SEC investigating fraud at Lucent

The probe focuses on whether Lucent (LU) improperly booked $679 million in revenue during its 2000 fiscal year, which ended Sept. 30, according to people familiar with the investigation. The telecom-equipment maker, once a highflying spinoff of AT&T Corp., restated the same revenue in December after conducting its own investigation.

As part of that restatement, Lucent deducted $199 million in credits offered to customers, and $28 million for a partial shipment of equipment. Further, the company took back an additional $452 million in revenue it had sent to its distribution partners but never actually sold to end customers.

According to one person with knowledge of related SEC documents, commission staff are investigating Lucent's procedures for booking sales, in particular its use of "nonrecurring credits," or one-time discounts, given to customers, as well as Lucent's accounting treatment of software-licensing agreements.

The SEC is also looking at how Lucent recognized revenue on sales to its distributors, who may not have sold the products, a practice known as stuffing the channels. Also under examination is the company's use of revenue targets for fiscal 2000.

"We are voluntarily and completely cooperating with the SEC," said Lucent spokeswoman Kathleen Fitzgerald.

Fitzgerald said the company initiated contact with the SEC on the morning of Nov. 21, just before it first publicly revealed some of the problems. Since then, Lucent has shared all of its findings on revenue restatements with the commission, she said. In addition, Lucent shared the results of an external audit of fiscal year 2000 conducted by PricewaterhouseCoopers LLP and Lucent's outside counsel, Cravath, Swaine & Moore, late last year. The company's lawyers have also made two in-person presentations at SEC headquarters in Washington, D.C.

The SEC has also requested documents from Lucent's customers and independent auditor, PricewaterhouseCoopers, people familiar with the matter said.

"We don't comment on any investigation the SEC may have under way. However, it's always our practice to fully cooperate with SEC requests for information," said Steve Silber, a spokesman for PricewaterhouseCoopers. An SEC spokesman declined to confirm or deny the investigation.

Lucent's December restatement reduced already-flagging investor confidence in the battered company. Since the company first hinted of financial difficulties with an earnings warning last January, Lucent's stock has lost 77% of its value. Since January 2000, Lucent's market capitalization has dropped roughly $185 billion.

CEO fired
Lucent's board fired former Chief Executive Richard McGinn in October after Lucent had missed numerous quarters of revenue and earnings targets. McGinn ended up being at the top of a long list of high-ranking Lucent executives who left or were fired last year.

In a whistleblower lawsuit filed in December, Nina Aversano, former president of sales for North America, claimed she was fired in retaliation for giving McGinn in October a detailed warning that Lucent's sales targets were unrealistic. Aversano couldn't be reached for comment.

In the suit, filed in a New Jersey Superior Court in Middlesex County, she alleged her former boss, Patricia Russo, who is now nonexecutive chairman of Avaya Inc., a Lucent spinoff, was also ousted for giving McGinn a similar warning. Russo has said she doesn't believe the elimination of her job was a punishment for anything. McGinn said Thursday he hasn't been contacted by the SEC.

Lucent also changed chief financial officers in fiscal 2000, hiring Deborah Hopkins in April, after naming former Chief Financial Officer Donald Peterson to the CEO's post at Avaya. Peterson had been Lucent's chief financial officer since its 1996 spinoff from AT&T. During Peterson's tenure, Lucent's accounting was sometimes criticized by analysts and some investors as aggressive, but legal. An Avaya spokeswoman said Peterson hasn't been subpoenaed or approached by SEC investigators.

Fiorina left before the mess
Carly Fiorina, now CEO of Hewlett-Packard Co., and formerly head of Lucent's global-services business and in charge of world-wide sales, left Lucent in July 1999, shortly before the beginning of the fiscal year that is involved in the continuing investigations.

A spokeswoman for Hewlett-Packard said the company's attorneys haven't received any SEC subpoenas and "to our knowledge," Fiorina hasn't been contacted by any SEC investigators. Fiorina was traveling and couldn't be reached directly for comment.

The SEC brings as many as 100 enforcement actions involving accounting-related fraud each year, representing about 20% to 25% of its caseload. A formal investigation must first be approved by the commission itself. Once it has that status, staffers can use legal subpoena power to compel employees, ex-employees and customers to speak.

Two years ago, the SEC made accounting-fraud cases a priority, weighing whether companies intended to deceive shareholders with aggressive financial reporting. Contributing to the rise in accounting-enforcement cases have been Wall Street pressure on financial executives to meet earnings estimates; court rulings and legislation making it harder to sue outside accountants; and greater use of stock options as executive compensation.

Restatements, resulting in earnings swings of tens of millions of dollars, have flourished amid the SEC crackdown on "earnings management" through accounting gimmicks. For example, many SEC probes have focused on one popular form of manipulation: inflating revenues by posting them prematurely or by playing games with inventory.

-- David Hamilton in San Francisco contributed to this story. The Securities and Exchange Commission's enforcement division is conducting a formal investigation into possible fraudulent accounting practices at Lucent Technologies Inc., according to people with knowledge of the investigation.

