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Agreement details the workings of a round-trip deal between Motorola and Adelphia that reportedly inflated product costs and EBITDA.
Stephen Taub, CFO.com | US
May 10, 2007
Motorola agreed to pay $25 million to settle charges by the Securities and Exchange Commission that it engaged in a round-trip cash transaction with Adelphia Communications Corp. stemming from the sale of digital cable television set-top boxes. According to the Commission, Adelphia agreed to pay money to Motorola, which was immediately returned to Adelphia in the form of marketing support payments.
The regulator said that the deal between the two companies, which was backdated and applied retroactively to the prior fiscal year, was suppose to work like this: Motorola would increase the price of digital cable television set-top boxes it was selling to Adelphia, and then pay the amount of the price hike back to Adelphia, which would market the Motorola set-top boxes.
But the arrangement was further complicated by Adelphia, which did not use the marketing support payments to market the set-top boxes, the SEC asserts. Instead, the cable company recorded the price increase it paid Motorola as a capital expense, and recognized the marketing support payments as a contra marketing expense, thereby artificially reducing its marketing expenditures and increasing earnings before interest, taxes, depreciation and amortization, noted the SEC.
The order also found that Motorola employees were aware of a "number of unusual and unique facts" that together demonstrated that Adelphia was misusing the marketing support agreement. Those facts included Adelphia's request to increase the cost of Motorola set top boxes, which was the first time a customer had asked the Motorola executives involved in the transaction to increase the price of the manufacturer's products, explained the order.
The SEC also asserts that the marketing support agreement, which Adelphia provided to Motorola, contained a false reason for the price increase. Reportedly, Motorola executives insisted, as a condition to entering into the transaction, that Adelphia provide a letter from its lawyers stating that Adelphia would not use the transaction in contravention of federal regulations governing cable television rates. Instead, "an Adelphia finance executive who was later implicated in the fraud signed the letter," added the order.
"The transaction was a 'wash' transaction with no economic impact on Motorola," said the SEC in the order. “Motorola did not treat the transaction as a marketing transaction for accounting purposes."