Former networking execs indicted for securities fraud

Two former executives at networking equipment provider Clarent have been indicted on securities fraud charges, the Department of Justice (DOJ) announced.

Jerry Shaw-Yau Chang, 48, of Los Altos, Calif., and Matthew Ming Chang Chiang, 36, of Taiwan were charged with filing fraudulent financial statements with the Securities and Exchange Commission (SEC) in the last quarter of 2000 and the first and second quarters of 2001, the DOJ said. Chiang was additionally charged with one count of witness tampering in the indictment, unsealed late Friday.

Chang, former president and CEO at Clarent, surrendered into custody Friday and was released on $1 million bond in the U.S. District Court for the Northern District of California, the DOJ said. An arrest warrant was issued for Chiang.

The defendants were top executives at Clarent, based in Redwood City, Calif. They are accused of conspiring to improperly recognize millions of dollars in revenue for Clarent.

Chang served as president and CEO of Clarent between July 1996 and about July 2001, and Chiang was president of Clarent Asia/Pacific between September 2000 and September 2001, the indictment said.

The two are alleged to have negotiated high-value deals on behalf of Clarent with various overseas distributors. The defendants carried out the improper revenue recognition scheme by immediately recognizing revenue from transactions in which customers had been given the right to return products, the right to cancel orders, or a guarantee that Clarent would find a purchaser for any product customers were unable to sell on their own, the DOJ said.

The defendants are charged with entering into undisclosed side agreements establishing the contingencies to the sales. The defendants allegedly made these agreements without disclosing this information to the SEC and Clarent’s independent auditor, Ernst & Young.

The purpose of the scheme to defraud was to falsely inflate Clarent’s revenue and profits, to exceed projected quarterly financial results, and to artificially sustain Clarent’s stock price, the indictment said.

Trading on Clarent stock was halted on Sept. 4, 2001. The stock price on the previous day was at $5.37, and the company was valued at approximately $216 million, the DOJ said. On May 8, 2002, Clarent restated its financial statements for 2000 and 2001, at that time the stock price closed at 27 cents per share, and the company was valued at about $10.9 million.

Clarent, a provider of VoIP hardware and software for large businesses and multi-use networks, was sold to Verso Technologies in February 2003.

The maximum statutory penalty one count of securities fraud is 10 years in prison and a $1 million fine, plus restitution. The maximum statutory penalty for witness tampering is 10 years in prison and a $250,000 fine.