UNITED STATES OF AMERICA

UNITED STATES OF AMERICA

Before the

SECURITIES AND EXCHANGE COMMISSION

SECURITIES EXCHANGE ACT OF 1934

Release No. 95053 / June 7, 2022

ACCOUNTING AND AUDITING ENFORCEMENT

Release No. 4306 / June 7, 2022

ADMINISTRATIVE PROCEEDING

File No. 3-20887

ORDER INSTITUTING CEASE-ANDDESIST PROCEEDINGS PURSUANT TO

SECTION 21C OF THE SECURITIES

EXCHANGE ACT OF 1934, MAKING

FINDINGS, AND IMPOSING A CEASEAND-DESIST ORDER

In the Matter of

JOHN MURDOCK,

Respondent.

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 John Murdock (“Murdock” or

“Respondent”).

II.

In anticipation of the institution of these proceedings, Respondent has submitted an Offer

of Settlement (the “Offer”) which 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 him and the subject matter of these

proceedings, which are admitted, and except as provided herein in Section V, 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

These proceedings arise out of improper accounting at Synchronoss Technologies, Inc.

(“SNCR” or the “Company”), a New Jersey-based technology company that primarily provides

products, software, and services to telecommunications companies. In July 2018, SNCR announced

a restatement of its 2013, 2014, 2015, and 2016 financial statements of approximately $190 million

in cumulative revenues. As part of this announcement, SNCR restated revenues related to a series

of transactions for which SNCR had recognized revenue improperly and in a manner inconsistent

with generally accepted accounting principles (“GAAP”). These included (1) transactions for

which SNCR, through “side letter” agreements, concealed that the revenue the Company recognized

upfront was in fact contingent on future events and (2) transactions in which the Company sold

software licenses together with multi-year related supporting services, and the Company improperly

recognized the revenue for the licenses immediately, rather than spreading it ratably over the term of

the arrangements.

Murdock, the-then Senior Director of Procurement and Business Operations at SNCR, was

involved, along with other company officials, in structuring and reviewing contracts for two of these

problematic transactions, for which SNCR improperly recognized a combined total of $8.85 million

in revenue. As a result, Murdock was a cause of SNCR’s violations of Sections 13(a) and

13(b)(2)(A) of the Exchange Act and Rules 13a-1, 13a-11, 13a-13, and 12b-20 thereunder.

Respondent

1.

Murdock, age 55, resides in Branchburg, New Jersey. Murdock joined SNCR in

2009, and served as the Company’s Senior Director of Procurement and Business Operations during

the relevant period. In that role, Murdock drafted and revised sales agreements for review and

approval by others at the Company.

Other Relevant Entity

2.

SNCR is a Delaware corporation based in New Jersey whose securities are

registered pursuant to Section 12(b) of the Exchange Act. Its securities are currently listed on

NASDAQ and have been since its initial public offering in June 2006, although SNCR’s common

stock was suspended from trading on NASDAQ from May 2018 to October 2018 because SNCR

had become delinquent in its required filings.

The findings herein are made pursuant to Respondent’s Offer of Settlement and are not

binding on any other person or entity in this or any other proceeding.

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FACTS

A.

Background

3.

In 2015 and 2016 (the “relevant period”), SNCR’s software products and services

included software-based activation, messaging, analytics, and cloud services for its

telecommunications customers.

4.

Under GAAP, companies are required to take into account all material terms of an

arrangement between two parties in recognizing revenue. If, for example, companies enter into

“side letter” agreements that alter the material terms of other transactional documents (such as by

providing that payments under the agreement are contingent on future events), companies must take

such terms into account in determining whether it is appropriate to recognize revenue.

5.

Similarly, when software companies such as SNCR sell software licenses to their

customers together with related, ancillary services (such as hosting and maintenance), GAAP

required that the sales be accounted for as “multiple-element arrangements” (“MLEs”). Under

GAAP during the relevant period, if a contract or series of contracts was determined to be an MLE,

the fee should be allocated to the various elements based on vendor-specific objective evidence

(“VSOE”) of fair value.2

6.

If certain components of MLEs have yet to be delivered (such as services that will

be performed over the life of the agreement), GAAP required that companies defer revenue

recognition of such elements until they have been performed. And if an MLE has undelivered

components for which the company lacks VSOE of fair value, GAAP generally required that the

revenue from the entire arrangement, including for delivered elements, be deferred until either all

elements lacking VSOE have been delivered or VSOE is established for all undelivered elements,

or in certain cases, be deferred and recognized over time, such as ratably over the term of the

agreement or as remaining services are expected to be performed.3

7.

