SANDY — Gary D. Kennedy, a former chief executive of a software company, was sitting in his home office here in Sandy beneath a portrait of his family. It was 1:15 p.m. on Dec. 15, 2005: He remembers it vividly. His wife, Jane, was standing over the fax machine when she noticed a strange expression on her husband's face. "What is it?" she asked.
Kennedy, 52, hung up the phone and told her that the government, which had pursued a securities fraud case against him for more than five years, had decided to drop the charges. Jane Kennedy, usually a poised and determined woman, collapsed and wept. "It was the first time I'd let myself acknowledge what had happened to us, the hell we had been through," she said.
It was a remarkable moment, not just because Kennedy had fought the Securities and Exchange Commission for years, but because he had won, just weeks before his trial was set to begin in Salt Lake City.
For wealthy, high-profile executives under scrutiny, fighting the government is nothing new. Consider Maurice R. Greenberg, the former chief at American International Group; Richard A. Grasso, the former head of the New York Stock Exchange; or Kenneth L. Lay and Jeffrey K. Skilling of Enron. But few executives at small and midsize companies, whose names are unknown in American living rooms, opt for war. The costs, the risks and the personal consequences are too great.
Indeed, soon after the SEC sued TenFold, Kennedy's software development company, along with him and three other executives in 2002 for accounting and disclosure issues, the company and its board of directors quickly settled. By the fall of 2005, two of the three executives named with Kennedy had also chosen to settle, and charges against the third were dropped. When the SEC decided not to take its case against Kennedy to trial, those settlements were scrapped.
Kennedy's battle was driven by his fierce conviction, his deep religious faith — and, by his own admission, a stroke of luck. Caught up in a period of unprecedented and egregious corporate fraud and a technology sector that seemed doomed, Kennedy was at the wrong place at the wrong time — an almost hopelessly honest, accountable chief executive among a world of angry investors, defensive regulators and an unforgiving bureaucracy.
And while the decision went his way, it came at a price. Kennedy said he felt he was abandoned by some friends, business associates and even some members of the Mormon community in which he had served as a bishop and a mission president for The Church of Jesus Christ of Latter-day Saints. He said he was no longer as trusting of others as he once was.
Kennedy said he was reluctant to sit on the board of any public company, convinced that the SEC would come after the company as retribution for him. "You don't get your reputation back," he said quietly.
Born and raised in Randolph, Rich County, a small ranching community about 75 miles northeast of Salt Lake City, Kennedy was the son of a miner and a grocery store cashier. At 18, he entered the University of Utah but interrupted his education to do missionary work in Brazil.
After graduating from the university, he went to the Kellogg School of Management at Northwestern University. With a freshly minted MBA, he landed at Intel, then a small company, in 1980. He said his time there was most influential in shaping his thinking on business, but he left for a startup software company called Oracle after a church friend introduced him to its founder, Lawrence J. Ellison.
In the early days, Ellison would stop by to play basketball and eat dinner with the Kennedys. During the less than a decade when he was at Oracle, sales soared from $1 million to almost $1 billion. But Kennedy said he grew frustrated with Ellison's infamous temper, and he opted to leave in 1990.
After Kennedy returned from another stint as a mission president for the LDS Church in Brazil, a former Oracle colleague, Jeff Walker, asked him to run TenFold, a software company Walker had founded in 1993. "Gary was one of the best — maybe the best — sales executives in the software industry," Walker said.
Friends warned Kennedy about returning to the egos and money of Silicon Valley. But he said he was intrigued by the company's business plan, which was to create software applications that were more tailored to clients' specific needs than off-the-shelf software, but not so customized as to make clients captive to the program designer.
The secret lay in technology that TenFold called the Universal Application, which the company said would let it build software solutions 10 times faster than other companies. Kennedy joined in 1996, when revenue was $3 million; revenue soared to $92.4 million in 1999. Clients included Allstate, Abbey National, SkyTel and Barclays Global Investors. In May 1999, Goldman Sachs took TenFold public at $17 a share. By March 2000, carried by the momentum of the tech boom, TenFold's stock price rocketed to $70.
Then the bubble burst, and TenFold's business model followed suit. The company lost more than half of the deals it had expected to close in the second quarter — almost all dot-com companies — and it missed its second-quarter earnings estimates. The stock plummeted to a low of $1.06 that year.
The earthquake revealed deeper problems: TenFold was failing to meet its deadlines. Companies changed their product demands, and TenFold had overextended itself. Legal problems were brewing. The SEC, apparently tipped off by an anonymous letter, started inquiring about allegations that TenFold had improperly accounted for a transaction and bribed a company with shares from its initial public offering to accelerate other revenue.
