Lucent Sings to the Feds

Yesterday, Lucent Technologies (NYSE: LU  ) became the latest American mega-company to report that it may be in trouble with the Justice Department and/or the Securities and Exchange Commission (SEC). (Both IBM (NYSE: IBM  ) and Lockheed Martin (NYSE: LMT  ) acquisition target Titan (NYSE: TTN  ) have fallen afoul of these agencies recently.)

According to reports, Lucent has fired four of its executives in China after discovering that they may be implicated in the bribery of foreign officials. The executives are not all bit players, either -- they include Lucent China's operations president and chief operating officer.

As in the Titan scandal, Lucent discovered its violations itself, through an internal investigation. The company had been running an internal audit of its operations in 24 countries when it discovered deficiencies in its internal business controls and procedures in China. Lucent is obviously not eager to publicize exactly what it found, but whatever it was alarmed the company, raising suspicions that Lucent had violated the Foreign Corrupt Practices Act's (FCPA) so-called "books and records test."

In essence, the books and records test is a requirement that publicly traded U.S. companies maintain internal accounting systems adequate to keep track of what their money is being used for. (This is to ensure that the money is not being used to bribe foreign officials.)

The fact that Lucent has already notified both the Justice Department and the SEC of its findings suggests that (a) Lucent China's accounting was subpar, and (b) Lucent has reason to believe that this allowed the dismissed employees to get away with bribing Chinese officials.

Lucent is now cooperating with the Justice Department and the SEC, which probably means that either or both will soon open official investigations into the matter. This seems all the more likely, given that the Feds are already in the middle of another FCPA investigation of Lucent, based on possible violations in Saudi Arabia.

This may get ugly, folks. The U.S. government could go easy on Lucent for volunteering the information on its China problems. Or the government could just as easily decide that Lucent revealed the information only because the Feds would have found it on their own, in the course of the Saudi Arabian investigation.

Either way, these investigations tend to drag on, and to drag down a targeted company's stock price while they last. Lucent shareholders may well be in for a long next few months.

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Fool contributor and lawyer Rich Smith advises companies on complying with the Foreign Corrupt Practices Act as part of his day job. His advice generally boils down to "You better do it." He owns no shares in any of the companies mentioned in this article.


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