Second of four articles

Michael Saylor, the founder and CEO of the bull market sensation MicroStrategy Inc., was enjoying a sunny weekend at his home in Vienna. His paper fortune had just hit $13.6 billion, which was $4.5 billion more than it was the previous weekend and $6.2 billion more than it was the weekend before that.

But that Sunday, March 12, 2000, the company's chief financial officer, Mark Lynch, received a call at home from Warren Martin, a partner at PricewaterhouseCoopers, MicroStrategy's financial auditors. Martin told Lynch that the firm's national office was reviewing three large contracts that MicroStrategy had booked the previous fall. Could MicroStrategy possibly delay the $2 billion stock offering it had planned for later that month? Martin asked.

Impossible, Lynch replied. The company had already begun its roadshow, the tour that leads up to a stock offering in which top executives pitch their firms to big investors in several cities. Martin told Lynch he would get back to him.

Lynch explained the situation to Saylor the next day during a roadshow stop in Philadelphia. Saylor was unconcerned at first. He assumed that Pricewaterhouse's past approval of MicroStrategy's financial statements would insulate the company from having to revise its numbers. "Please make this go away," Lynch told Saylor, and Saylor went back to what he loved most, delivering evangelical pitches for MicroStrategy.

In early 2000, investors were falling heavily for "Mike's Come-to-Jesus speech," as some MicroStrategists called it. And they were not the only ones hearing his ever more sweeping declarations. "I think my software is going to become so ubiquitous, so essential, that if it stops working, there will be riots," Saylor told the New Yorker's Larissa McFarquar in an article that appeared that March. "I mean that literally. I mean that people will die this year because they didn't buy my software."

Friends and aides warned Saylor to tone down the rhetoric, telling him he risked sounding offensive or ridiculous. His staff and MicroStrategy's board members reminded him to stay focused on business "fundamentals" -- operations, finance, customer service. But Wall Street was the oracle that Saylor heeded the most, and he relied heavily on Lynch to please it.

Lynch, then 37, was affable, soft-spoken and well liked at MicroStrategy. With a sheepish, Woody Harrelson-like disposition, he was viewed as a sort of everyman ambassador to the volatile Saylor. He was one of the few people in the chief executive's inner circle who did not talk like a whiz kid or boast an MIT or Ivy League pedigree. Lynch, who attended Penn State University, worked hard, avoided confrontation and was one of the few outside executives who succeeded at MicroStrategy, largely, in the words of one insider, "by being a good soldier."

Lynch was also gifted at "managing Mike." This meant he could steel himself from Saylor's outbursts and also keep the chief executive happy while he performed his increasingly difficult job. What was clear to anyone inside MicroStrategy was that Lynch was under enormous stress. As the company revised its business model to suit the online mania of the late 1990s, Lynch and his small financial team faced tricky accounting challenges. They were no longer a simple "business intelligence" company that made its money by licensing software to firms that helped them mine their corporate databases for useful information.

Now MicroStrategy's expanded business was more complex. It included Strategy.com, Saylor's fixation, which delivered information such as weather updates and sports scores directly to consumers by phone, computer and wireless tools. The subsidiary made deals with companies such as Ameritrade, the online brokerage that used MicroStrategy's software to relay stock quotes to its customers. MicroStrategy could no longer account for every deal as a straight-forward, one-time transaction. Once-simple questions about how and when to account for sales were opened up to interpretation.

Quietly, and over several months, people within MicroStrategy had raised questions about the company's accounting methods. Some midlevel officials who came to work at the company from larger software firms such as Oracle or Sybase were amazed at how much revenue MicroStrategy was able to book up-front. While a deal might span for several years, MicroStrategy would often take credit for a large proportion of the money at the start.

Likewise , the audit committee of MicroStrategy's board of directors -- Ralph Terkowitz, a vice president of technology at The Washington Post Co., and Frank Ingari, chief executive of Wheelhouse Corp. -- had repeatedly expressed dissatisfaction with the quality of Pricewaterhouse's reviews of its books. Terkowitz and Ingari met regularly with Lynch and Warren Martin. Terkowitz and Ingari told Martin that Pricewaterhouse's quarterly audits seemed sparse and undetailed, board sources said, especially given the mounting revenue that MicroStrategy was recording.

Each time they complained, Martin reassured Terkowitz and Ingari that the accounting was "accurate and conservative."

