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LUCENT TECHNOLOGIES INC. 1.

Company profile Alcatel-Lucent is at the forefront of global communications, providing products and innovations in IP and cloud networking, as well as ultra-broadband fixed and wireless access to service providers and their customers, enterprises and institutions throughout the world. Underpinning Alcatel-Lucent in driving the industrial transformation from voice telephony to high-speed digital delivery of data, video and information is Bell Labs, an integral part of AlcatelLucent and one of the worlds foremost technology research institutes, responsible for countless breakthroughs that have shaped the networking and communications industry. Alcatel-Lucent innovations have resulted in the company being recognized by Thomson Reuters as a Top 100 Global Innovator, as well as being named by MIT Technology Review as amongst 2012s Top 50 Worlds Most Innovative Companies. Alcatel-Lucent has also been recognized for innovation in sustainability, being ranked Technology Super sector Leader by the Dow Jones Sustainability Index in 2012 for making global communications more sustainable, affordable and accessible, all in pursuit of the companys mission to realize the potential of a connected world. With revenues of Euro 14.4 billion in 2012, Alcatel-Lucent is listed on the Paris and New York stock exchanges (Euronext and NYSE: ALU). The company is incorporated in France and headquartered in Paris. ORGANIZATION Alcatel-Lucents operational organization* has been created to generate maximum value from the companys specialist focus on IP networking and ultra-broadband access, while placing full profit-and-loss accountability within the businesses. *Effective July 1, 2013, subject to relevant information and consultation processes applicable in certain countries. LEADERSHIP Alcatel-Lucents operations are overseen by a leadership team chaired by CEO Michel Combes and which represents the companys business lines, transversal and corporate functions. TIMELINE Lucent Technologies is North America's leading maker of telecom equipment and software, including switching and transmission equipment and business communications systems. Lucent Technologies started trading publicly in 1996 with an initial public offering that was, at the time, the largest in domestic history (Hayes). In December 1999, Lucent's stock reached a high of $77.78 and was the nation's fourth most widely held stock (Romero and Atlas). But by July 2001, Lucent's stock was trading at $6.43, the SEC was investigating its accounting practices, and several former, high-level managers had been sanctioned by the SEC or were under criminal indictment for wrong-doing while at Lucent (Romero and Atlas). The plunge in stock value was

primarily the result of a November 21, 2000, announcement in which Lucent said it had to restate its financial statements as a result of an internal investigation revealing accounting irregularities. Lucent's restatement reduced revenues by $679 million (McGough, Bloomberg). As early as June 2000, media attention had begun to be directed towards Lucent's aggressive accounting policies. A Wall Street Journal article in June, 2000 suggested that Lucent Technologies might be engaging in creative accounting practices, noting that Lucent's receivables were rising at 49% while revenues were rising at only 20% (Wall Street Journal). Selected events pre restatement Jul. 20, 2000 - Warns 4Q will miss Oct. 11, 2000 - 4Q estimate revised downward again Oct. 2000 - CEO fired, 1Q 01 warning, board learns of reporting problems and informs SEC Nov. 2000 - Internal investigation conducted Dec. 2000 - Paul ONeill resigns from audit committee to become Treasury Secretary, Dec. 2000 - Lawsuit filed against Lucent claiming Nina Aversano was fired for disputing unrealistic sales targets

Selected events restatement - Dec. 21, 2000 - Restates 4Q revenue o $679 million restatement - Restatement result of internal investigation, not SEC - Lucent claimed that $125 million represented improper recognition, while the rest represented subsequent agreements with vendors Selected events post restatement - Jan. 24, 2001 - Reports sales have fallen 28% and restructuring charge announced - Feb 8, 2001 - SEC investigation formalized - Nov. 1, 2002 - WSJ article o Reports SEC investigation far broader than Lucent disclosed Investigating earnings manipulations as far back as 1996 and role of audit committee Looking into managements earnings projections Examining potential overstatement of restructuring charge o Lucent claims SEC investigation is almost complete 2. Auditor PricewaterhouseCoopers (PwC) Audit Committee o Paul Allaire - Former chairman and CEO of Xerox o Franklin Thomas - Lucent director and Alcoa board member o Betsy Atkins - Cofounder of Ascent Communication (a Lucent Acquisition) o Paul ONeill - Alcoa CEO o Donald Perkins - Committee chairman until Feb. 1999* *With the exception of Donald Perkins, all of those listed on the slide comprised of the audit committee at the time of the revision. Perkins resigned less than two years before the restatement. -

