Litigation Release No. 18715 / May 17, 2004
Accounting and Auditing Enforcement Release No. 2016 / May 17, 2004
SEC CHARGES LUCENT TECHNOLOGIES INC. AND TEN DEFENDANTS FOR A $1.1 BILLION ACCOUNTING FRAUD
LUCENT WILL PAY A $25 MILLION PENALTY
THREE INDIVIDUALS ALSO SETTLE SECURITIES FRAUD CHARGES
SECURITIES AND EXCHANGE COMMISSION v. LUCENT TECHNOLOGIES INC., NINA AVERSANO, JAY CARTER, A. LESLIE DORN, WILLIAM PLUNKETT, JOHN BRATTEN, DEBORAH HARRIS, CHARLES ELLIOTT, VANESSA PETRINI, MICHELLE HAYES-BULLOCK, AND DAVID ACKERMAN, Civil Action No. 04-2315 (WHW) (D.N.J.)(filed May 17, 2004).
The Securities and Exchange Commission today filed fraud charges in the United States District Court for the District of New Jersey against Lucent Technologies Inc. and ten individuals. The 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 (October 1, 1999 to September 30, 2000) in violation of Generally Accepted Accounting Principles ("GAAP"). $511 million of revenue and $91 million in pre-tax income were recognized prematurely in quarterly results during Lucent's fiscal year 2000. The remaining $637 million in revenue and $379 million in pre-tax income should not have been recognized at all during Lucent's fiscal year 2000. These GAAP violations 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.
Individuals Sued: The SEC Complaint alleges the following: Lucent's violations of GAAP were due to the fraudulent and reckless actions of the defendants and were also the result of 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, Lucent officers, (Aversano and Carter), executives, (Dorn, Plunkett, Bratten, and Harris), and employees, (Elliott, Petrini, and Hayes-Bullock) improperly granted, and/or failed to disclose, various side agreements, credits and other incentives (collectively "extra-contractual commitments") made to induce Lucent's customers to purchase the company's products. In carrying out their fraudulent conduct, the defendants 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. In addition, 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.
Aversano and Dorn engaged in a pattern and practice of orally granting Anixter International, Inc. and Graybar Electric Company (Lucent's top two distributors) certain rights and privileges beyond those contained in their respective distribution agreements with Lucent. While the specific rights and privileges granted to Anixter and Graybar varied from transaction to transaction, the general nature of the agreements was that if these distributors took the product offered by Lucent they would not get hurt in a given transaction; that Lucent would assist them in moving the product to end-customers; and that Lucent would accept a return of the product if sales to the end-customers did not materialize. Despite the fact that Aversano and Dorn knew, or were reckless in not knowing, that the verbal agreements entered into in connection with these transactions made revenue recognition improper under GAAP, they nevertheless failed to inform Lucent's CFO structure of the existence of those agreements. Moreover, on some occasions Aversano and Dorn affirmatively misrepresented facts to members of Lucent's CFO structure. In total, Aversano and Dorn's fraudulent conduct resulted in Lucent materially overstating its pre-tax income for fiscal year 2000 by approximately 7 percent.
In September 2000, Plunkett negotiated, with the assistance of Lucent's Winstar sales team members, Harris and Petrini, the sale of $135 million worth of software in a software pool transaction with Ackerman of Winstar. The software pool arrangement allowed Winstar to select software by September 29, 2001, and Lucent to recognize $135 million in revenue in its fiscal year ending September 30, 2000. Responding to pressure from Lucent's senior management, including Aversano, to recognize revenue, Plunkett reached an agreement with Ackerman in which Winstar would pay Lucent $135 million for the software and the parties would separately document additional elements of the software pool transaction that would give Winstar additional value. The additional value came in the form of a $35 million credit to be applied to Winstar's future purchases, a $45 million credit expected to comprise substantially all the cost of a network integration laboratory for Winstar, and reduced pricing for Winstar on purchases of equipment for building and hub sites ("the side agreements").