Saylor said later he was never made aware of the audit committee's concerns about Pricewaterhouse's work. But suspicions about MicroStrategy's accounting had also entered the public domain. In November 1999, the Center for Financial Research and Analysis, a Rockville firm that studies corporate financial statements, issued a report that expressed "concern about the quality of MicroStrategy's September quarter revenue and earnings" as well as "the timing of revenue and income recognized in the September quarter." Then, a brief article by David Raymond in the March 6, 2000, Forbes magazine cast suspicions about three deals that MicroStrategy had recorded in the third and fourth quarters of 1999.

None of this particularly troubled Saylor. Warren Martin had approved everything, after all. Nor did the skeptics seem to bother Wall Street -- indeed, MicroStrategy's stock price jumped $21 on the issue date of the Forbes piece. And Saylor was feeling emboldened. "I feel that if I don't succeed," he was quoted saying in the New Yorker, "it's an abomination in the eyes of God."

An Urgent Message

Continuing the roadshow, Saylor and Lynch arrived at the Ritz-Carlton Hotel in Houston late Monday night, March 13. Lynch had a message waiting from Martin when he checked in: Call him back at 10:30, East Coast time, the message said. He would be his office.

Worried by the urgency of the message, Saylor and Lynch called Martin together from Saylor's suite. Martin put John Dirks, the head of Pricewaterhouse's national technology practice, on the phone. Dirks, whom Saylor had never met, said he had reviewed some contracts booked in the previous quarter and concluded that the original accounting had been done incorrectly. Saylor's face became red.

"We believe it would be appropriate for us to retract the previously audited financial statement of December 1999," Dirks said, according to a source familiar with that conversation. He suggested that MicroStrategy issue a press release announcing it would be restating its revenue figures from the previous quarter.

Dirks focused on a large deal that MicroStrategy had struck the previous fall with NCR Corp, a computer equipment and services firm. MicroStrategy sold $27.5 million worth of software and services to NCR for NCR to "resell" to its own customers. As part of the transaction, MicroStrategy agreed to pay $25 million in stock and cash to NCR for one of its business units and a data warehousing system. Some stock analysts saw the deal as a virtual revenue wash, but MicroStrategy still issued a press release on Oct. 4, 1999, hailing its "52.5 million agreement with NCR." MicroStrategy recorded $17.5 million in sales from the NCR deal in the quarter that ended that Sept. 30. NRC accounted for the deal in the following quarter.

Without that $17.5 million, MicroStrategy's revenue for the third quarter would have dropped nearly 20 percent from the previous quarter, instead of growing by 20 percent. It would have reported a loss of 14 cents a share instead of a profit of 9 cents. And it would have fallen well below Wall Street's expectations, making it unlikely its stock price would have risen as much as it did the following month, when Saylor and a group of company insiders sold shares at a collective value of $82 million.

The firm's accountants had approved MicroStrategy's financial statements until as late as Jan. 26, 2000. They were acting now, they privately told MicroStrategy officials, in response to the Forbes article, which had examined the NCR deal in detail. Citing an ongoing client relationship with MicroStrategy, Pricewaterhouse refused to respond to several written questions for these articles. Dirks and Martin also declined to comment through Pricewaterhouse spokesman Steven Silber.

"Wait," Saylor said to Dirks and Martin, his voice cracking, "you guys signed off on this." If MicroStrategy issued a press release, he said, "there will be a collapse of confidence and trust in our company that will cause great collateral damage."

Everyone agreed to talk again the next morning. Lynch bought cigarettes, and neither he nor Saylor slept that night.

At midnight Washington time, Saylor and Lynch called the Arlington home of MicroStrategy's chief counsel, Jonathan Klein. This set off a flurry of sleep-jangling calls between Klein, other MicroStrategy attorneys, executives and members of the company's board of directors.

On the Road Again

Late on Tuesday, Lynch returned to Washington to join a group of MicroStrategy accountants, lawyers and board members who were meeting with Pricewaterhouse. Saylor continued his roadshow, except for a trip back to Washington where he announced that he would spend $100 million of his own money to start a free online university, a plan that was previewed on the front page of The Washington Post.

Back on the road, Saylor would call Klein in Washington after every pitch for updates. The meetings centered on small computations, arcane rules and subjective analyses, but Saylor told his executives they were really about something else: "Whether we live, or whether everything will end."

Lynch slept a total of eight hours over those five days. The numbers they discussed fluctuated widely.