While SNCR did have VSOE of fair value for certain components of MLEs such as

professional services, critically, SNCR lacked VSOE of fair value for the hosting service it often

provided for customers who utilized its software. Accordingly, the addition of hosting to an MLE

would require that the revenue from the entire arrangement, including for delivered elements, be

deferred and recognized over time, i.e. that revenue be recognized ratably over the term of the

agreement.

8.

As a result, Murdock should have known that other employees at SNCR undertook

efforts to make it appear as if the hosting services in the agreements described below were not part

2

VSOE is, for example, the price established by the vendor for the separate sale of each

element.

Financial Accounting Standards Board (“FASB”) Accounting Standards Codification

(“ASC”) 985-605-25-9 through 25-10.

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of the MLEs, so that SNCR could improperly recognize the license fees in these transactions as

revenue upfront, rather than ratably over the term of the agreement.

B.

Customer A Transaction

9.

Before the relevant period, SNCR’s software business was premised largely on a

“software as a service” (“SaaS”) model, in which SNCR agreed to provide customers with the use

of its software, together with related support services such as hosting and maintenance, primarily

through multi-year agreements. For SaaS arrangements, SNCR was required to recognize revenue

ratably over the life of the agreements, as the services were provided.

10.

In the second quarter of 2016, SNCR sought to accelerate the recognition of revenue

on a number of existing customer relationships in order to generate the appearance of an improved

financial performance in its publicly-filed financial reports. One way it sought to do so was by

breaking a number of its SaaS arrangements with those customers into their component parts and

selling “perpetual license agreements” (“PLA”s)4 to SNCR’s software purportedly separately from,

or without, the other ancillary elements of the previous SaaS agreements, such as hosting. SNCR

then improperly recognized revenue from the entirety of the PLA fee upfront, instead of only

ratably over the term of the agreement.

11.

In connection with this effort, SNCR sought to convert its pre-existing SaaS

arrangement with Customer A for its payment processing software5 into a PLA. SNCR

simultaneously negotiated separate agreements for the related, ancillary hosting and support

services for the software that it had already been providing to Customer A under its SaaS

arrangement.

12.

The PLA with Customer A was signed on June 30, 2016. Negotiations for the

three-year, related hosting and support services agreements were conducted contemporaneously

with the PLA negotiations; however, SNCR postponed execution of them to January 2017 and

made them retroactive to July 1, 2016. SNCR continued to provide hosting and support services to

Customer A throughout the period, without interruption, just as SNCR had under its SaaS

arrangement with Customer A.

13.

At the same time it was conducting these negotiations, the same SNCR employees

also negotiated an amendment to an existing audit services agreement with Customer A. The “audit

services” in question consisted of the review of Customer A’s invoices by SNCR and its

subcontractor to determine if Customer A had been overcharged by various vendors. Customer A

would authorize SNCR and its subcontractor to seek reimbursement from the vendors on its behalf

and, if successful, Customer A would pay SNCR and its subcontractor a percentage of the

4

A customer purchasing a PLA pays for the license upfront and has the right to use the

software indefinitely.

5

The software processed invoices, automated payments, and sought to improve margins by

optimizing cost and revenue.

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reimbursed payments as audit fees. No fee was payable to SNCR until Customer A had realized the

savings identified by SNCR. At the time of these negotiations, SNCR had already identified

potential overcharges, but had not yet negotiated reimbursement from Customer A’s vendors. The

amendment substituted an upfront fee applicable to a set amount of identified potential overcharges

instead of the contingency fees.

14.

Throughout June, as an inducement for Customer A to purchase the PLA, SNCR

proposed an upfront fee that was significantly less than the amount SNCR estimated it would

receive in contingency fees if SNCR achieved its historical success rate.

15.

Murdock was among the employees who drafted and revised both the PLA and audit

services agreement and helped structure the transaction. During the negotiations, SNCR attributed

more than $6 million in value to the audit services, and a significantly smaller amount ($750,000 in

SNCR’s final proposal) to the PLA. However, shortly before the agreements were finalized, a

SNCR employee switched the dollar value between the two agreements. Although the total price to

Customer A was the same, the amount allocated to the PLA was now $6.15 million and the amount

allocated to the audit services was now $600,000.

16.

The price in the final contract for the license was $4.3 million, almost 6 times the

price agreed to in the “final” proposal. SNCR added another license for software not even

negotiated with Customer A, nominally for $1.85 million, to reach the $6.15 million total in the

executed PLA. Murdock reviewed and provided comments on these revisions to the contracts.

17.