To ensure that Lucent's accountants would not deduct the value of the side agreements from the $125 million ($135 million less a $10 million properly documented credit) Lucent would recognize on the software pool agreement in September 2000, Plunkett instructed Petrini to draft and post-date three letters documenting the side agreements with fictitious dates in October 2000. The effect of the post-dated letters was to create the appearance that the side agreements were reached after September 30, 2000 and were not connected to the software pool agreement. Petrini drafted and post-dated the letters as instructed and Plunkett signed the post-dated letters on September 29, 2000. Petrini told Harris that Plunkett and Petrini had documented the side-agreements in post-dated letters. In addition, after receiving an email specifically requesting any information regarding discounts or incentives offered by Lucent to Winstar, Harris, despite knowing of the existence of the side agreements and the true nature of the concessions granted to Winstar, nevertheless failed to disclose the side agreements to Lucent's accountants.
Ackerman received the three executed post-dated letters on September 29, 2000 and knew that they did not accurately portray the entire software pool transaction. Nevertheless, Ackerman agreed to Plunkett's post-dating of Lucent's obligations thereby creating the false appearance that they had been agreed to after September 30, 2000. Ackerman also counter-signed the letter dealing with reduced pricing on purchases of equipment for building and hub sites. Ackerman post-dated that letter October 20, 2000 and sent that executed letter back to Plunkett on September 29, 2000. Petrini, Harris, Plunkett, and Ackerman knew, or were reckless in not knowing, that if the credits and discounts had been properly recorded by Lucent in the same quarter that the software pool agreement was executed, Lucent would not have recognized $125 million on the transaction. By engaging in such conduct, Ackerman aided and abetted Lucent's fraud.
In a transaction with AT&T wireless services ("AWS") Carter and Hayes-Bullock knew, or were reckless in not knowing, that Lucent's recognition of $53 million of revenue and operating income on June 30, 2000, at the end of Lucent's third quarter of fiscal year 2000, violated GAAP. Starting in approximately the summer of 1999, Lucent and AWS began to negotiate a new business model known as Voice Path Pricing ("VPP"). Under VPP, AWS would no longer pay Lucent for the individual pieces of equipment that make up a telecommunications network as they had done traditionally ("conventional pricing"). Instead, AWS would pay a price for each voice path - in essence pay for each data/voice connection that could be handled on the finished network.
While the VPP agreement continued to be negotiated, Carter authorized his subordinates to enter into a verbal agreement with AWS. Through that verbal agreement, Lucent and AWS agreed that VPP would be retroactively applied to product purchased between April 1, 2000 and the date the agreement was ultimately reached ("interim period"). As part of this side agreement, any pricing differential between VPP and conventional pricing for product purchased during the interim period would be adjusted through credits via a "true-up" process once the VPP agreement was finalized. In effect, the parties agreed to have VPP commence on April 1, 2000. Hayes-Bullock, who was the CFO for Lucent's AT&T customer business unit, was aware the oral side agreement had been entered into with AWS.
During the interim period, Lucent provided AWS with switching equipment valued at $53 million under conventional pricing. In order to recognize revenue on the switches, Carter instructed his subordinates to obtain a purchase order from AWS for the switches. AWS provided a purchase order at the end of Lucent's third quarter of fiscal year 2000 with the explicit understanding that - in conformity with the original oral understanding - Lucent would provide a credit for the invoiced amount and that AWS would ultimately pay the VPP price for the equipment. On June 30, 2000, at the end of Lucent's third quarter of fiscal year 2000, this switching equipment was invoiced under conventional pricing and Lucent violated GAAP by recognizing revenue and operating income in the amount of $53 million. Carter and Hayes-Bullock knew, or were reckless in not knowing, that Lucent's recognition of the revenue and operating income violated GAAP because the price AWS would ultimately pay for the switches was not fixed and determinable, and Lucent could have no expectation that it would collect $53 million for the switching equipment because the parties had agreed AWS would receive an offsetting $53 million credit. Carter and Hayes-Bullock also took affirmative steps to mislead Lucent's Chief Accountant about the existence and nature of the side agreement with AWS.
