eWEEK content and product recommendations are editorially independent. We may make money when you click on links to our partners. Learn More.
Lucent Technologies executives allegedly engaged in a series of fraudulent financial transactions with Winstar Communications – a company that Lucent heavily financed – to falsify sales and revenue performance, according to new documents filed in a pending class action shareholder lawsuit in New Jersey.
Those documents include e-mail messages of former Lucent executives Richard McGinn, CEO; Deborah Hopkins, chief financial officer; and Donald Peterson, Hopkins predecessor – all of whom are defendants with Lucent in the case. The documents also include internal company memoranda and other corporate documents obtained under subpoena by attorneys representing a West Virginia International Brotherhood of Teamsters local pension fund and other lead plaintiffs in the case.
The documents appear to shed some light on a pending formal investigation of Lucents accounting practices by the Securities and Exchange Commission that has been ongoing since last year.
Those inquiries have been described in published reports as focused on suspected “accounting irregularities” by executives of the giant telecom equipment manufacturer. But new allegations within the shareholders recent amended complaint raise issues of fraud through intentional manipulation of both Winstars and Lucents financial agreements.
SEC officials wont talk about specific pending investigations as a matter of policy. Lucent has publicly acknowledged the investigation, and said it helped bring some of those issues to the SECs attention. The lawsuit documents indicate, however, that the scope of the investigation could well touch on customers of Lucent, and Winstar in particular.
It was widely reported earlier this year that Lucents massive financial problems stemmed from its failure to keep up with competitors in the development of optical networking products, and from aggressive vendor financing for companies that were often themselves in financial trouble.
Many of those, such as ICG Communications and Winstar, are now in Chapter 11 bankruptcy reorganization.
But the recently filed documents, along with witness statements and other details in the amended complaint, filed in mid-August in the U.S. District Court in New Jersey, paint a more sinister picture – one of the under-the-table deals between Lucent and Winstar allowed both to book revenue on transactions that plaintiffs said were “phony.”
According to the documents, the relationship between Lucent and Winstar was “extraordinary.” While Lucent routinely financed 100 percent of the purchase price of telecom equipment for companies, in Winstars case the financing was often for 130 percent of the equipments value. Lucent also financed Winstars purchase of equipment from other companies.
Furthermore, Lucent allegedly booked revenue on equipment sold to Winstar knowing that the company would later return it, or when Lucent had simultaneously granted credits to Winstar in the amount of its purchases. Lucent would also defer billings to Winstar until after the end of a fiscal quarter, though it recorded sales revenue in the previous quarter.
At one point, the suit contends, Lucent tried to extract itself from the arrangements, but relented after Winstar threatened to cease to cooperate in “end-of-the-quarter deals.” Those deals resulted in more than $350 million in recorded revenue for Lucent over three quarters in fiscal 2000, much of which was later restated.
The SEC investigation, the pending class action shareholder suit and other litigation swirling around Lucent are only part of the woes faced by the giant telecom equipment manufacturer, which was spun off from parent AT&T in 1996.
The company, now with new top management, is attempting to cope with drops in revenue and stiff competition for network and telecom equipment from rivals Cisco Systems and Nortel Networks in a faltering economy. Lucent has laid off more than half of its work force, sold manufacturing facilities in three states and cut back to focus on its core business – equipment for major telecom carriers worldwide.
Documents filed in the shareholder suit include materials obtained under subpoena from former North American division CEO Nina Aversanos lawsuit against Lucent. Aversano said that she was forced to resign by McGinn after she refused to go along with efforts to hide the companys financial difficulties from Wall Street.
Plaintiffs attorneys contended that Internal corporate documents are evidence that Lucent had a “pervasive practice of recording sales prematurely, or falsely, at the end of each quarter, to assure that projections given to Wall Street analysts would be met,” the suit says.
The suit alleges that the company also took “other steps in this regard, such as stuffing the channels and fraudulently recategorizing overdue receivables so they would no longer appear to be uncollectible.”
The suit quotes an anonymous letter to McGinn and Hopkins that outlined a series of fraudulent transactions between Lucent and Winstar, alerting both that Lucent and Winstar were “cooking the books.”
Attempts to reach McGinn and Hopkins for comment were unsuccessful. Lucent spokesman John Skalko said the company would have no comment on the pending litigation. “Well do our talking in court,” he said.
Winstar spokeswoman Laura Kline noted that Winstar is not a defendant in the case, and said the company would have no comment on the allegations.
The class action suit was brought by numerous shareholders who lost money when Lucents stock began a long and dramatic plunge from a high of $78 per share, beginning in late 1999. The company, with new management, is in the midst of a wholesale restructuring.
The shareholder suit has been wending its way through the U.S. District Court in New Jersey since late last year. The new 184-page complaint says that Lucent shipped products to customers that they had not ordered, recorded equipment shipped to distributors as “sold” and cut “side deals” to let customers return those goods after they had been recorded as sales.
The suit also contends that Lucent and Winstar traded contracts at the end of each quarter – with no money changing hands – that allowed each to book hundreds of millions of dollars in phony revenue.
Attorneys for plaintiffs did not return calls for comment on the newly detailed allegations.
Winstar, after filing for Chapter 11 in Delaware, also filed a $10 billion lawsuit against Lucent for allegedly failing to abide by financing agreements between the two companies.
McGinn, who was fired in October last year, was paid $5.5 million this past August in a severance package that included forgiveness of more than $4 million in outstanding loans.
Hopkins, who stepped down earlier this year, was given $3.3 million in severance benefits. Both packages included confidentiality clauses prohibiting the former executives from making disparaging remarks about Lucent.