Lucent on SEC: 'Nothing New'
Indeed, it seems Lucent's been expecting these particular chickens to come home to roost. Today's story in USA Today echoes one that emerged early in 2001, after the company acknowledged accounting woes (see SEC Knocking on Lucent's Door). Ultimately, those woes could bring serious trouble to former senior executives and more headaches for a company that's still fighting for its life.
A report cites a government source as stating that Lucent's about to be served with a "Wells notice," a letter in which the SEC states that civil charges may be pending and requests a response from the company.
The SEC did not return a call for comment at press time.
Lucent's official comment on the news is much the same as it was back in February 2001. Emailed by a spokesman today, it says: "There is nothing new here. This is the same issue we brought to the attention of the SEC two years ago. We haven't received a Wells notice, but if we did, it would be a routine matter in these types of situations. We continue to cooperate fully with the SEC in an effort to bring this matter to closure."
The "matter" involves an accounting mess recognized by Lucent shortly after the board's dismissal of ex-CEO Richard A. McGinn late in 2000 (see McGinn: McGone and McGinn McFound). The error involved $125 million in revenue that shouldn't have been booked, which forced Lucent to restate its earnings (see Lucent Shares Hammered by $125M Goof). Less than two months later, Lucent took another battering when an audit found the problem was bigger than was originally thought (see LR Index: Dead in the Water and Lucent Starts Cleaning Up).
While Lucent maintains it took immediate corrective action, including revamping its books and dismissing a former employee, that didn't stop the wheels of litigation from turning. And there's been a ton of it, which today's newspaper report says has helped instigate a possible SEC action.
Two lawsuits in particular stand out above the rest. The first was a "whistleblower" complaint filed by Nina Aversano, a former North American sales president during McGinn's tenure, who claimed to have been wrongfully terminated when she put the CEO on notice that his sales figures were unrealistic (see Nina Aversano). The second is a class action complaint filed by Teamsters Local 175 and 505 D&P Pension Trust Fund, headquartered in West Virginia, and the Parnassus Fund and the Parnassus Income Trust/Equity Income Fund, based in San Francisco.
Lucent won't comment on these still-pending cases, but both are noteworthy because they allege malfeasance on the part of McGinn and other execs. The class action complaint, in particular, charges that they concealed Lucent's true financial status from investors and the public, while manipulating the company's revenue recognition in order to make up for underlying inadequacies.
The complaint holds that Lucent was losing business as a result of its failure to develop competitive optical networking products, and, as a result, got creative with its numbers, recording inventory foisted on customers as revenues, even though it may later have been sent back. The papers also allege that Lucent "stuffed" its distributors with gear that was recorded as revenue but never sold.
"Faced with declining demand for the only optical networking products it could reliably deliver and for its other products, defendants decided to artificially inflate reported sales by shipping products that were not yet ready," reads the class action complaint.
It's an ugly picture, and it appears that it won't go away. Indeed, court reports indicate that a judge has allowed the suit to proceed despite protestations from McGinn and others, including former CFOs Donald K. Peterson and Deborah Hopkins. Further, SBC Communications Inc. (NYSE: SBC) has been subpoenaed for documents related to the case, although the carrier is not a party to the litigation.
Lawyers representing the class could not be reached for comment at press time.
If the SEC has followed up on the claims of the class represented by the Teamsters and Parnassus funds, the outcome may be negative or positive for Lucent. But either way, the process comes at an inconvenient time, just when it looks as if the company may be making some headway against the economic forces dragging it down.
— Mary Jander, Senior Editor, Light Reading