SEC Settles Telecom Twofer

UTStarcom execs past and present to pay up over revenue-recognition errors; GlobeTel officials settle case about falsely inflating revenue.
Stephen TaubMay 2, 2008

The Securities and Exchange Commission has announced separate settlements of charges against people at two telecommunications companies.

Former UTStarcom CFO Michael Sophie and current company chief executive Hong Liang Lu settled a case involving false financial reports and recurring internal-control deficiencies. Without admitting or denying guilt, they agreed to pay civil penalties of $75,000 and $100,000, respectively.

According to the SEC’s complaint, UTStarcom publicly reported more than $400 million in sales between 2000 and 2005 that were subject to undisclosed side agreements or contract modifications that rendered revenue recognition improper under applicable accounting principles.

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The commission also alleged that UTStarcom failed to disclose and properly account for transactions between the company and an entity controlled by an executive of UTStarcom’s China subsidiary, and that the company failed to properly record compensation expenses for employee stock options.

The SEC had accused Lu and Sophie of falsely certifying that the company’s financial statements and books and records were accurate.

In a related administrative order, the SEC found that UTStarcom violated securities rules and that Lu and Sophie caused the company’s violations. Both the company and the individuals agreed to cease and desist from such violations.

UTStarcom, which makes wireless network equipment and cellular phones, said last September that it would restate its results for the seven-year period ended December 31, 2006, to correct the way it recognized revenue generated in China. Part of the revenue the company had garnered in China was reported earlier than it should have been, UTStarcom said in a press release at the time.

This was not the first time the company has run afoul of rules because of revenue-recognition problems in Asia. In May 2006 UTStarcom said it would restate its results for nearly three years because of its premature recognition of revenue on a contract with a customer in India, as well as other transactions.

In a statement Thursday, the company stressed that no monetary penalties were assessed against it. It acknowledged, though, that the settlement with the SEC does not include the Justice Department’s ongoing investigation of whether the company violated the Foreign Corrupt Practices Act.

In the other case, the SEC filed a civil action against GlobeTel Communications and three former officers: CFOs Thomas Jimenez and Lawrence Lynch and chief executive Timothy Huff. According to the complaint, Jimenez and Lynch schemed to inflate GlobeTel’s revenue and hide millions of dollars of unpaid receivables and liabilities between 2004 and 2006. The SEC alleges that GlobeTel recorded $119 million in revenue on the basis of fraudulent invoices created by two people in charge of its wholesale telecommunications business.

Jimenez and Lynch are accused of making, or causing to be made, entries on GlobeTel’s general ledger that improperly offset the receivables associated with those revenues against the liabilities, thereby concealing the revenue fraud from investors. Huff is alleged to have caused GlobeTel to sell $1.6 million worth of its common stock in 2005 in violation of the registration provisions of the federal securities laws.

In a settlement announced Thursday, Lynch agreed to a five-year officer and director bar and to pay a civil penalty in an amount to be determined by the court. Huff agreed to pay a $30,000 civil penalty. Neither admitted nor denied guilt.