Management Accounting

SEC Accuses Ex-CFO of Channel Stuffing

The regulator alleges that one-time Lantronix CFO overstated revenue while understating losses.
Stephen TaubSeptember 28, 2006

The Securities and Exchange Commission has accused the former chief financial officer of Lantronix Inc. of engaging in a scheme to overstate financial results for personal gain.

On Wednesday, the Commission noted in its cease-and-desist proceedings against the company that Steven Cotton, the former CFO, allegedly inflated revenues for the second and third quarters of fiscal year 2001, its fiscal year 2001, and the first quarter of fiscal year 2002. He reportedly did this primarily through artificially boosting sales by offering distributors special terms to induce them to purchase more product than they needed, which is called channel stuffing, according to the SEC complaint.

As a result, Lantronix, which sells networking equipment, is charged with overstating its revenues for these periods by 2.24 percent to 21.42 percent and understated pre-tax losses by 12 percent to 98 percent, according to the SEC.

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The regulator claims that Lantronix deliberately sent excessive product to distributors and granted them expanded return rights and extended payment terms. In addition, as part of its alleged channel stuffing scheme and to prevent imminent product returns, Lantronix loaned funds to a third party to purchase Lantronix product from one of its distributors, noted the complaint. The third party later returned the product, said the document.

The SEC also asserted that Lantronix engaged in other improper revenue recognition practices, including shipping product without a purchase order and recognizing revenue on a contingent sale.

According to the SEC, the company separately agreed to settle without admitting or denying the findings.