3. Issues Need for adequate internal control methods and transparency in the firms financial statements The finance related scandals law requirements and the penalty for giving statements which causes the investors to be misled Maintaining corporate integrity Issue of unethical practices and lack of good corporate governance, and the effect on the company's financial status and image The senior executives, board of directors, and the external auditors roles and responsibilities Loopholes in the accounting systems and the understanding on how the company manipulates the financial statements to their advantage Understanding the account classifications on the financial position of a company

4. Irregularity committed Violation of federal securities law Poor internal control provisions and reporting Improper maintenance of the books (e.g. revenue recognition, restructuring charges, pension fund accounting, acquisition accounting) GAAP violations Companys official gave statements that misled the public There was an accounting irregularity in its 4th fiscal quarter ending September 30, 2000 of $125 million revenues (adjustment of $679 million from the revenue is announced) Revenue recognition o What the restatement consisted of: $452 millionEquipment shipped to distributors but never sold (channel stuffing) $199 millionCredits offered to customers $28 millionPartial shipment of equipment o Documentary red flags: The $125 million of improper revenue was attributable to false documents o Analytical red flags: Fiscal 1999 revenue grew 20%, while receivables grew 49% Bad debt reserves decreased while accounts receivable and sales grew Restructuring charges o $2.6 billion right before AT&T spin-off o The issueUsing cookie-jar reserves to meet expectations by reversing the charge when needed o From 1996 to 1999, Lucent reversed $540 million (28%) o The resultLucent met expectations in three quarters that it otherwise would not have o Similar to Xerox except for better disclosure Pension fund accounting o Converted to fixed income vehicles (bonds) just as the market was recovering and missed the approximately 29% run up of equities in 2003.

used its pension fund for severance. medical trust funds for retirees : encouraged older employees to leave by offering them accelerated health coverage in retirement. Possible red flags o Significant insider influence All but Allaire are insiders o Potential ethical implications Xerox o Peculiar timing of turnover Why did Perkins leave? Who cooked whose books? o Fred Moldfoski posted earnings releases on Yahoo Finance on March 22-23, 2000 The fraudulent releases were designed to look like official Lucent releases The releases stated that Lucent would miss expectations The impact: Lucents stock opened at $62.125 and traded as low as $60.375 o The ironyfrom what we know now, it is possible that Lucent had indeed missed expectations John Bratten, former VP of Sales, and Charles Elliott, former employee did a fraudulent conduct by misreporting the entire proceeds of a software pooling agreement as revenue and operating income which later on caused Lucent to violate GAAP. On September 30, 2000, Lucent and BellSouth Telecommunications Inc. entered into a pooling agreement. BellSouth is required to pay Lucent $95 million by April 1, 2001, for software that it had to select by September 30, 2002. Bratten agreed to provide BellSouth with a $20 million credit and a price discount valued at $1 million, but he allegedly did not notify Lucent's "CFO structure" that he had agreed to the credit and discount as part of the transaction. On October 10, Bratten sent a letter to BellSouth falsely representing that the credit and discount had been granted on that date rather than in September. The letter was drafted by Elliott, "who knew that Bratten had granted the credit and discount in September as an inducement for BellSouth" to enter into the agreement. The SEC alleged that Lucent had fraudulently and improperly recognized approximately $1.148 billion of revenues and $470 million in pre-tax income in the fiscal year 2000 (October 01, 1999 to September 30, 2000) in violation of GAAP. The Securities and Exchange Commission today charged Lucent Technologies Inc. with securities fraud, and violations of the reporting, books and records and internal control provisions of the federal securities laws. The SEC also charged nine current and former Lucent officers, executives and employees, and one former Winstar Communications Inc. officer with securities fraud and aiding and abetting Lucent's violations of the federal securities laws. The SEC's complaint alleges that Lucent fraudulently and improperly recognized approximately $1.148 billion of revenue and $470 million in pre-tax income during its fiscal year 2000. The SEC's complaint alleges that Lucent's violations of generally accepted accounting principles (GAAP) were due to the fraudulent and reckless actions of the defendants and deficient internal controls that led to numerous accounting errors by others. In their drive to realize revenue, meet internal sales targets and/or obtain sales bonuses, the complaint alleges, defendants Nina Aversano, Jay Carter, Leslie Dorn, William Plunkett, John Bratten, Deborah Harris, Charles Elliott, Vanessa Petrini, and Michelle Hayes-Bullock, in their respective capacities as officers (Aversano and Carter), executives (Plunkett, Bratten, Dorn

