Edited by Thane Peterson

A few months back, Business Week ("Anatomy of the Kurzweil Fraud," Sept. 16, 1996) chronicled the bizarre and disturbing accounting fraud that nearly destroyed Kurzweil Applied Intelligence Inc., a small high-tech company headquartered outside Boston. Today (Dec. 12), a federal judge sentenced two former Kurzweil executives to stiff jail terms that nonetheless were considerably shorter than he could have imposed. Former co-CEO Bernard F. Bradstreet received 33 months, while former Sales Vice-President Thomas E. Campbell got 18 months.

The two men were convicted back in May on fraud and conspiracy charges. In a three-week trial, the government presented strong evidence that Bradstreet, Campbell, and other managers conspired to artificially pump up the company's revenues both before and after its 1993 initial public offering. Goods that were supposedly sold to customers instead were secretly shipped to an outside warehouse, where they gathered dust. The defendants also allegedly resorted to forgery and an extensive coverup plot to hide the scheme from auditors, underwriters, and shareholders. One odd aspect of the case was the seemingly inexplicable involvement of Bradstreet, a Harvard MBA and former Marine fighter pilot with a pristine reputation.

The case also was notable because, according to prosecutors, it was the first ever in which executives of a public company were convicted of criminal charges for accounting fraud relating to posting of phony revenues. Normally, the government pursues those accused of securities fraud using civil means, such as enforcement action by the Securities & Exchange Commission.

But federal prosecutors in Boston sought criminal sanctions in the Kurzweil case for two reasons: First, because they had an unusually strong case bolstered by the testimony of a top Kurzweil manager who was cooperating with authorities. Second, because they wanted to send a strong deterrent message to other potential wrongdoers.

Judge Richard G. Stearns noted the government's desire for deterrence but said both defendants had suffered a considerable amount already. Both are financially ruined and have been barred from serving as an officer or director of a public company. Although federal sentencing guidelines called for the defendants to receive stiffer sentences -- a minimum of 51 months for Bradstreet and 33 months for Campbell -- Stearns clearly was looking for a way to wiggle out of the sentencing straightjacket imposed by Congress.

He noted the defendants' otherwise exemplary past behavior and said he believed their crimes resulted not from personal greed but out of a misguided dedication to the interests of the company. He agreed to recommend that they serve their sentences at a minimum-security federal prison.

Even so, the sentences are hardly a slap on the wrist. They establish an important precedent: The government is prepared to be tough on securities fraud.

By Mark Maremont in Boston