U.S. Securities and Exchange Commission
Litigation Release No. 18914 / September 30, 2004
Accounting and Auditing Enforcement Release No. 2117 / September 30, 2004
SECURITIES AND EXCHANGE COMMISSION v. JERRY S. CHANG, United States District Court for the Northern District of California, San Francisco Division, No. C 04-4144 MHP
COMMISSION FILES FRAUD CHARGES AGAINST FORMER CEO OF CLARENT CORPORATION
The Securities and Exchange Commission announced that it has filed financial accounting fraud charges against the former Chief Executive Officer of a Redwood City, California-based Clarent Corporation. His misconduct, and that of another Clarent executive, led Clarent, a now-bankrupt provider of Internet telephone products, to overstate its revenue by 33% for the fourth quarter of 2000, and by 23% and 39% respectively for the first two quarters of 2001.
The Commission sued former CEO Jerry S. Chang, 45, of Los Altos Hills, California, for allegedly inflating Clarent's revenue through fraudulent sales transactions and siphoning cash to a company in which the other Clarent executive and his family held influential positions.
The complaint alleges that, in December 2000, Chang induced a Taiwanese technology firm to place separate orders totaling $15 million for Clarent hardware and software by promising that, if the firm could not resell the products, Clarent would arrange for a company associated with the family of the other Clarent executive to buy the goods (as in fact ultimately occurred). These side arrangements made it improper for Clarent to recognize revenue for the sales, but, according to the complaint, Chang concealed the secret deal terms from Clarent's finance personnel, causing the company to report phony revenue to the public.
The complaint further alleges that, in June 2001, Chang directed the unauthorized release of $35 million from Clarent's Asia Pacific office to the entity related to the other Clarent executive and his family. Chang also arranged an additional $11 million loan guarantee for this entity. Neither the $35 million cash disbursement nor the $11 million loan guarantee was disclosed to Clarent's financial personnel or management. These improper payments caused Clarent to overstate its cash and to fail to disclose a liability.
The Commission's complaint, filed in the U.S. District Court for the Northern District of California, charges Chang with violating the antifraud, corporate reporting, books and records and internal accounting control provisions of the federal securities laws, and seeks injunctions, disgorgement, monetary penalties, and orders barring them from serving as officers or directors of public companies.
In particular, the Commission asserts claims against Chang for violations of Sections 10(b), 13(b)(5) of the Securities Exchange Act of 1934 ("Securities Act") and Rules 10b-5, 13b2-1 and 13b2-2 thereunder as well as for aiding and abetting violations of Sections 10(b), 13(a) and 13(b)(2)(A) of the Exchange Act and Rules 12b-20, 13a-1 and 13a-13 thereunder.
In a related matter, the Commission filed a separate action against the former President of Clarent's Asia Pacific office, Matthew M Chiang, charging him with violating, or aiding and abetting violations of, the antifraud, corporate reporting, books and records and internal control provisions of the federal securities laws. (Sections 10(b), 13(a), 13(b)(2)(A), 13(b)(5) of the Exchange Act and Rules 12b-20, 13a-1, 13a-13, 13b2-1 and 13b2-2 thereunder.) In addition, the complaint alleges that Chiang aided and abetted Clarent's violations of certain of these provisions.