U.S. SECURITIES AND EXCHANGE COMMISSION

Litigation Release No. 20197 / July 18, 2007

Accounting and Auditing Enforcement
Release No. 2641 / July 18, 2007

SEC v. Lorine Sweeney and Gary Scherping, Civ. No. 07-CV-01511 (WYD-MEH) (D. Colo.)
SEC v. Ilona Kay Collins, Civ. No. 07-CV-01506 (WDM-MEH) (D. Colo.)
SEC v. David Eric Nesvisky, Civ. No. 07-CV-01509 (REB-CBS) (D. Colo.)
SEC v. Robert Allen Diehl, Civ. No. 07-CV-01507 (RPM-CBS) (D. Colo.)
SEC v. Madhavan Sivathanu Pillai, Civ. No. 1:07-CV-01273 (RMC) (D.D.C.)

SEC Sues Former CEO and Former CFO of Quovadx, Inc. for Fraudulent Revenue Recognition; Settles with the Company and Six Individuals

On July 17, 2007, the Commission filed a civil action in federal court in Colorado charging Lorine Sweeney, the former President and Chief Executive Officer of Quovadx, Inc., and Gary Scherping, Quovadx's former Chief Financial Officer, with participating in a fraudulent scheme to overstate Quovadx's software licensing revenue in 2003. The Commission also instituted settled enforcement proceedings against Quovadx, a Colorado software company, two of its former officers and a high-ranking salesperson, and the principals of three of its customers.

The Commission's complaint alleges that:

• During the third and fourth quarters of 2003, Sweeney and Scherping participated in the fraudulent recognition of over $11.1 million in software licensing revenue from three transactions with Infotech Network Group, an India-based IT outsourcing company. Sweeney and Scherping knew or recklessly disregarded that the transactions had undisclosed material contingencies and it was not likely Quovadx would be paid. The Infotech revenue overstated Quovadx's software licensing revenue by approximately 164% for the third quarter and 118% for the fourth quarter of 2003.
   
• In the second quarter of 2003, Sweeney and Scherping participated in the fraudulent recognition of approximately $570,000 in software revenue from a transaction with Sourceworks LLC, when they knew or recklessly disregarded that Sourceworks' payment was contingent upon Quovadx securing a customer for Sourceworks. This transaction overstated Quovadx's second quarter 2003 software revenue by about 9%.
   
• In the third quarter of 2003, Sweeney and Scherping participated in the fraudulent recognition of approximately $380,000 in software revenue from three parking transactions with MicroStar, Inc. Sweeney and Scherping knew or recklessly disregarded that MicroStar was merely holding the software in its inventory until Quovadx could complete negotiations with its true customers. Moreover, when these transactions did not materialize, Quovadx roundtripped an unrelated payment through MicroStar with Scherping's knowledge and approval. As instructed by Quovadx, MicroStar kept $10,000 as a kickback and sent the rest of the money back to Quovadx, creating the false appearance that MicroStar had paid for some of the parked software. The MicroStar revenue overstated Quovadx's third-quarter software revenue by approximately 14%.
   
• In the third quarter of 2002, Sweeney and Scherping also improperly accelerated approximately $250,000 in software revenue from a transaction with another Quovadx customer, which overstated Quovadx's software revenue for the quarter by approximately 10%.

The Commission's complaint charges Sweeney and Scherping with violating the antifraud provisions of the federal securities laws, Section 17(a) of the Securities Act of 1933 and Section 10(b) and Rule 10b-5 of the Securities Exchange Act of 1934. The complaint also charges them with: knowingly circumventing internal controls and falsifying books and records, in violation of Exchange Act Section 13(b)(5) and Rule 13b2-1; making misleading statements to the auditor and falsely certifying Quovadx's filings, in violation of Exchange Act Rules 13b2-2 and 13a-14; and aiding and abetting Quovadx's violations of the reporting, books and records, and internal control provisions, Sections 13(a), 13(b)(2)(A), and 13(b)(2)(B) of the Exchange Act and Exchange Act Rules 12b-20, 13a-1, 13a-11, and 13a-13. The Commission is seeking permanent injunctions, disgorgement, civil penalties, and officer and director bars against Sweeney and Scherping.

The Commission also filed separate settled civil actions against Lona Collins, Quovadx's former Controller, David Nesvisky, Quovadx's former Executive Vice-President of Sales, and Robert Diehl, the president of MicroStar, based on their involvement in the MicroStar transactions. The separate complaints allege that: Collins approved the fraudulent revenue, even though she knew or recklessly disregarded that MicroStar was merely holding the software for other customers, and participated in the roundtripping; Nesvisky proposed the parking arrangements and participated in the roundtripping; and Diehl aided and abetting Quovadx's fraud by agreeing to the parking arrangements, knowing that he was just "passing paper" and that Quovadx was using the parking arrangements to accelerate revenue recognition.

