Struggling telecommunications equipment company Lucent Technologies Inc. may soon be charged by the U.S. Securities and Exchange Commission (SEC) in a civil lawsuit that alleges the company used improper accounting techniques to inflate its sales.
According to published reports, the SEC’s enforcement division will soon be sending Lucent a “Wells notice,” advising the company of the SEC’s plans to file civil charges against it.
A Wells notice informs a company of the SEC’s intention to file charges and gives that company the opportunity to respond directly to the SEC regarding the charges. A company’s response to a Wells notice is taken into account by the SEC before making a decision on whether or not to procede with an enforcement action, according to an SEC spokesperson.
The SEC refused to comment on the reports of a Wells notice being prepared for Lucent and does not keep statistics on how often it does or does not proceed with enforcement actions following the issuance of a Wells notice, according to the spokesperson.
A Lucent spokesperson said that the company has not received a Wells notice and is not aware of any plans by the SEC to file charges, but that the company would continue to cooperate with the SEC even if one is issued.
“This is nothing new. These are the same issues that we brought to (the SEC’s) attention. We fully expected them to investigate this themselves,” said company spokesperson Bill Price.
Lucent announced two years ago that it had discovered accounting problems in its fiscal 2000 earnings statement. The company subsequently announced that it was revising its revenues downward for the year by US$679 million.
In February of 2001 the SEC announced that it was investigating Lucent, but it has so far held off on filing charges.
Among the improper accounting practices that Lucent is alleged to have engaged in are recording revenue for the sale of systems that had not been shipped to customers and recording fictional sales on its books.
The company is also said to have booked revenue for equipment sold to distributors such as Winstar Communications Inc. but ultimately returned to Lucent, according to charges filed in a shareholder lawsuit against the company. Lucent executives are reported to have forged private agreements with Winstar that absolved them of the responsibility of paying for equipment they did not sell.
On Oct. 23, 2002, the Murray Hill, N.J., company reported a net loss of US$2.81 billion, or US$0.84 per share, for its fourth fiscal quarter of 2002, ended Sept. 30, compared with a US$8.8 billion net loss, or US$2.59 per share in the same period a year ago. It was the company’s tenth consecutive losing quarter.
Despite the blow to Lucent’s corporate image that would result from charges being filed, action by the SEC would likely have only a small effect on the battered company’s financial standing, according to independent telecommunications industry analyst Jeff Kagan.
“Normally (an SEC enforcement action) would mean that the company would take a hit in its stock price. In Lucent’s case, the company has already taken a hit. It will have an impact, but not the level of impact it would have had if this was the first hurdle that Lucent was dealing with, ” Kagan said.
Still, SEC action against Lucent could further slow the recovery of the moribund telecommunications sector, Kagan said.
“This would be the last thing the (telecommunications) industry needs,” said Kagan. “The industry is trying to hit a bottom, to reach a bottom where all the bad news comes out so that it can stabilize and try to build from there. The last thing the industry needs is more investigations and scandals. Hopefully (the SEC investigation) won’t turn in to that.”
