Lucent Agrees to a $25M Settlement; Ten Individuals Charged With Securities Fraud
The Securities and Exchange Commission today charged Lucent Technologies Inc. with securities fraud, and violations of the reporting, books and records and internal control provisions of the federal securities laws. The SEC also charged nine current and former Lucent officers, executives and employees, and one former Winstar Communications Inc. officer with securities fraud and aiding and abetting Lucent's violations of the federal securities laws. The SEC's complaint alleges that Lucent fraudulently and improperly recognized approximately $1.148 billion of revenue and $470 million in pre-tax income during its fiscal year 2000.
Lucent and three of the former Lucent employees agreed to settle the case without admitting or denying the allegations. As part of the settlement, Lucent agreed to pay a $25 million penalty for its lack of cooperation.
"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."
The SEC's complaint alleges that Lucent's violations of generally accepted accounting principles (GAAP) were due to the fraudulent and reckless actions of the defendants and deficient internal controls that led to numerous accounting errors by others. In their drive to realize revenue, meet internal sales targets and/or obtain sales bonuses, the complaint alleges, defendants Nina Aversano, Jay Carter, Leslie Dorn, William Plunkett, John Bratten, Deborah Harris, Charles Elliott, Vanessa Petrini, and Michelle Hayes-Bullock, in their respective capacities as officers (Aversano and Carter), executives (Plunkett, Bratten, Dorn and Harris) and employees (Petrini, Elliott and Hayes-Bullock) of Lucent improperly granted, and/or failed to disclose, various side agreements, credits and other incentives (collectively "extra-contractual commitments") to induce Lucent's customers to purchase the company's products. These extra-contractual commitments were made in at least ten transactions in fiscal 2000, and Lucent violated GAAP by recognizing revenue on these transactions both in circumstances:
(a) where it could not be recognized under GAAP; and
(b) by recording the revenue earlier than was permitted under GAAP.
In carrying out their fraudulent conduct, according to the complaint, these Lucent officers, executives and employees 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.
The complaint also alleges that Ackerman, at the time an officer of Winstar, 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 year 2000. His fraud included signing a document that disguised the timing of a side agreement in connection with that sale. By engaging in such conduct, Ackerman aided and abetted Lucent's fraud.
Lucent's Lack of Cooperation
Lucent's penalty for its failure to cooperate is based on the following conduct.
- Throughout the investigation, Lucent provided incomplete document production, producing key documents after the testimony of relevant witnesses, and failed to ensure that a relevant document was preserved and produced pursuant to a subpoena. As a result, the staff's ability to conduct an efficient and comprehensive investigation was impeded.
- After reaching an agreement in principle with the staff to settle the case, Lucent's former Chairman/CEO and outside counsel agreed to an interview with Fortune magazine. During the interview, 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. Lucent's statements were made after Lucent had agreed in principle to settle this case without admitting or denying the allegations concerning, among other things, the Winstar transaction. Lucent's public statements undermined both the spirit and letter of its agreement in principle with the staff.
- After reaching an agreement in principle with the staff to settle the case, and without being required to do so by state law or its corporate charter, Lucent expanded the scope of employees that could be indemnified against the consequences of this SEC enforcement action. Such conduct is contrary to the public interest.
- Lucent also failed over a period of time to provide timely and full disclosure to the staff on a key issue concerning indemnification of employees. Failure to provide accurate and complete disclosure to the staff undermines the integrity of SEC investigations.
- Lucent, Plunkett, Harris and Petrini have reached settlements with the SEC. These defendants have agreed to permanent injunctions against future violations of the anti-fraud, reporting, books and records and internal controls provisions of the federal securities laws.
- Lucent will pay a penalty of $25 million.
- Plunkett also will pay a civil penalty of $110,000 and has 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 thereon in the amount of $23,487.
The SEC will litigate this case against the remaining seven defendants.