Too Much Tequila, Too Little Sunscreen

A Depressing Memory

I’ve never told this story, but it has haunted me for years, the time I made and lost over four million dollars. My story is set early in 1992. I had just resigned from Intel, turned fifty, and was looking for something interesting to do for my last few years. My six years of promoting massively parallel computing and establishing Intel as the market leader had made me known in this specialized industry.

I was offered the top position in a number of startup supercomputer operations. The venture capitalists funding these infant companies were especially persuasive with their generous offers. I could make millions for a couple of years work. I was weighing my options when I got a call from a giant in the computer industry, Henry Burkhardt. He had an early stage startup supercomputer company and wanted to meet me.

Henry was a legend. He attended Princeton on a math scholarship when he was sixteen, dropped out and joined Digital Equipment as a programmer. He left DEC and founded Data General where he implemented his new minicomputer architecture, the Data General Nova. Data General’s success made him wealthy and established him as titan in the industry.

I joined Henry and his management team at Kendall Square Research’s new headquarters in Waltham, Massachusetts. Everyone I met was selling and selling hard. They were convinced that their shared cache-only memory architecture made massively parallel computers as easy to program as conventional computers. I was impressed with Henry, his company, his people, and his revolutionary new computer design.

Gordon Bell, one of the biggest names in computer science, had consulted with Henry and was listed in the company profile as a technical advisor. Gordon and I had stayed in touch since our days at DEC. I called Gordon to get his take on Henry’s new machine. Gordon echoed the praise I had heard over and over. I now had an assessment from someone I admired and trusted.

After a long day interviews and sales pitches Henry took me to dinner to get to know me better. We talked and talked. He was brilliant and unlike most computer nerds he had interests beyond computer science. He really impressed me. As we finished our desserts he offered me the position of Executive Vice President, and I could choose what I wanted to do.

There was nothing to negotiate. I had checked all the boxes. I accepted. Henry raised his glass and toasted me.

I didn’t know where I could contribute so I did an informal audit of each functional area. I quickly concluded that engineering and finance were on the right track and it was too early to think about manufacturing, so I went to work on sales and marketing. Henry agreed with my assessment and gave me free rein. I redefined our sales message from high performance to ease of programing. My critique and suggestions were well received by our small sales force, but not by the VP of sales, an old-line Cray supercomputer salesman who only knew his old Cray Research pitch. We continued to butt heads, but the salespeople did as I suggested and began to look to me as their leader.

I set up, contracted, and trained an international distribution network that included Olivetti and Siemens in Europe, Canon in Japan, and lesser known firms in Taiwan, Hong Kong, South Korea, and South Africia. I trained the salespeople of each of our new distributors. Canon was especially excited by our new relationship. They introduced me to the who’s who of supercomputing in Japan and invited me to give the keynote talk at a conference. We soon sold a large system to prestigious government organization. Our first international sale.

We were on our way to becoming the new force in supercomputing when we woke the giant, IBM by selling systems into their coveted and protected installed base. I know IBM would fight back, but how?

We soon reached the point where Henry, our CFO, and our investors began the process of taking KSR public. I ran the business while Henry drove our IPO (Initial Public Offering) effort. Cheers rang out the day of our IPO. KSR now had the money to grow and expand, and all of the senior management were millionaires. I did the numbers, and my stock options were worth three point two million dollars. Woopie, I was rich.

Our sales continued to grow and as public corporation we reported our sales and financial results quarterly. A sale is technically complete when the customer pays for the product but DEC, and I assume other companies, had a revenue recognition policy of financially declaring the sale complete when the product is shipped to the customer with thirty day payment terms. So the revenue from a sale is recognized and reported a month or two before it is actually earned.

Our sales volume and stock price continued to grow. My net worth on paper was now over four million dollars and growing. I fantasized how and where we were going to live in luxury once my stock options matured. Stock options are incentives structured to reward efforts but also to ensure longevity. My options were exercisable over the coming four years.

I never paid much attention to financial details of running the company, but I did know Henry had contracted the same accounting firm as Data General. What he didn’t know was it was also IBM’s accounting firm. Back in the early days when IBM’s competitors were the BUNCH (Burrows, Univac, NCR, Control Data, Honeywell) IBM assigned a financial analyst to monitor each competitor and report any irregularities. I believe that IBM was monitoring KSR and when they saw that our reported revenue was growing but our cash was not they blew the whistle to their/our accounting firm.

Our accounting firm launched a detailed audit of our revenue recognition process and learned that we had declared revenue for a system that was on loan for evaluation and not sold along with some other revenue recognition irregularities. They reported their findings to the SEC (U.S. Securities and Exchange Commission) and they stopped the trading of our stock. Our stock price fell to zero and all of our senior managers were under investigation for fraud. I had not only lost my fortune, I was also a suspect in a criminal act.

KSR went belly up and I was found to have played no part in our phony bookkeeping. Henry, the Sales VP that I fought with, and our CFO were charged with issuing materially false and misleading financial statements. While they didn’t admit or deny wrongdoing, they settled. Henry paid $1.1 million. Our Sales VP and CFO were ordered to pay in excess of $300,000 each but they had spent their illicit gains, so their fines were reduced toto $40,000 each. Henry was barred from holding a top management position in a U.S. corporation again and our CFO lost his CPA designation.

I had lost my fortune, was unemployed, and seriously depressed.

Remembering all of this still depresses me. I’ll sign off now, have another drink, and sulk.