By Cynthia D. Webb, October 2002

Founders of a Plano-based semiconductor maker have sued accounting firm PricewaterhouseCoopers L.L.P. and investment firm UBS Warburg L.L.C., seeking more than $100 million in damages for the firms' failure to detect allegedly fraudulent finances of San Jose, Calif.-based HPL Technologies Inc.

Plaintiffs Mark Harward, Brenda Stoner and Merrill Wertheimer sold Covalar Technologies Group Inc. and its TestChip Technologies Inc. unit to chip software maker HPL in February for $10 million in cash and $33 million in stock.

Covalar, which was named to the Dallas Business Journal's 2001 Fast Tech 50 list, had revenue of $8 million and 60 employees at the time of the sale.

The lawsuit, filed in a Dallas County District Court, says PricewaterhouseCoopers approved the financial statements of now-delisted HPL Technologies during the three years preceding HPL's initial public offering in July 2001, even though HPL's financial results were based on allegedly nonexistent revenue fraudulently reported by the company's chairman and CEO, David Lepejian.

These financial statements were included in a prospectus approved of and distributed by UBS Warburg, the lead underwriter of HPL's IPO.

According to the suit, on July 19 HPL "stunned the financial world" when it said it was investigating internal financial and accounting irregularities and was dismissing Lepejian.

The finding caused HPL's Nasdaq-listed stock "to drop like a rock," the plaintiffs said. The shares, which closed at $14.10 July 18 fell to $4 a share before trading was halted. The shares were later delisted from Nasdaq and closed on the Pink Sheets at 8 cents Oct. 17.

"PricewaterhouseCoopers assured our clients and the investing public that HPL Technologies was in a strong financial position even though the company's CEO provided false financial statements, completely fabricating as much as 80 percent of the company's purported sales," Mark Werbner, lead attorney with Dallas law firm , which is representing the plaintiffs, said in a statement. "Had they performed their job properly, PricewaterhouseCoopers' auditors would have detected this scheme."

Officials at PricewaterhouseCoopers were not immediately available to comment.

Last month, federal officials in California filed criminal charges against Lepejian for allegedly fabricating customer orders that made up most of the company's software sales for the last fiscal year. In addition, the Securities and Exchange Commission said Lepejian has settled civil fraud charges for allegedly creating more than $28 million in nonexistent sales that resulted in HPL overstating its 2002 revenue by 328 percent.

© 2002 American City Business Journals Inc.