SEC Details Lucent Fraud Charges
Yesterday, Lucent and the Securities and Exchange Commission (SEC) announced that Lucent had agreed to pay a $25 million fine for a lack of cooperation with an investigation into accounting fraud at the company. Charges are still pending against former Lucent executives, and new details about the accounting treatments of certain transactions raise questions about how Lucent was being run at the time of the alleged accounting tricks.
The SEC alleges that Lucent “fraudulently and improperly recognized approximately $1.148 billion of revenue and $470 million in pre-tax income during its fiscal year 2000 (October 1, 1999, to September 30, 2000) in violation of Generally Accepted Accounting Principles..."
The former Lucent employees charged in the suit include Nina Aversano, Jay Carter, A. Leslie Dorn, William Plunkett, John Bratten, Deborah Harris, Charles Elliott, Vanessa Petrini, Michealle Hayes-Bullock, and David Ackerman.
Lucent, Plunkett, Harris, and Petrini have all settled their cases with the SEC. The exact terms have not been disclosed. The action against the other defendants is pending.
The action is a civil case, meaning the penalties for the remaining parties could include fines, disgorgement of gains, and possible disciplinary actions -- but not jail time.
Aversano had sued Lucent herself, but that lawsuit was settled and the specifics kept mum (see Lucent Puts Aversano Suit to Rest and Nina Aversano) The devil is in the details, and the details of the SEC charges are interesting in themselves. Specifically, they revolve around a few big deals that Lucent officials struck with: Anixter Inc. and Graybar, Lucent's top two distributors; Winstar LLC, a company that was reorganized and sold to IDT Corp. (NYSE: IDT) (see Winstar Sues, Lucent Scoffs); AT&T Corp. (NYSE: T); and BellSouth Corp. (NYSE: BLS). In all of these cases, the SEC contends, Lucent officers and executives were breaking GAAP rules, aggressively accounting for revenues that should never have been recognized. In some cases, the Lucent officials even made stuff up or hid stuff from other employees, the SEC charges.
For example, the SEC says that Aversano and Dorn “engaged in a pattern and practice of orally granting Anixter International, Inc. and Graybar Electric Company (Lucent's top two distributors) certain rights and privileges beyond those contained in their respective distribution agreements with Lucent.” In short, the SEC says they told these distributors that if they took a Lucent product, they would never have a problem unloading it as Lucent would help them sell it or else would accept a return if sales to the end-customers did not materialize. Such arrangements made revenue recognition improper under GAAP, says the SEC. The SEC says that Aversano and Dorn misled Lucent's financial division, failing to inform them of these promises. In total, says the SEC, these agreements with distributors led Lucent to overstated pre-tax income for fiscal year 2000 by approximately 7 percent.
In the Winstar example, the SEC says that the Lucent officials in question -- Plunkett, Harris, and Petrini, who worked under Aversano -- helped negotiate a package of software agreements that were tacked on to an existing $135 million software deal with Winstar. These included a $35 million credit to be applied to Winstar's future purchases, a $45 million credit expected to comprise substantially all the cost of a network integration laboratory for Winstar, and reduced pricing for Winstar on purchases of equipment for building and hub. The SEC says the Lucent officials then post-dated the letters regarding these agreements to separate them from a software deal to which they were connected.
In other deals including AT&T and BellSouth, the SEC alleges that Lucent officials Carter, Hayes-Bullock, and Bratten created pricing and credit schemes that violated GAAP.
All in all, the SEC says that $511 million of revenue and $91 million in pre-tax income were recognized prematurely in quarterly results during Lucent's fiscal year 2000. The remaining $637 million in revenue and $379 million in pre-tax income should not have been recognized at all during Lucent's fiscal year 2000, according to the SEC. “These GAAP violations were made in at least ten transactions in fiscal 2000, and Lucent violated GAAP by recognizing revenue on these transactions both in circumstances: (a) where it could not be recognized under GAAP; and (b) by recording the revenue earlier than was permitted under GAAP.”
One big question to emerge from all this: What about Henry Shacht and Richard McGinn? Both Schacht, as chairman, and McGinn, as CEO, were in charge of Lucent during the period at issue, and McGinn was Aversano's boss. Neither is mentioned in the SEC suit. Shacht has retired as chairman but still sits on Lucent’s board (see Schacht Faces Retiree Wrath and Schacht Out, Russo In at LU). McGinn is now a venture capitalist (see Rich McGinn and McGinn: McGone).
— R. Scott Raynovich, US Editor, Light Reading