original statements. In a total of 919 restatements, these companies lost an estimated $100 billion in market capitalization as a result.
Furthermore, the Informix restatement was nowhere near the biggest in the high-technology industry. The table below taken from United States Securities and Exchange Commission databases shows a few of the recent restatements.
| Restatement Years | Company | Amount (millions) |
| 2001 - 2002 | Worldcomm | $3,800 |
| 1995 - 2001 | Aldelphia Communications | $2,300 |
| 2000 - 2001 | Qwest Communications | $2,200 |
| 2000 - 2001 | Computer Associates | $2,200 |
| 2000 | Lucent Technologies | $679 |
| 1999 - 2001 | Peregrine Systems | $509 |
| 1999 - 2002 | I2 Software | $359 |
| 1999 - 2001 | Peregrine Systems | $509 |
| 1998 - 1999 | McKesson HBOC | $327 |
| 1994 - 1996 | Informix Software | $311 |
Widespread Impact
Revenue restatements are more than just accounting reversals. Their impact affects a company in every possible way. Customers are hesitant to purchase products, investors watch stock prices free-fall, employee morale is ruined (along with the value of employees' stock options), and flurries of class-action lawsuits are filed by lawyers eager to capitalize on misfortune. It's a devastating experience that almost always results in a management change and sometimes in bankruptcy. As I2's CEO and chairman said about the company's recent restatement, "Surely, the audit was no fun for us or our customers, and our customers were asked a lot of questions internally by their own people."
If these restatements are "no fun," then why are they commonplace today? John Coffee Jr., professor of law at Columbia University, offers the following reasons: "First, there is intensifying or weakening of a particular company's stock, which usually occurs during a stock market bubble. Second, there is an overall decline in business morality and in the words of Federal Reserve Chairman an atmosphere of 'Infectious greed.' Third, the company has a weak board of directors who are not independent from senior management. Finally and most importantly, it's gatekeeper failure--the failure of the auditors, securities analysts, and securities attorneys, who prepare, review or analyze disclosure documents."
When a restatement occurs, almost everyone loses, and Informix's auditor, Ernst and Young, was one of the biggest losers of Informix's 1997 restatement. In one of the largest securities fraud settlements in the history of Silicon Valley, Ernst and Young paid the majority of the cash portion of the $142 million required to settle the dozens of class-action lawsuits filed against Informix in 1999.
Rationale for Restatement
While Professor Coffee would rightly argue that Informix's downfall was the result of greed, cronyism among the board of directors, and a gatekeeper that wasn't independent, there are four additional reasons for revenue restatements that are specific to the high-technology industry.
- Pride. The high-tech industry is filled with leaders who have a fundamental desire to become rich and, equally important, famous. Since one of their most important possessions is their pride, they will go to any length to prove they are right and to avoid embarrassment, even if they have to cheat. I would argue that the CEOs' desire to protect their egos is just as powerful a motivator as greed.
- Pressure. The pressure starts at the local sales office, where proving oneself is a matter of survival. Pressure is exerted on the finance department to keep the numbers up. Pressure is on the gatekeeper to keep the client happy, and an incredible amount of pressure is placed on the CEO from investors, analysts, and the press alike. Pressure at all these points encourages revenue fraud.
- Politics. When the management regime changes at a troubled technology company, it is in the best interest of the new leaders to restate earnings and make the largest restatement possible. By doing so, they reset expectations extremely low and improve their likelihood of turnaround success. In other words, they debook as much revenue as possible, regardless of necessity, so that it can be recounted later and improve the financial numbers under their watch.
- Past history. History naturally repeats itself. Prior to Informix, White had served as the president of computermaker Wyse Technology. In 1989, Wyse Technology and company officials including White were sued for fraud and insider trading. According to court documents, computers were shipped "around the corner" to warehouses and then returned after the quarter ended. The lawsuit was settled in 1992 for $15.2 million in cash and served as a precursor of the future.
The Personal Cost
While customers, investors, and employees all lose during a restatement, some of the biggest losers are usually the individuals who were responsible for the error (whether a mistake or fraud) in the first place. These executives are forced to disgorge themselves of their proceeds from stock sales for the period in question, assessed penalties and fines, prevented from serving as company officers in the future, and sometimes sentenced to prison. Typical punishments handed out to high-technology executives involved in revenue manipulations are severe.
- The former CEO of one software company was convicted by a federal jury on charges of securities fraud. The evidence at trial established that he engaged in a scheme to overstate third-quarter revenues in 1999 by directing other employees to write side letters giving two customers a right to cancel their contracts and concealing those side letters from accounting personnel. Revenues from the two software sales transactions inflated sales by approximately $5 million. He was ordered to pay a $50,000 penalty and a $12,500 fine and serve twenty-seven months in prison.
- The former president of another software and services company pled guilty to securities fraud in the third and fourth quarters of 2000. Specifically, he admitted his participation in six transactions that improperly recognized revenue. In one fraudulent transaction, he signed a side letter that gave a customer more time to pay for the software. In a transaction with a software company, he participated in negotiations for a quid pro quo exchange known as a "software swap." In this barter transaction, the companies exchanged software in order to inflate revenue numbers. He was sentenced to one year and one day in federal prison and ordered to pay a civil penalty of $110,000, a fine of $7,500, and restitution.
- Many SEC investigations result in large fines and the return of monies made from stock sales. The co-president of one technology firm was ordered to return $733,360 and pay a civil penalty of $1 million. The CEO, COO, and CFO of another software company were forced to disgorge approximately $10 million of stock proceeds and paid $350,000 each in fines.
Against this background, what happened to Phil White is quite surprising.
Perhaps White's attorney spoke a little too soon when he said, "When Mr. White is ultimately cleared, we hope the public and the media will ask why an innocent man was forced to answer these baseless charges." On May 12, 2004, Phil White pled guilty to one count of false statements in a registration statement, a felony.
Legal documents show that White made $8,149,015 from the sale of Informix stock between February 7, 1995, and November 18, 1997. However, the sentence judge Charles R. Breyer, brother of Supreme Court Justice Stephen Breyer, gave him was quite astonishing. White was sentenced to a $10,000 fine, a $100 special assessment, and sixty days in prison. It seems the world's greatest salesman had closed the biggest and best deal of his life.
Informix as a company was the ultimate restatement loser, and the times that followed were not particularly kind to the company. Following White's eight-year tenure, three CEOs would occupy the corner office in three years. After a less-than-successful merger with Ardent Software, the company was renamed "Ascential." In the bitter end, Informix's database assets were sold off to IBM in 2001 in what one analyst called "a fire sale, but nobody can find the fire." As a database company, Informix no longer exists today. This is a sad statement about what was once a great company.
Lessons Learned
Today's software executives can learn from Phil White's mistakes.
- CEOs must pay attention to all the details because CEOs will be held accountable for all the details.
- Most acquisitions and mergers are done at the wrong time for the wrong reasons. (Informix' acquisition of Illustra Software marked the beginning of the end.)
- Badly missing a quarter is just a matter of time for organizations that rely solely on big deals.
In the end, even the corporate greatest leaders may not be anywhere near as great as their laurels and press clippings make them out to be.
Steve W. Martin's latest book is titled The Real Story of Informix Software and Phil White: Lessons in Business and Leadership for the Executive Team.
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