“Side deals” center of Lucent accounting fraud

Lucent Technologies agreed to pay $25 million to settle securities fraud charges filed against the company by the Securities and Exchange Commission at the conclusion of an investigation that began in late 2000.

According to the SEC complaint, Lucent fraudulently recognized approximately $1.148 billion in revenue and $470 million in pre-tax income during its fiscal year 2000.

The SEC also charged nine current and former Lucent officers, executives and employees--and one former officer of Winstar Communications--with securities fraud or the aiding and abetting of it. Charged were former officers Nina Aversano and Jay Carter; executives Leslie Dorn, William Plunkett, John Bratten and Deborah Harris; and employees Charles Elliott, Vanessa Petrini and Michelle Hayes-Bullock.

“In their drive to realize revenue, meet internal sales targets and/or obtain sales bonuses,” the SEC complaint alleges, these defendants “improperly granted and/or failed to disclose various side agreements, credits and other incentives…to induce Lucent’s customers to purchase the company’s products.”

Lucent made at least 10 of these “extra-contractual commitments” in its fiscal year 2000, the SEC said. For example, the SEC claimed Lucent officers made oral promises to two distributors, Anixter International and Graybar Electric Company, that Lucent would help sell the product to end users and take the products back if they could not be sold. In carrying out these and other similar agreements, the defendants “violated and circumvented Lucent’s internal accounting controls, falsified documents and hid side agreements with customers” from Lucent’s finance personnel.

The SEC also blamed Lucent for failing to maintain sufficient accounting controls to ensure accurate reporting.

The SEC also charged former Winstar Communications officer David Ackerman with abetting Lucent’s fraud, accusing him of misreporting a Winstar software purchase in the fourth quarter of Lucent’s fiscal year 2000, fraudulently signing a document that disguised a side deal made in connection with that purchase.

In January 2003, Aversano settled a suit she filed against Lucent in which she claimed she was fired from her job as Lucent’s head of North American sales in October 2000 after telling former CEO Richard McGinn that his sales goals were unrealistic. Terms of the settlement were undisclosed.

Carter, the other former officer named as a defendant, was president of Lucent’s AT&T customer business unit and reported directly to Aversano for much of 2000. Bratten was Lucent’s vice president for the BellSouth region. Plunkett was vice president of Lucent’s Emerging Service Provider unit, which handled the Winstar account, and Harris reported to Plunkett.

Plunkett, Harris and Petrini have settled with the SEC without admitting or denying the allegations made against them. Plunkett will pay a $110,000 penalty and has agreed to never again act as an officer or director of a public company. Harris will pay $100,000 and will not act as an officer or director of a public company for five years. Petrini will pay $60,000 and disgorge $109,505, representing profit he gained from his improper conduct, plus interest.

The SEC will take the other defendants to court.