Copyright 2002 Toronto Star Newspapers, Ltd.

Toronto Star…11/01/2002

From LexisNexis

U.S. securities regulators are considering filing civil charges against telecommunications gear maker Lucent Technologies Inc. over certain sales accounting practices, USA Today reported yesterday.

Citing unnamed government officials familiar with the probe, the newspaper said the Securities and Exchange Commission enforcement division plans to send the company a so-called "Wells notice," which is frequently a precursor to the agency filing civil charges against a company.

A Wells notice gives the recipient a certain time to reply to the staff's allegations. Sometimes a Wells recipient succeeds in convincing the commission that no action is warranted, but in most cases it is followed up by the filing of civil charges.

Lucent spokesperson Mary Lou Ambrus said the company had not received a Wells notice from the SEC and the issue was not new.

"This is the same issue we brought to the attention of the SEC two years ago," she told Reuters. "We haven't received a Wells notice, but if we did it would be a routine matter."

Murray Hill, N.J.-based Lucent has struggled the past two years during the telecom slowdown, as cutbacks in telephone company spending has forced it to slash jobs and money-losing products, sell non-core businesses, post billions of dollars in losses and play down investor fears of bankruptcy.

In November, 2000, Lucent raised questions about its revenue recognition, and a month later revised its fiscal fourth-quarter results down by $679 million. The SEC took no action at the time.

The newspaper said the investigation centers on allegations that Lucent in 1999 and 2000 booked non-existent sales and also booked large sales through a practice known as "channel stuffing."

Channel stuffing occurs when a company encourages its distributors into taking on excessive inventory, goods for which the distributor is not obliged to pay if they don't sell.

Analysts suggest that civil charges by the SEC are somewhat diminished by greater challenges facing the company.

SEC actions "are never a positive thing," CIBC World Markets analyst Steve Kamman told Dow Jones News. He owns no Lucent stock, but the firm has performed investment banking services for the company. "But we really need to resolve the question of what Lucent's capital situation looks like. Are revenues going to hold up? The bigger concern is if the U.S. wireless equipment business weakens over the next year, there will be whole new worries about liquidity."