At the same time, internal tensions were rending TenFold's management. Kennedy thought the company should sell its way out of the crisis, while the board wanted to cut a third to a half of the 900 employees, according to Kennedy and two board members. By the start of 2001, he had resigned at the board's request, TenFold was in tatters and the SEC was investigating them both.
"I was unemployed, and I was unemployable," Kennedy said. If he joined a public company, it would have to disclose he was being investigated. If he joined a private company that intended to go public, it would have to disclose the investigation in its offering documents. And if he joined a venture capital firm, it would have to disclose his legal problems to investors while raising money.
He said he slipped into bouts of depression. When his wife prodded him to wear his seatbelt, his response, which both say was code for what they were going through, was: "There are worse things than dying."
Some in his church community offered little support. "The vast majority thought that I did it," he said.
A small community of Salt Lake investors — mostly friends who knew of Kennedy's talent — invited him to invest in their companies and work as an informal consultant. He was among the original investors in Overstock.com, the online retailer; iDirect Technologies, a satellite-based high-speed Internet provider that was just sold to a company in Singapore for $165 million; the In-Store Broadcasting Network, which provides music and sells advertising in supermarkets and drug stores; and Northface Learning, a computer-science training academy that recently changed its name to Neumont University.
Even in the start-up community, however, problems arose. One investor who expressed interest in Neumont University backed out because Kennedy was involved. Neumont, which Kennedy helped fund, later asked him to resign from the board because the company's president told him it could not get director and officer insurance for him.
The success of the start-ups did little to restore Kennedy's standing. "It's been a financial windfall," he said, "but it's not that gratifying if no one wants to be associated with me."
Even Kennedy's oldest daughter, Anne, got a taste of the acrimony when she was 21. When she joked to a friend at Brigham Young University that maybe they had all learned not to invest at the height of a stock market bubble, the friend retorted, "Or we all learned not to trust Annie's dad." In the five years since he left TenFold, Kennedy got only one formal job offer — from TenFold. In 2002, Bennett asked him to return. "Gary was a hard-driving sales manager who people loved," Bennett said. But Kennedy was not interested.
On Nov. 18, 2002, almost two years after Kennedy left TenFold, the SEC sued the company, Kennedy and three other company executives. It said they had improperly accelerated the booking of some revenue to make the company appear profitable right before it sold shares to the public. The SEC also accused the company and its executives of concealing the company's tendency to miss deadlines for major software projects.
TenFold settled right away, without admitting or denying guilt, as did the board. The executives, including Kennedy, chose to fight.
At the time the suit was filed, the SEC was facing pressure from Congress, the news media and the public, all eager to affix blame after the technology bubble burst, wiping out billions of dollars in investors' wealth just as a string of big corporate frauds — Enron, WorldCom and Tyco, among others — began to surface. When the commission received an anonymous letter accusing the once high-flying software company of shady accounting, it pounced.
Two things happened to derail the government's case: a forensic accountant hired by the SEC suggested the accounting looked legitimate, said a person familiar with the case. And TenFold, which had refused to release privileged information, was forced by the courts in the spring of 2005 to hand over documents that revealed Kennedy had sought internal and external legal advice as to what was proper to disclose and what was not. The advice from legal counsel was clear: Unless you know a project will be terminated, don't disclose it.
"We didn't do a good job of estimating projects, and I was running the company," Kennedy said. "I am happy to accept responsibility for something I did. But I won't sign to something I didn't do."
"It's a wonderful experience as a lawyer to have a client who's willing to stand up for what's right and has the courage as one man to take on the government if he knows he did nothing wrong," said Darryl Rains, Kennedy's lead attorney who works with Morrison & Foerster in Palo Alto, Calif.
The commission voted not to proceed with the case. "The decision was based on new evidence that came to light in this litigation," John Nester, an SEC spokesman, said.
Some people involved in the case complimented the SEC for its restraint. The Kennedys are not as forgiving.
Kennedy now runs RemedyMD, which aggregates data for doctors to assist in medical decisions. He says his goal is "not to take the company public." He refers to the ordeal as the "five-year invasion" and questions the case against those on trial today, like Enron's Lay. His faith and marriage are strengthened, he says, but not his faith in a system of checks and balances.
Few who know Kennedy were surprised by his decision to fight.
"I've never been able to get through to people, it's not about calculating the best outcome," Kennedy said. "It's about right and wrong."
Contributing: Greg Kratz