Scientific-Atlanta Inc., a maker of cable TV set-top boxes, agreed to pay $20 million to settle U.S. claims that it helped Adelphia Communications Corp. deceive investors.
Scientific-Atlanta, acquired in February by Cisco Systems Inc. (CSCO:US), engaged in so-called round trip transactions with Adelphia in 2000. The now-bankrupt cable company used them to artificially boost its reported earnings, the U.S. Securities and Exchange Commission said today in a lawsuit in federal court in Manhattan.
``Scientific-Atlanta was aware of numerous red flags that should have alerted them that Adelphia was using this transaction to improperly reduce expenses and inflate earnings,'' Alistaire Bambach, an SEC official overseeing the case, said today in an interview.
Adelphia, based in Greenwood Village, Colorado, filed for bankruptcy in 2002 after disclosing $2.3 billion in hidden debt. John Rigas, the company's founder and chief executive officer, was sentenced last year to 15 years in prison for looting the company and lying to investors about its finances. Scientific- Atlanta didn't admit or deny wrongdoing as part of the SEC settlement, which requires court approval.
``Scientific-Atlanta properly disclosed this matter in its financial filings over the past several years,'' company spokeswoman Sara Stutzenstein said. ``As the SEC has stated, Scientific-Atlanta's financial statements to its investors are not at issue.''
Shares of Scientific-Atlanta parent, San Jose, California- based, Cisco, the world's biggest maker of computer-networking equipment, fell 38 cents to $19.69 in Nasdaq Stock Market composite trading.
The SEC said the Lawrenceville, Georgia-based firm entered into a marketing support agreement with Adelphia to help the cable company increase demand for set-top boxes provided by Scientific-Atlanta.
Under the terms of the agreement, Adelphia would pay a higher price for the set-top boxes and Scientific-Atlanta would pay back the price increases in the form of marketing support. Adelphia improperly recorded price increases it paid Scientific- Atlanta as capital expenditures and recognized the support payments to reduce recorded marketing expenses, the SEC said.
Adelphia used the Scientific-Atlanta transaction to ``reduce improperly its operating costs and increase its earnings by approximately $16.8 million in 2000 and $26.2 million in 2001,'' the SEC said in its complaint.
As part of the settlement, Wallace G. Haislip, Scientific- Atlanta's senior vice president, operations, and Julian W. Eidson, senior vice president, consented to orders barring involvement in any future violations of federal securities rules, the SEC said. Haislip was chief financial officer and Eidson was principal accounting officer at the time of the Adelphia transactions.
``They were the most senior Scientific-Atlanta executives responsible for approving the form of the marketing support agreement,'' the SEC said a press release. ``They should have been on notice that it was unlikely that Adelphia was using the marketing support agreement to market Scientific-Atlanta set-top boxes.''
Haislip and Eidson didn't admit or deny any liability, Stutzenstein said.
The case is Securities and Exchange Commission v. Scientific-Atlanta Inc., 06cv4823, U.S. District Court, Southern District of New York.
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