Accounting & Tax

SEC Charges Lucent, Executives

Imposes the largest penalty ever for not cooperating with an SEC probe.
Stephen TaubMay 18, 2004

The Securities and Exchange Commission fined Lucent Technologies Inc. $25 million for not cooperating with an investigation of its accounting practices and charged 10 executives with securities fraud and helping Lucent violate federal securities laws.

This is the largest penalty imposed on a company for not cooperating with an SEC probe.

“Companies whose actions delay, hinder or undermine SEC investigations will not succeed,” said Paul Berger, associate director of enforcement. “Stiff sanctions and exposure of their conduct will serve as a reminder to companies that only genuine cooperation serves the best interests of investors.”

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The SEC charged Lucent with securities fraud and violations of the reporting, books and records, and internal control provisions of the federal securities laws. The commission alleges that Lucent fraudulently and improperly recognized about $1.148 billion of revenue and $470 million in pre-tax earnings during fiscal 2000.

The SEC’s complaint alleged that to realize revenue, meet internal sales targets, and obtain sales bonuses, nine current and former Lucent executives — Nina Aversano, Jay Carter, Leslie Dorn, William Plunkett, John Bratten, Deborah Harris, Charles Elliott, Vanessa Petrini, and Michelle Hayes-Bullock — “improperly granted, and/or failed to disclose, various side agreements, credits and other incentives to induce Lucent’s customers to purchase the company’s products.”

These extra-contractual commitments were made in at least 10 transactions in fiscal 2000, alleged the commission. Lucent violated generally accepted accounting principles by recognizing revenue on these transactions, both in circumstances where it could not be recognized under GAAP and by recording the revenue earlier than was permitted, added the commission.

The SEC also asserted that the nine Lucent executives violated and circumvented Lucent’s internal accounting controls, falsified documents, hid side agreements with customers, failed to inform personnel in Lucent’s corporate finance and accounting structure of the existence of the extra-contractual commitments or, in some instances, took steps to affirmatively mislead them, according to the complaint.

The complaint also named former Winstar officer David Ackerman, alleging that he engaged in a scheme with Plunkett that resulted in Lucent improperly recording a $125 million software purchase by Winstar at the end of Lucent’s fourth quarter of fiscal 2000. His fraud included signing a document that disguised the timing of a side agreement in connection with that sale, the SEC charged.

Lucent and three of its former executives agreed to settle the case without admitting or denying the allegations.

In fining Lucent for failing to cooperate, the SEC accusing the company of incomplete document production and failing to ensure that a relevant document was preserved and produced in response to a subpoena. The commission also asserted that after reaching an agreement in principle with the SEC to settle the case, Lucent’s former chairman/CEO and outside counsel agreed to an interview with Fortune magazine in which Lucent’s counsel characterized Lucent’s fraudulent booking of the $125 million software pool agreement between Lucent and Winstar as a “failure of communication,” thus denying that an accounting fraud had occurred.

Under the settlement, Plunkett will pay a civil penalty of $110,000 and agreed to be permanently barred from acting as an officer or director of a public company. Harris will pay a civil penalty of $100,000 and has agreed to be barred from acting as an officer or director of a public company for five years. Petrini will pay a civil penalty of $60,000 and disgorge $109,505, representing profits gained as a result of the conduct alleged in the complaint, together with prejudgment interest of $23,487.

The other seven executives will pursue their differences with the SEC in court.