The probe focuses on whether Lucent (LU) improperly booked $679 million in revenue during its 2000 fiscal year, which ended Sept. 30, according to people familiar with the investigation. The telecom-equipment maker, once a highflying spinoff of AT&T Corp., restated the same revenue in December after conducting its own investigation.

As part of that restatement, Lucent deducted $199 million in credits offered to customers, and $28 million for a partial shipment of equipment. Further, the company took back an additional $452 million in revenue it had sent to its distribution partners but never actually sold to end customers.

According to one person with knowledge of related SEC documents, commission staff are investigating Lucent's procedures for booking sales, in particular its use of "nonrecurring credits," or one-time discounts, given to customers, as well as Lucent's accounting treatment of software-licensing agreements.

The SEC is also looking at how Lucent recognized revenue on sales to its distributors, who may not have sold the products, a practice known as stuffing the channels. Also under examination is the company's use of revenue targets for fiscal 2000.

"We are voluntarily and completely cooperating with the SEC," said Lucent spokeswoman Kathleen Fitzgerald.

Fitzgerald said the company initiated contact with the SEC on the morning of Nov. 21, just before it first publicly revealed some of the problems. Since then, Lucent has shared all of its findings on revenue restatements with the commission, she said. In addition, Lucent shared the results of an external audit of fiscal year 2000 conducted by PricewaterhouseCoopers LLP and Lucent's outside counsel, Cravath, Swaine & Moore, late last year. The company's lawyers have also made two in-person presentations at SEC headquarters in Washington, D.C.

The SEC has also requested documents from Lucent's customers and independent auditor, PricewaterhouseCoopers, people familiar with the matter said.

"We don't comment on any investigation the SEC may have under way. However, it's always our practice to fully cooperate with SEC requests for information," said Steve Silber, a spokesman for PricewaterhouseCoopers. An SEC spokesman declined to confirm or deny the investigation.

Lucent's December restatement reduced already-flagging investor confidence in the battered company. Since the company first hinted of financial difficulties with an earnings warning last January, Lucent's stock has lost 77% of its value. Since January 2000, Lucent's market capitalization has dropped roughly $185 billion.

CEO fired
Lucent's board fired former Chief Executive Richard McGinn in October after Lucent had missed numerous quarters of revenue and earnings targets. McGinn ended up being at the top of a long list of high-ranking Lucent executives who left or were fired last year.

In a whistleblower lawsuit filed in December, Nina Aversano, former president of sales for North America, claimed she was fired in retaliation for giving McGinn in October a detailed warning that Lucent's sales targets were unrealistic. Aversano couldn't be reached for comment.

In the suit, filed in a New Jersey Superior Court in Middlesex County, she alleged her former boss, Patricia Russo, who is now nonexecutive chairman of Avaya Inc., a Lucent spinoff, was also ousted for giving McGinn a similar warning. Russo has said she doesn't believe the elimination of her job was a punishment for anything. McGinn said Thursday he hasn't been contacted by the SEC.

Lucent also changed chief financial officers in fiscal 2000, hiring Deborah Hopkins in April, after naming former Chief Financial Officer Donald Peterson to the CEO's post at Avaya. Peterson had been Lucent's chief financial officer since its 1996 spinoff from AT&T. During Peterson's tenure, Lucent's accounting was sometimes criticized by analysts and some investors as aggressive, but legal. An Avaya spokeswoman said Peterson hasn't been subpoenaed or approached by SEC investigators.

Fiorina left before the mess
Carly Fiorina, now CEO of Hewlett-Packard Co., and formerly head of Lucent's global-services business and in charge of world-wide sales, left Lucent in July 1999, shortly before the beginning of the fiscal year that is involved in the continuing investigations.

A spokeswoman for Hewlett-Packard said the company's attorneys haven't received any SEC subpoenas and "to our knowledge," Fiorina hasn't been contacted by any SEC investigators. Fiorina was traveling and couldn't be reached directly for comment.

The SEC brings as many as 100 enforcement actions involving accounting-related fraud each year, representing about 20% to 25% of its caseload. A formal investigation must first be approved by the commission itself. Once it has that status, staffers can use legal subpoena power to compel employees, ex-employees and customers to speak.

Two years ago, the SEC made accounting-fraud cases a priority, weighing whether companies intended to deceive shareholders with aggressive financial reporting. Contributing to the rise in accounting-enforcement cases have been Wall Street pressure on financial executives to meet earnings estimates; court rulings and legislation making it harder to sue outside accountants; and greater use of stock options as executive compensation.

Restatements, resulting in earnings swings of tens of millions of dollars, have flourished amid the SEC crackdown on "earnings management" through accounting gimmicks. For example, many SEC probes have focused on one popular form of manipulation: inflating revenues by posting them prematurely or by playing games with inventory.

-- David Hamilton in San Francisco contributed to this story.