On Sunday, March 19, at 4 p.m., MicroStrategy's board of directors, made up of many of the prominent local businessmen Saylor had cultivated during his rise, convened around a large table in a 14th-floor conference room of the company's Tysons Corner offices. In addition to Saylor, Terkowitz and Ingari, the board included Worldcom Corp. Vice Chairman John Sidgmore, who had joined the board a week before, entrepreneur Jonathan Ledecky; and MicroStrategy co-founder Sanju Bansal. The board voted to issue an accounting restatement the next day.

At the end of the day, they were joined by top company executives, lawyers and a crisis public relations team that was brought in from New York. "It will be a PR victory for us if our stock doesn't drop 100 points tomorrow," Ledecky said.

But Saylor grew more frustrated by what he was hearing. He became especially agitated with Ralph Ferrara, a securities law expert from the Washington office of Debevoise & Plimpton who spoke to the board about the accounting problems. As Ferrara was making a point about the possible ramifications of the restatement, Saylor cut him off, according to two sources who were in the room. Saylor told Ferrara that none of the information he was providing was new to him.

"If you know all this," Ferrara snapped back, "then you've ruined your company."

Stunned, Saylor remained silent for several minutes while Ferrara continued, sources recalled. Saylor, who does not remember this specific exchange, said he never acted in any way that would have "ruined the company," and if Ferrara had accused him of it, he would have responded immediately.

After Ferrara continued for a few minutes, the sources said, Saylor began banging his palm on the table in boredom. He said Ferrara was lingering on unimportant detail and he told him to move on to the next item. "Michael, my D and O [directors and officers] insurance only covers me up to $15 million," Ledecky said, glaring at Saylor. "After that, they come after my own assets. So I want to hear this." Saylor's eyes bulged, he went silent again and Ferrara continued.

Saylor recalls the tension in that meeting to be a result of "our company heading into a horrifically difficult period." Up until six days before, he added, "everyone told me I was doing a perfect job."

As midnight approached on March 19, Saylor called his family to inform them of the announcement to come. He spoke longest to his mother, Phyllis Saylor, the dominant figure in Michael's life. She doted on her son, and friends said Saylor often credited her with instilling a belief that he could "do great and enormous things."

"There's gonna be a lot of bad publicity," Saylor explained to his mother, who had recently accompanied her son to the White House millennium party. "People will write bad things about me."

"I loved you when you were a paper boy and a $30,000-a-year engineer," Phyllis Saylor reassured her son. "And I'll love you just as much tomorrow."

Hate Mail The angry messages started as soon as Glenda Thomas, Michael Saylor's executive assistant, arrived at work the next morning, March 20. Hate mail, electronic and hand-delivered. "I hope you burn in hell" phone calls. Profane threats against her boss that brought tears to Thomas's eyes.

MicroStrategy had issued a press release at 8:06 a.m. announcing its restatement. Instead of claiming a 1999 profit of $12.6 million, as it had previously announced, the company now said it would show a loss of about $34 million to $40.3 million. Revenue for that year, previously reported at $205.3 million, would be reduced to "between approximately $150 million and $155 million." The company also reduced its 1998 revenues from $106.4 million to "between approximately $95.9 million and $100.9 million."

Saylor held a conference call with stock analysts just after 9 a.m. Six employees crowded into the office of Sid Banerjee, MicroStrategy's vice president for worldwide services to listen on a speaker phone. Banerjee charted MicroStrategy's share price on Yahoo's financial Web site. Every few minutes, while Saylor spoke, Banerjee pressed the "refresh" button on his browser; and every few minutes, Banerjee would see that the stock had dropped by another double-digit dollar amount.

Saylor remembers little about the day. He did interviews, about 20, his face filling office televisions next to a diving graph line of his company's share price. By the time the markets closed, MicroStrategy's shares had lost 62 percent of their value -- dropping from $226.75 to $86.75. The public stock offering was postponed, so was a planned share split. Five class action lawsuits were filed. Shareholders lost a collective $11.1 billion.

At 4:01 p.m., Saylor received a digital page from a Strategy.com stock service: "Hello, Michael," it said. "Your portfolio is down $6.1 billion."

Gallows Humor Saylor figured the trouble would blow over quickly. Privately, friends said, he was both angry, mostly at PricewaterhouseCoopers, and quick to play down the company's culpability for the restatement. He resisted the gallows humor that swept the company's hallways and e-mail network. When an employee showed him the front page of the March 21 New York Daily News, a close-up of Saylor's with the headline "LOST $6B IN A DAY," Saylor did not smile.

One Sunday a few weeks later, Saylor called about 30 of his top executives to a meeting in a basement conference room at the McLean Hilton. He said he was determined to keep growing, keep hiring people and keep pumping resources into Strategy.com, an increasingly unpopular service within the top ranks of the company given how expensive it was to run.

