Suit: Ramp Networks Abused Channel

Did Ramp Networks collude with distributors to take possession of its merchandise, and then count those goods as sold to inflate financial results?

Thats the claim of a federal suit filed by shareholders against the networking equipment manufacturer. It alleges distributors Ingram Micro and Tech Data agreed to store Ramps products and then to remove shrink-wrap packaging and return the goods as defective.

The suit also charges that Ramp agreed to ship merchandise knowing that it would be returned after a financial reporting period ended.

In November, Ramp changed its accounting practices and restated its financial results for the first nine months of 2000, increasing a net loss by $1.3 million to $27 million. Under the new policy, it recognized revenue only when distributors reported sales to end users, instead of when products were shipped to distributors.

“On occasion, Ramp would make sweetheart deals to keep Ramp products with Ingram Micro rather than agree to process them as returns,” the class action suit against Ramp charges.

Lionel Glancy, an attorney for the plaintiffs, said major distributors such as Ingram often cooperate with manufacturers to inflate their financial returns. The practice is known as “channel stuffing.”

The charges are “wild and unsupported,” said Paul Bessette, an attorney for Ramp. Magistrate Joseph Spero in U.S. District Court in San Jose was expected last week to hear motions to dismiss the suit.

An Ingram Micro spokeswoman said the company does not comment on lawsuits that do not affect it.

Tech Data officials could not be reached for comment.

According to the Ramp shareholders lawsuit, the company, “dumped product on distributors during the first quarter of 2000.” Although the distributors did not want the items, Ramp paid the companies to store them, and distributors in San Jose and Seattle agreed to take the merchandise and later returned it as used or defective.

Channel stuffing isnt new. The Securities and Exchange Commission issued a cease-and-desist order in June 2000 against Ronald Davies, a former executive vice president at Ikon Office Solutions, for providing auditors “false statements” about product return policies connected with sales of $1.8 million in Hybrid Networks products to Ikon.

Hybrid salespeople told Ikon it needed sales to meet revenue expectations, the SEC said.