Lucent's Saudi Deal Prompts Probe

A Saudi telecommunication company's lawsuit against Lucent has prompted the DOJ and SEC to investigate

August 25, 2003

4 Min Read
Lucent's Saudi Deal Prompts Probe

Legal troubles at Lucent Technologies Inc. (NYSE: LU) are heating up. Late on Friday, the company said it was being investigated by the U.S. Department of Justice and the Securities and Exchange Commission (SEC) for possible violations of the Foreign Corrupt Practices Act in connection with its operations in Saudi Arabia.

Lucent wouldn't comment on any specifics regarding the investigations. "We are cooperating with both agencies and we have no further comment," said Bill Price, a company spokesman.

The company disclosed the investigations late Friday, in a document it filed with the SEC.

The investigations were prompted by a lawsuit filed earlier this month by National Group for Communications and Computers Ltd., a Saudi telecommunications company (see Saudi Firm Sues Lucent for Bribery).

In court papers, NGC, now known as Silki La Silki National Telecommunications, accuses Lucent of bribing a Saudi official with money, gifts, and free use of private jets to make business decisions in Lucent's favor between 1995 and 2002. Lucent had said at the time the lawsuit was filed that it believes the allegations are without merit.

Analysts say they are still evaluating the potential impact of the investigations on the company’s financials. The company's stock has taken a small hit as investors also assess what the possible damage might be. It was trading down $0.02 (1.09%) to $1.82.

"I don’t have a clue what the impact or the outcome will be yet," says Steven D. Levy, an analyst with Lehman Brothers. "At this point, we're still digging into what the worst-case scenario could be. But anytime there is uncertainty, it impacts the stock price. And right now, nobody understands what the possibilities are yet."

Many analysts say that even in a worst-case scenario -- if any wrongdoing is found -- Lucent would likely pay minimal fines. They cite the SEC's 2002 settlement with Xerox Corp. as an example. In April 2002, Xerox Corp. (NYSE: XRX), which had been accused of inflating revenues by $3 billion, settled with the SEC for $10 million. For Lucent, which made $1.96 billion in revenue in the third quarter, $10 million would be a mere slap on the wrist (see Lucent Q3 Revenues Slide).

But there are signs that the SEC is toughening up. Earlier this month, a bankruptcy judge approved a $750 million settlement to resolve SEC fraud allegations against WorldCom Inc. (see Court OKs MCI's SEC Settlement). The judge approved the payment to investors, who lost about $200 billion in the company's collapse. This penalty surpasses the Xerox case as the largest penalty assessed for an accounting fraud case. WorldCom has admitted accounting irregularities of $11 billion.

There are other signs that the SEC is cracking down on corporate malfeasance. The agency has been increasingly seeking to stop wrongdoers from continuing to serve as top officers and directors. It's also been requiring individual offenders to return more money than ever: Last year, defendants in SEC cases were ordered to repay $1.3 billion in ill-gotten gains, double the amount in 2001.

Depending on what the Department of Justice finds during its investigation, Lucent executives could also face criminal charges. If tried and found guilty, former and current Lucent executives who were involved in the Saudi contracts could face up to five years in prison and $100,000 in fines for each charge, according to the federal statute. In addition, they could be fined $10,000 if found guilty in a civil court.

But the real impact to Lucent and its executives lies in the potential damage to its public image. Regardless of what is uncovered in these investigations, Lucent is much more vulnerable to the whims of investors than to the penalties imposed by government agencies or courts, say analysts.

"This is definitely a step backwards for the company," says one analyst, who didn’t want his name used. "They’ve got a new management team that's trying to build investor confidence, and this will likely hurt that somewhat."

Ironically, while Lucent copes with the flap over contracts in one part of the Middle East, it had good news in another part of the region: This afternoon, Lucent announced it's won a $25 million contract to supply gear for rebuilding Iraq's phone network (see Bechtel Picks Lucent to Rebuild Iraq).

— Marguerite Reardon, Senior Editor, Light Reading

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