Murdock knew or should have known that there was no factual basis for switching

the price of the PLA and audit services (or for including the additional software license in the PLA).

Murdock had previously reviewed proposals showing the values SNCR originally attributed to the

PLA and audit services. Moreover, he later reviewed and revised an agreement to pay SNCR’s

subcontractor approximately $4 million for its audit services to Customer A, a figure that was

almost seven times the $600,000 attributed to those services in the contracts, but which was

consistent with the amount originally contemplated for those services.6

18.

Switching these two amounts in the agreements provided the appearance that SNCR

was entitled to recognize significantly more revenue upfront than it would have been entitled to had

the prices in the contracts not been altered. Under GAAP, revenue for the audit services could not

be recognized upfront in its entirety because the audit service fee had not been earned. SNCR,

through its subcontractor, was still required to perform by negotiating the disputes with the vendors.

Furthermore, if SNCR did not successfully negotiate and obtain a set amount of reimbursement

from the covered claims by a given date, SNCR would be required to discount its audit services

going forward until Customer A had realized the promised amount. In contrast, in certain

circumstances, revenue from a PLA could properly be recognized upfront in its entirety.

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Because SNCR provided the audit services primarily through its subcontractor, the

subcontractor was entitled to approximately 2/3 of the $6.15 million audit services fee.

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19.

In its Form 10-Q for the quarter ended June 30, 2016, SNCR recognized $5.25

million in revenue for the PLA sold to Customer A, with approximately $900,000 being allocated to

maintenance. SNCR’s recognition of $5.25 million in revenue for the PLA was improper under

GAAP because the PLA and the ancillary hosting and audit services agreements comprised an

MLE, and SNCR had no VSOE for the fair value of hosting or audit services. According to GAAP,

the fees from these agreements should therefore have been recognized ratably over the life of the

agreement.

20.

The improperly recorded revenue appeared in a press release announcing net

revenues and net income for the second quarter 2016, which was included in a Form 8-K issued on

August 3, 2016, and in SNCR’s Form 10-K issued on February 27, 2017, which included net

revenues and net income for 2016. The improperly recorded revenue from the Customer A

transaction materially inflated SNCR’s revenue in these periods.

21.

SNCR reversed the PLA revenue for the Customer A transaction when it restated its

2016 financial results, reducing revenue by $5,252,000 in the quarter ended June 30, 2016 and

$4,660,000 for the year ended December 31, 2016.

C.

Reseller Transaction with Subcontractor A

22.

In late 2016, sales and finance personnel at SNCR forecasted internally that SNCR

would close on the sale of PLA for several types of software7 to Customer A, for an estimated $4

million in revenue.

23.

As the close of the fourth quarter approached, however, Customer A informed the

sales and finance personnel at SNCR that it would not close the deal until 2017.

24.

In response, Thomas, Marc Bandini (“Bandini”), then the Senior Director of

Communications and Media at SNCR, and Daniel Ives, then the Executive Vice President of

Investor Relations at SNCR, with the approval of senior SNCR executives, embarked on an effort to

persuade one of SNCR’s subcontractors (“Subcontractor A”) to agree to acquire the software PLA

originally intended for Customer A before the end of the year for $3.6 million, and then resell it to

Customer A in 2017 (the “Reseller Agreement”). Subcontractor A had never previously been a

customer of SNCR, had never purchased any of its software, and had never been a reseller of

software. Rather, Subcontractor A was a party to a consulting agreement with SNCR under which

it performed services for licensees of SNCR’s software products in exchange for consulting fees.

25.

In addition, Subcontractor A was not financially capable of paying SNCR $3.6

million, a fact its president told SNCR before the end of the year.

26.

To get around that obstacle, on December 28, 2016, Bandini and Thomas prepared,

signed, and sent a side letter (“first side letter”) to Subcontractor A stipulating that (1) Subcontractor

A did not need to pay SNCR under the Reseller Agreement until it had resold the software, and

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The software assisted telecommunications companies with managing invoices, including

paying vendors, auditing invoice charges, managing invoice disputes, and analyzing billing data.

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(2) SNCR would make Subcontractor A whole for any losses incurred in the resale by adjusting the

sale price and awarding Subcontractor A additional consulting services. Murdock was not made

aware of the side letter.

27.