There was growing sentiment to refocus on MicroStrategy's core business of "business intelligence software," which was bringing in most of the revenue. For months, a few executives had been referring to Strategy.com as "Mike's pet," while others simply called it his "dog." But Saylor clung to Strategy.com, symbol of big possibilities and key to Wall Street's bestowing him the dot-com halo he so coveted.

Saylor's overriding message at the Hilton was that the restatement was trivial and that everything would settle back to normal. But many "constituencies" were not cooperating, especially the media, where Saylor's pumped-up image was suffering a harsh deflating. He began devoting more time to managing public relations. He spoke of the press in increasingly Nixonian terms. "Our enemies SHOULD NOT own our news ticker," he wrote in a May 18, 2000, e-mail to several members of his marketing and public relations staff. "I need you guys to fix this. Issue one press release per hour if you must."

"When we let negative press releases pile up on that ticker," he wrote in another e-mail that day, "we are allowing those who would see us fail clogg [sic] our arteries and attach weights to our limbs."

But it was becoming clear to Saylor that the unpleasantness would not be short-term. Lawyers were everywhere. There were class action attorneys, smelling fresh kill, as they often do when companies suffer huge stock losses after a tacit admission of past errors (in this case, MicroStrategy's restatement). Lawyers for the Securities and Exchange Commission began to snoop.

MicroStrategy retained an A-list cast of Washington lawyers to defend it, among them Ferrara and Brendan Sullivan of Williams & Connolly. Saylor was represented personally by Harvey Pitt of Fried, Frank Shriver and Jacobson -- and, according to a filing with the SEC, Saylor's personal legal representation cost the company $1 million in 2000.

Bansal was represented by Neil Eggleston, formerly of the Clinton White House, and Lynch by Bruce Baird of Covington & Burling. Robert Fiske, the former Whitewater prosecutor, represented the outside board of directors. There were scores of other private lawyers to go with MicroStrategy's own in-house lawyers. The free-wheeling cult of MicroStrategy had lawyered up.

Everyone seemed suspicious, choosing words carefully with old friends. Press releases were vetted, sometimes for days. If information was flowing at all, it was behind doors. Board meetings, several of which occurred in the days before and after March 20, became more heated. This was a change from prior meetings, which Saylor tended to dominate. Saylor was bluntly urged to bring in more experienced help.

There was concern that certain executives, particularly Lynch, were in way above their depth and experience, especially given the company's mounting financial troubles. Several members of MicroStrategy's board and legal team were pushing Saylor to fire Lynch immediately. But Saylor resisted, believing that the board just wanted to do something to make itself look tough.

There were practical reasons for Saylor to keep Lynch. One was that to hire a new chief financial officer and educate him about MicroStrategy's finances would take months, but MicroStrategy had just a few weeks.

By April 13, it was due to file with the SEC its "10-K" financial form, which would include extensive details about its restatement. If the company failed to file it, Nasdaq could "de-list" the company, or no longer include it on its exchange. Lynch, who told Saylor he would do whatever he wanted him to do -- including resign -- worked 80-hour weeks from mid-March to mid-May. He resumed smoking and lost 10 pounds.

In a board meeting that Spring, Saylor asked the board if they had "lost confidence" in his ability to lead the company, sources close to the board said. No, was their answer, but they had reservations, concerns that only mounted through the summer.

But ultimately, any move to remove Saylor would have been moot because the chief executive held more than 75 percent of the voting power on important company decisions. Board members were essentially advisers, powerless to make him do anything he didn't want to do. This contrasted with another "constituency" that Saylor feared could "torch the whole thing:" the SEC.

Staff researcher Richard Drezen contributed to this report.

Next: Facing the SEC

On the corporate jet, Michael Saylor, left, and Mark Lynch and celebrate the initial sale of public stock in MicroStrategy Corp. Ralph Terkowitz was dissatisfied with the quality of Pricewaterhouse's reviews of MicroStrategy's books. Frank Ingari had been reassured by Warren Martin, a partner at Pricewaterhouse- Coopers, that the accounting was "accurate and conservative." John Sidgmore, vice chairman at Worldcom Corp., was a newcomer to the MicroStrategy board.Entrepreneur Jonathan Ledecky had strong words to say to Saylor about the state of the company. Sanju Bansal, MicroStrategy co-founder, a member of the board.An article in Forbes magazine cast suspicions about three MicroStrategy deals in 1999. Michael Saylor was not happy after an employee showed him the New York Daily News.