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and Harris) and employees (Petrini, Elliott and Hayes-Bullock) of Lucent improperly granted, and/or failed to disclose, various side agreements, credits and other incentives (collectively "extra-contractual commitments") to induce Lucent's customers to purchase the company's products. These extra-contractual commitments were made in at least ten transactions in fiscal 2000, and Lucent violated GAAP by recognizing revenue on these transactions both in circumstances: (a) where it could not be recognized under GAAP; and (b) by recording the revenue earlier than was permitted under GAAP. 5. Impact on financial statements

6. Irregularity uncovered

7. Outcome of investigation The charges were made for a $ 1.5 billion accounting fraud. December 2000 - breach of contract suit filed by Nina Aversano May 17, 2004 - SEC against Lucent and 10 individuals changing them with fraud and violation of GAAP during reporting for fiscal 2000 o $511 million revenue prematurely recognized; o $637 million should not have been recognized [total $1.148 billion] o $91 million pre-tax income prematurely recognized; o $379 million should not have been recognized [total $470 million (16%)] Lawsuit filed by Nina Aversano details undisclosed Shareholder lawsuits totaling $568 million Bratten was ordered to pay a $40,000 civil penalty and Elliott, a $25,000 penalty. The SEC alleged that Lucent had fraudulently and improperly recognized approximately $1.148 billion of revenues and $470 million in pre-tax income in the fiscal year 2000 (October 01, 1999 to September 30, 2000) in violation of GAAP. SEC filed charges against the company, Lucent, and ten of the companys top executives. Lucent, William Plunkett, Deborah Harris, and Vanessa Petrini have reached settlements with the SEC. These defendants have agreed to permanent injunctions against future violations of the anti-fraud, reporting, books and records and internal controls provisions of the federal securities laws. Lucent will pay a penalty of $25 million for refusing to cooperate with SECs regulatory investigations. Plunkett also will pay a civil penalty of $110,000 and has agreed to be permanently barred from acting as an officer or director of a public company. Harris will pay a civil penalty of $100,000 and has agreed to be barred from acting as an officer or director of a public company for five years. Petrini will pay a civil penalty of $60,000 and disgorge $109,505, representing profits gained as a result of the conduct alleged in the complaint, together with prejudgment interest thereon in the amount of $23,487.

8. Where is the entity now and what happened to them?

After the 2004 scandal, heres the timeline of Alcatel Lucent: 2005

2005 was a record year for Alcatel in terms of results, contracts, events, and agreements as operators looked to Alcatel for network transformation solutions. Jeong Kim becomes 11th president of Bell Labs and Lucent signs a multiyear contract with Sprint worth more than $1.5 billion. Alcatel announced a deal to increase its shareholding and transfer its satellite subsidiaries, its railway signaling business and its critical security systems domains to Thales, a key player in the French defense industry. On November 30, 2006, Alcatel and Lucent Technologies merge. Acquired Nortel's UMTS radio access business to strengthen its leadership position in this technology. Announced plans to acquire all the assets, including all intellectual property of Canadian metro WDM networking supplier Tropic Networks, Inc. Acquired NetDevices, a developer of services gateway products for enterprise branch networks, based in Sunnyvale, California. Acquired Thompson Advisory Group, Inc. (TAG), one of the largest nationally recognized telecommunications consulting practices in the U.S. As a fully independent subsidiary, TAG will help enterprise customers cut their telecom expenses by leveraging network outsourcing resources. Acquired Tamblin, a privately held software company that provides applications and tool kits that will enhance Alcatel-Lucents solution for enabling IPTV users to easily find, connect and interact with brands and entertainment they care about. Acquired Motive, Inc., a leading provider of service management software for broadband and mobile data services. The acquisition extends a productive three-year relationship between Alcatel-Lucent and Motive together the companies jointly developed and sold remote management software solutions for automating the deployment, configuration and support of advanced home networking devices called residential gateways.

2006

2007

2008

Sources:

http://www.sec.gov/news/press/2004-67.htm http://www3.alcatel-lucent.com/aboutus/companyoverview.html http://voices.yahoo.com/lucent-technologies-company-profile-150007.html?cat=3 http://www.icmrindia.org/casestudies/catalogue/Finance/FINC039.htm http://www.cfo.com/article.cfm/5346440/c_5346473 http://lucentretirees.com/docs/why_lucent_retirees_are_concerne7.15.04.htm