On September 30, 2000, Lucent and BellSouth Telecommunications, Inc. ("BellSouth") entered into a software pooling agreement, called LOA 105, which obligated BellSouth to pay Lucent $95 million by April 1, 2001 for software that it had to select by September 30, 2002. To induce BellSouth to enter into LOA 105, Bratten agreed to provide BellSouth with a $20 million credit and a 2 percent price discount (valued at $1 million). Bratten failed to notify Lucent's CFO structure that he had agreed to the credit and discount as part of a software pooling transaction. In addition, on October 10, 2000, Bratten executed a letter to BellSouth that falsely represented that the credit and discount had been granted on that date rather than in September. The letter was drafted by Elliott, who knew that Bratten had granted the credit and discount in September as an inducement for BellSouth to enter into LOA 105. As a result of their fraudulent conduct, Lucent violated GAAP by recording the entire $95 million as revenue and operating income, rather than $74 million.
Lucent, Plunkett, Harris and Petrini have agreed to settle these matters without admitting or denying the allegations in the Complaint. The Commission expects the penalties from the settling defendants to be distributed pursuant to the Fair Fund provisions of Section 308(a) of the Sarbanes-Oxley Act of 2002. The settlement terms are subject to court approval.
Lucent has consented to the entry of a judgment that enjoins it from violations of the anti-fraud, reporting, books and records and internal control provisions of the federal securities laws, (Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder, Section 13(a) of the Exchange Act and Rules 13a-11, 13a-13, and 12b-20 thereunder, and Sections 13(b)(2)(A) and 13(b)(2)(B) of the Exchange Act). Lucent will also pay a $25,000,000 civil penalty and $1 in disgorgement.
Plunkett, Harris and Petrini have each consented to the entry of a judgment that enjoins them from violating the anti-fraud provisions of the federal securities laws and from knowingly circumventing internal controls (Section 10(b) of the Exchange Act and Rule 10b-5 thereunder and Section 13(b)(5) of the Exchange Act), and from aiding and abetting violations of the reporting, books and records and internal control provisions of the federal securities laws (Section 13(a) of the Exchange Act and Rules 13a-11 and 12b-20 thereunder, and Sections 13(b)(2)(A) and 13(b)(2)(B) of the Exchange Act). Additionally, Plunkett has consented to an order permanently barring him from acting as an officer or director of any public company and payment of a $110,000 civil penalty. Harris has consented to an order baring her from acting as an officer or director of a public company for five years and payment of a $100,000 civil penalty. In addition, Petrini will 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, and pay a civil penalty of $60,000.
THE REMAINING DEFENDANTS
The seven remaining defendants have not reached settlements with the Commission. All of these defendants, except Ackerman, have been charged with violating, and aiding and abetting the violation of, the anti-fraud provisions of the federal securities laws and aiding and abetting violations of the reporting, books and records and internal control provisions of the federal securities laws. The Commission seeks, as to all these defendants, except Ackerman, permanent injunctions against future violations of these provisions of the federal securities, disgorgement of ill-gotten gains (including salaries and other benefits), prejudgment interest thereon and civil penalties. For Aversano and Carter, the Commission also seeks orders prohibiting them from acting as an officer or director of any public company. Solely as to Aversano, the Commission also seeks an injunction from future violations of Exchange Act Rule 13b2-2, which prohibits, among other things, making materially false or misleading statements to an accountant in connection with an audit or examination of financial statements that will be filed with the Commission.
The Commission's Complaint charges Ackerman with aiding and abetting Lucent's violation of the anti-fraud provisions of the federal securities laws and the reporting, books and records and internal control provisions. The Commission seeks from Ackerman a permanent injunction against aiding and abetting future violations of these provisions of the federal securities laws, disgorgement of ill-gotten gains (including salaries and other benefits), prejudgment interest thereon and civil penalties.