Murdock reviewed certain documents for this transaction, and knew or should have

known that Thomas, Bandini, and Ives were attempting to eliminate Subcontractor A’s risk on the

deal to overcome its reluctance to engage in the transaction, and thus allow SNCR to recognize the

revenue in the fourth quarter of 2016. Among the documents Murdock reviewed was a draft letter

amending a previously signed agreement between Subcontractor A and SNCR (the “draft letter

amendment”)8 that contained a provision that purported to indemnify Subcontractor A for any losses

incurred in reselling SNCR software. Murdock told Bandini, Thomas, and Ives that the

indemnification provision in the draft letter amendment would create revenue recognition problems

for SNCR (as he believed it would have required the use of a different sell-through guidance that

may have deferred the recognition of revenue until profitability was determined), but to help

achieve the same effect with less obvious revenue recognition issues, he revised the letter

amendment to, among other things, make the indemnification provision less explicit. The revised

letter amendment required SNCR to increase Subcontractor A’s consulting fee until the excess fees

made up for any shortfall in promised proceeds of the resale.

28.

Murdock forwarded the revised letter amendment to the then-CFO and

then-Assistant Controller for review, directing their attention to the indemnification section.

Murdock explained in an email to the then-Senior Director of the Deal Desk & Business Operations

that the new language was largely the same thing as the deleted indemnification provision, but less

direct. The Assistant Controller rejected the letter agreement on the basis that the introduction of

the make whole clause made revenue recognition contingent on whether Subcontractor A

successfully resold the software. The revised letter agreement was never signed.

29.

On the morning of December 31, 2016, Thomas proposed—and Subcontractor A

agreed—that SNCR would pre-pay the fees it expected to owe Subcontractor A under the

Consulting Agreement, so that Subcontractor A could use those funds to pay the $3.6 million it

would ostensibly owe SNCR under the Reseller Agreement. Following the meeting, Subcontractor

A emailed Thomas, Bandini, and Ives to confirm that they were working on memorializing the

terms of the proposal in a draft agreement (“second side letter”). This second side letter, which was

drafted with the assistance of others at SNCR, again amended the Consulting Agreement and

provided that SNCR would prepay $4.05 million in fees to Subcontractor A by February 28, 2017.

Murdock, who was aware that the Assistant Controller had just rejected the earlier attempt to

provide an indemnification provision to Subcontractor A, reviewed and commented on the second

side letter without objecting to this prepayment provision. As Murdock knew or should have

known, the parties agreed to formally sign the document in early 2017.

The previously signed Auditing and Consulting Services Agreement (the “Consulting

Agreement”) was executed between Subcontractor A and a company which SNCR acquired prior

to the relevant period.

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30.

In the meantime, on the afternoon of December 31, 2016, SNCR and Subcontractor

A signed the Reseller Agreement, which ostensibly provided that Subcontractor A would pay

SNCR $3.6 million for a PLA for three types of SNCR software that it could then resell to other

companies. The Reseller Agreement on its face did not contain any contingencies, made no

mention of the first or second side letter, and purported to require Subcontractor A to pay for the

software PLA by March 31, 2017.

31.

SNCR included the $3.6 million fee under the Reseller Agreement as revenue for the

quarter and year ended December 31, 2016, in a press release and Form 8-K issued on February 8,

2017, and in its Form 10-K for the year ended December 31, 2016, filed on February 27, 2017.

32.

SNCR’s inclusion of this revenue was improper under GAAP because, as reflected

in the first and second side letter and as Murdock knew or should have known, the fee was

contingent on Subcontractor A reselling the software. Because of this contingency, the Reseller

Agreement was in substance a consignment agreement, revenue for which, according to GAAP, can

be recognized only when the sale to an end customer is complete (provided all other revenue

recognition criteria have been met).

33.

The improperly recorded revenue from the Subcontractor A transaction materially

inflated SNCR’s revenue for the quarter and year ended December 31, 2016 and was reversed when

SNCR restated its 2016 financial results.

D.

The Above Transactions Resulted in a Material Overstatement of SNCR’s Financial

Performance

34.

The revenue from the foregoing transactions that SNCR improperly recorded for the

quarters ended June 30, 2016 and December 31, 2016 materially inflated SNCR’s revenue for these

periods. SNCR also understated its pre-tax loss for the quarter ended June 30, 2016 by

approximately 57% by improperly including revenue from the Customer A transaction. SNCR

understated its pre-tax loss from continuing operations for the quarter ended December 31, 2016 by

approximately 10.7% by improperly including revenue from the Subcontractor A transaction.

Based on its improper inclusion of revenue from these two transactions, SNCR understated its 2016

pre-tax loss from continuing operations by approximately 10% in its Form 10-K for the year ended

December 31, 2016.

VIOLATIONS

35.

