Risk & Compliance

SEC Charges Six with Inflating Revenue

Former employees of Riverstone Networks, which has since been acquired by Lucent, stand accused of recognizing revenue from sales with undisclosed ...
Stephen TaubOctober 16, 2006

The Securities and Exchange Commission filed a complaint against five former officers — included two finance executives — and one former employee of Riverstone Networks, Inc., a telecom equipment company, accusing them of fraudulently inflating revenues.

The suit was filed in U.S. District Court for the Northern District of California against chief executive officer Romulus S. Pereira, chief financial officer Robert B. Stanton, vice president of finance William F. McFarland, executive vice president of sales L. John Kern, vice president of marketing Andrew D. Feldman, and director of sales operations Lori H. Cornmesser.

The SEC alleges that from June 2001 through June 2002, Riverstone improperly recognized revenues on sales transactions that involved side agreements with purchasers, under which the customer’s payment for Riverstone product was contingent upon resale or the purchaser was granted full return, exchange, or cancellation rights.

The side agreements were then concealed from Riverstone’s outside auditors, according to the complaint.

Riverstone, whose assets were acquired by Lucent Technologies earlier this year, reported almost $30 million of fraudulent revenues as a result of these contingent sales, causing revenue overstatements in four fiscal quarters ranging between 14.3 and 23.1 percent, according to the SEC.

The regulator accused the individuals of circumventing Riverstone’s internal accounting controls, falsifying Riverstone’s accounting records, and lying to the company’s outside auditors.