SEC Knocking on Lucent's Door

There's no news here, Lucent says. But mounting legal pressure may force the company to further action

February 9, 2001

4 Min Read
SEC Knocking on Lucent's Door

The hot water just keeps rising for Lucent Technologies Inc. (NYSE: LU). According to a report in today's Wall Street Journal, the beleaguered company faces a formal investigation by the U.S. Securities and Exchange Commission. At issue are alleged fraudulent accounting practices -- money on the books that shouldn't have been there.

The SEC refuses to confirm or deny the existence or status of the alleged investigation.

"This isn't news," Lucent spokesperson Michelle Davidson told Light Reading today. She says Lucent notified the SEC of suspect numbers based on its own audit late in November 2000. "We fully expected they'd look into the matter."

Lucent itemized its questionable revenue in an announcement on December 21, in which it stated the discovery of four major errors in its books, adding up to a total of $679 million. Lucent says the errors included a series of "misleading documentation" by salespeople, such as recording sales in the wrong quarter or putting purchase credits associated with one sale in the records of another quarter. This kind of problem resulted in the famous $125 million error that originally tipped off Lucent that it needed an overhaul of its financial records (see Lucent Shares Hammered by $125M Goof). Lucent also duly noted back in December that, in another $28 million error, revenue had been recorded for equipment that hadn't yet been shipped. And it stated that it was "taking back" $452 million in equipment that had been sent to integrators and distributors but not sold to end-customers.

The news here is that Lucent could wind up in more trouble than ever if the SEC decides to press charges. It's a situation that could stymie its recently announced plans for a slow comeback, a process that is scheduled to include the layoff of 10,000 employees (see Lucent Starts Cleaning Up).

Indeed, analysts are appalled. "Wall Street sees a lot of value in Lucent still," says Jim Jungjohann, analyst at CIBC World Markets. "But everyone's waiting for a catalyst to unlock that value. A fraud review isn't that catalyst."

The alleged investigation also highlights a growing backlog of litigation facing Lucent. Within the last month alone, four new securities class-action and stockholder suits have been opened against Lucent. That's in addition to at least two publicized early in January (see Lucent Faces Shareholder Suit and Lucent Sued Again).

The sheer volume of suits has caused Lucent to start reviewing its legal options, says spokesperson Davidson. And that includes consolidating the lawsuits in an effort to keep legal costs in hand.

The alleged SEC investigation also could have repercussions for ex-CEO Richard A. McGinn, who is named as a defendant in all of Lucent's pending securities-related litigation, along with current CEO Henry Schacht.

According to the Wall Street Journal, McGinn also is cited in a complaint by Nina Aversano, formerly president of Lucent's North American sales, who reportedly says McGinn fired her immediately following a meeting in October 2000. The paper says Aversano was one of at least two executives who gave McGinn "a detailed warning that Lucent's sales targets were unrealistic."

The paper also indicates that former Lucent CFO Donald Peterson, now CEO of Lucent's spinoff Avaya (NYSE: AV), was sometimes criticized for his "aggressive, but legal" accounting methods prior to his replacement by Deborah Hopkins in April 2000. Hopkins is now listed as a defendant in much of the Lucent litigation.

According to SEC records, McGinn was still negotiating his separation agreement with the board of Lucent in early January. In 2000, he was awarded $1,100,000 in base salary and a total of 3,434,820 shares of Lucent stock. He also received $137,384 in additional compensation, including payment of "above-market interest on deferred compensation." There was no bonus.

It is not clear what remuneration could come McGinn's way as a shareholder, in light of Lucent's recent spinoff of Agere Systems Inc., since it's not yet clear how the payoff on that transaction will be distributed among Lucent shareholders (see Agere Aims for $8.5 Billion IPO).

These year-2000 figures represented a cut in pay for McGinn, who earned a bonus of $5,129,636 in addition to his $1.1 million base salary in 1999 and $11,861,652 in bonuses in 1998.

By mid-afternoon today, Lucent stock was trading at 15.18, down 1.71 (10.12%).

-- Mary Jander, senior editor, Light Reading

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