The three defendants, without admitting or denying the Commission's allegations, have agreed to the following settlements, which are subject to court approval:

• Collins has consented to the entry of a Final Judgment enjoining her from violating the antifraud provisions and from circumventing internal controls, falsifying books and records, or making false statements to an auditor (Section 17(a) of the Securities Act and Sections 10(b) and 13(b)(5) of the Exchange Act and Rules 10b-5, 13b2-1 and 13b2-2), as well as aiding and abetting violations of the reporting, books and records, and internal control provisions of the Exchange Act (Sections 13(a), 13(b)(2)(A) and 13(b)(2)(B) and Rules 12b-20, 13a-11, and 13a-13). She also has consented to a five-year officer and director bar. The Final Judgment would not impose a civil penalty, based upon her sworn financial statements and other documents submitted to the Commission.
   
• Nesvisky has consented to the entry of a Final Judgment enjoining him from violating Section 17(a)(3) of the Securities Act and Rule 13b2-2 of the Exchange Act and from aiding and abetting violations of the reporting, books and records, and internal control provisions of the Exchange Act (Sections 13(a), 13(b)(2)(A) and 13(b)(2)(B) and Rules 12b-20, 13a-11, and 13a-13). The Final Judgment would impose a civil penalty of $20,000.
   
• Diehl has consented to the entry of a Final Judgment enjoining him from violating or aiding and abetting violations of the antifraud provisions (Section 10(b) and Rule 10b-5) and from aiding and abetting reporting violations (Section 13(a) and Rules 12b-20, 13a-11, and 13a-13) of the Exchange Act. The Final Judgment would require Diehl to pay disgorgement and interest of $10,962.79, but would not impose a civil penalty, based on Diehl's sworn financial statements and other documents submitted to the Commission.

The Commission further filed a settled civil action against Madhavan Pillai, the principal officer of Infotech, based on his involvement in the Infotech transactions. The Commission's complaint alleges that Pillai aided and abetted Quovadx's fraud by agreeing to enter into transactions with undisclosed material contingencies to accommodate Quovadx's revenue recognition objectives, and that Infotech was not likely to pay for the software licenses involved. Without admitting or denying the Commission's allegations, Pillai has consented to entry of a Final Judgment enjoining him from violating or aiding and abetting violations of the antifraud provisions (Section 10(b) and Rule 10b-5) and from aiding and abetting reporting violations (Section 13(a) and Rules 12b-20, 13a-11, and 13a-13) of the Exchange Act. The Final Judgment would not impose a civil penalty, based upon his sworn financial statements and other documents submitted to the Commission.

In related proceedings, the Commission instituted separate settled administrative proceedings against Quovadx, one of Quovadx's former high-level sales persons, and the principal of Sourceworks. The Quovadx Order finds that Quovadx, under its then-senior management, improperly recognized over $12 million in revenue from software licensing deals with four of its customers between 2002 and 2003. As a result, Quovadx materially overstated its software licensing revenues in its quarterly reports by amounts ranging from 10% in the third quarter of 2002 to nearly 180% by the third and fourth quarters of 2003. Quovadx has been ordered to cease and desist from committing or causing any violations and any future violations of the antifraud, reporting, books and records, and internal control provisions of the securities laws (Securities Act Section 17(a) and Exchange Act Sections 10(b), 13(a), 13(b)(2)(A) and 13(b)(2)(B) and Rules 10b-5, 12b-20, 13a-1, 13a-11, and 13a-13). Quovadx consented to the issuance of the order without admitting or denying the findings.

The Commission also instituted settled proceedings against Ronald Renjilian, the former Head of Emerging Market Sales at Quovadx, for his involvement in the Sourceworks and Infotech transactions, and Paul Davis, a partner of a Colorado-based venture capital firm, for his involvement in the Sourceworks transaction. Without admitting or denying the Commission's findings, Renjilian and Davis agreed to cease and desist from causing violations of the reporting provisions of the Exchange Act (Section 13(a) and Rules 12b-20, 13a-1 (Renjilian only), 13a-11, and 13a-13).

For additional information, see below:

SEC Complaint (Sweeney and Scherping)
SEC Complaint (Collins)
SEC Complaint (Nesvisky)
SEC Complaint (Diehl)
SEC Complaint (Pillai)

Administrative Proceeding No. 33-8825 (Quovadx)
Administrative Proceeding No. 34-56083 (Renjilian)
Administrative Proceeding No. 34-56084 (Davis)