Securities regulators netted no big fish in Lucent's (LU) fraud case.
After more than three years of investigation, the
Securities and Exchange Commission
named nine former and current sales employees in a scheme that inflated company's 2000 revenue by $1.15 billion and boosted the pretax bottom line by $470 million. The agency also fined Lucent $25 million for failing to cooperate with the inquiry.
The case, filed in Federal District Court in Newark Monday, focuses on a sales period in 2000 when Lucent overstated its revenue to keep up with growth expectations, even as the telecom equipment industry was starting to stall. Lucent has already agreed to a tentative settlement and erased $679 million in false sales from its books.
The SEC says "in their drive to realize revenue, meet internal sales targets and/or obtain sales bonuses" the nine defendants "improperly granted" side agreements, credits and other incentives to induce sales.
The SEC case does not appear to be aimed at former CEO Rich McGinn, or former CFOs Debbie Hopkins and Don Peterson, say people close to the situation.
"The best I can tell, this looks like the trail ends here," said one legal expert indirectly associated with the case. Part of the reason the case has taken so long is that the SEC probably did a lot of double checking to see if the responsibilities went any higher up than the lower level people that have been targeted, says the legal observer.
The SEC case charges that defendants Nina Aversano, Jay Carter, Leslie Dorn, William Plunkett, John Bratten, Deborah Harris, Charles Elliott, Vanessa Petrini, and Michelle Hayes-Bullock, padded the company's performance and beat sales targets by getting distributors and customers to agree to make larger than necessary purchases.
SEC enforcement director Paul Berger says that while no top executives were named in the case, players like Aversano were "pretty high up." Berger estimates that in 2000, Aversano was responsible for $26 billion in sales.
Nina Aversano, former head of North American sales, and one-time whistleblower, is contesting the SEC case. Aversano role with distributors was one of the focuses of the investigation.
Aversano's attorney, Ed Schallert with Debevoise & Plimpton, vows to fight. "We regret that the SEC has taken this step, but making a claim is different than proving it," says Schallert.
In some deals with distributors, investigators charge that Lucent officials engaged in so-called channel stuffing. This typically consists of sales agreements that carry an informal understanding that distributors could return a certain amount of goods to Lucent, say people familiar with the case.
The side deals allowed Lucent to ship the products and book the sales, then worry about the returned goods later, say these sources.
Similarly, the SEC charges that former sales vice president William Plunkett, with the help of a
official, wrote a $125 million software order then falsified the timing of the purchase and also included a side deal for massive credit. The orders typically were booked as standard sales, and the credits were disguised to avoid directly undercutting the appearance of the sale.
The SEC says Plunkett will pay a civil penalty of $110,000 and has agreed to be permanently barred from acting as an officer or director of a public company.
Two other officials, Harris and Petrini, have reached settlements with the SEC. Harris will pay a civil penalty of $100,000 and has agreed to be barred from acting as an officer or director of a public company for five years. Petrini will pay a civil penalty of $60,000 and $109,505 in disgorgements of proceeds gained in the scam.
Early last year, Lucent
settled a $420 million shareholder lawsuit, which charged that the company was using this type of trickery to enhance its growth and prop up its stock price.
has become the subject of several investigations into the company's books and recent financial restatements. Nortel, which fired its CEO and most of its top finance executives, has said that the focus of the audits has been on the treatment of accruals or pay installments from sales contracts.
Nortel has also been criticized for setting up some $50 million worth of bonuses for top management based on
controversial declarations of profits in 2003.
Lucent, which helped kick off the era of tech accounting scandals with its
January shocker three years ago, says it has tentatively agreed to settle the SEC's investigation into $679 million worth of credits, discounts and fictitious sales improperly booked in 2000.
Critics point to some of the aggressive business practices fostered under former CEO McGinn as the source of the company's self-inflicted wounds. Under McGinn's leadership, for example, Lucent issued as much as
$8 billion in financing commitments to its customers. These so-called vendor financing deals put Lucent on the hook for massive loans to feeble companies. Lucent promised outfits such as failed telco Winstar $2 billion in financing, while teetering wireless shop Leap got a $1.3 billion commitment.
Lucent has since lowered its customer loan exposure to less than $500 million.