As a result of the conduct described above, Murdock was a cause of SNCR’s

violations of Sections 13(a) and 13(b)(2)(A) of the Exchange Act and Rules 13a-1, 13a-11, 13a13, and 12b-20 thereunder, which require every issuer of a security registered pursuant to Section

12 of the Exchange Act to file with the Commission accurate information, documents, and

annual and quarterly reports as the Commission may require, mandate that periodic reports

contain such further material information as may be necessary to make the required statements

not misleading, and require issuers to make and keep books, records, and accounts that

accurately and fairly reflect the transactions and dispositions of the assets of the issuer.

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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 that:

Pursuant to Section 21C of the Exchange Act, Respondent cease and desist from

committing or causing any violations and any future violations of Sections 13(a) and 13(b)(2)(A) of

the Exchange Act and Rules 12b-20, 13a-1, 13a-11, and 13a-13 thereunder.

Respondent shall pay a civil money penalty in the amount of $15,000.00 to the

Securities and Exchange Commission. Payment shall be made in the following installments:

•

•

$5,000.00 within thirty days of the entry of this Order;

an additional $2,500.00 every 75 days thereafter, with payments ending no later than

one year from the entry of this Order.

Payments shall be applied first to post order interest, which accrues pursuant to 31 U.S.C.

§ 3717. Prior to making the final payment set forth herein, Respondent shall contact the staff of the

Commission for the amount due. If Respondent fails to make any payment by the date agreed

and/or in the amount agreed according to the schedule set forth above, all outstanding payments

under this Order, including post-order interest, minus any payments made, shall become due and

payable immediately at the discretion of the staff of the Commission without further application to

the Commission.

Payment must be made in one of the following ways:

(1)

Respondent may transmit payment electronically to the Commission, which will

provide detailed ACH transfer/Fedwire instructions upon request;

(2)

Respondent may make direct payment from a bank account via Pay.gov through the

SEC website at http://www.sec.gov/about/offices/ofm.htm; or

(3)

Respondent may pay by certified check, bank cashier’s check, or United States

postal money order, made payable to the Securities and Exchange Commission and hand-delivered

or mailed to:

Enterprise Services Center

Accounts Receivable Branch

HQ Bldg., Room 181, AMZ-341

6500 South MacArthur Boulevard

Oklahoma City, OK 73169

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Payments by check or money order must be accompanied by a cover letter identifying John

Murdock as a Respondent in these proceedings, and the file number of these proceedings; a copy of

the cover letter and check or money order must be sent to Lara Mehraban, Division of Enforcement,

Securities and Exchange Commission, New York Regional Office, 100 Pearl Street, Suite 20-100,

New York, New York 10004.

Pursuant to Section 308(a) of the Sarbanes-Oxley Act of 2002, as amended, a Fair

Fund is created for any penalties referenced in paragraph IV(B) above. The Fair Fund may be

added to or combined with any other fair fund created in a related district court action or

administrative proceeding arising out of the same violations. The Fair Fund will be distributed to

harmed investors in accordance with a Commission-approved plan of distribution. Amounts

ordered to be paid as civil money penalties pursuant to this Order shall be treated as penalties paid

to the government for all purposes, including all tax purposes. To preserve the deterrent effect of

the civil penalty, Respondent agrees that in any Related Investor Action, he shall not argue that he is

entitled to, nor shall he benefit by, offset or reduction of any award of compensatory damages by the

amount of any part of Respondent’s payment of a civil penalty in this action (“Penalty Offset”). If

the court in any Related Investor Action grants such a Penalty Offset, Respondent agrees that he

shall, within 30 days after entry of a final order granting the Penalty Offset, notify the

Commission’s counsel in this action and pay the amount of the Penalty Offset to the Securities and

Exchange Commission. Such a payment shall not be deemed an additional civil penalty and shall

not be deemed to change the amount of the civil penalty imposed in this proceeding. For purposes

of this paragraph, a “Related Investor Action” means a private damages action brought against

Respondent by or on behalf of one or more investors based on substantially the same facts as

alleged in the Order instituted by the Commission in this proceeding.

V.

It is further Ordered that, solely for purposes of exceptions to discharge set forth in Section

523 of the Bankruptcy Code, 11 U.S.C. § 523, the findings in this Order are true and admitted by

Respondent, and further, any debt for disgorgement, prejudgment interest, civil penalty or other

amounts due by Respondent under this Order or any other judgment, order, consent order, decree

or settlement agreement entered in connection with this proceeding, is a debt for the violation by

Respondent of the federal securities laws or any regulation or order issued under such laws, as set

forth in Section 523(a)(19) of the Bankruptcy Code, 11 U.S.C. § 523(a)(19).

By the Commission.

Vanessa A. Countryman

Secretary

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