SEC takes belated fraud action against L&H

Blast from the Past

ComputerWire: IT Industry Intelligence

The US Securities and Exchange Commission said yesterday it has filed a lawsuit against defunct language software developer Lernout & Hauspie Speech Products NV, alleging "fraudulent schemes" that wiped $8.6bn off the company's market value.

The complaint claims that L&H, based and listed in Belgium and the US, artificially inflated its revenue by over $350m between 1996 and 2000, when it entered Chapter 11 following a string of newspaper exposes.

The SEC said the alleged fraud resulted in an "international financial scandal, the destruction of L&H as an operating company, and a loss of at least $8.6bn in market capitalization". The regulator seeks an injunction against future violations, but it is difficult to see how that will achieve anything practical.

L&H went bankrupt in November 2000, three months after the Wall Street Journal reported that the company's exponential revenue growth could be accounted for by questionable sales in Korea and Singapore, where L&H recognized the majority of its revenue in early 2000.

The SEC, which has been investigating L&H since late 2000, said between 1999 and 2000, the majority of the $175m L&H reported from its Korean business was fraudulent. The complaint said L&H freed its customers from payment obligations and masked the fact that money might not ever be received.

The complaint also alleges that L&H funded two Belgian startups, which then became customers, allowing it to claim revenue from R&D. Later, L&H acquired both companies for the amounts they had paid to L&H plus more. The SEC said these deals "were, in substance, disguised loans," and L&H should not have recognized some $60m revenue from them.

Finally, the SEC claims L&H created shell companies, called "Language Development Companies" in order to recognize $102m in license fees and $8.5m in prepaid royalties. The commission said these companies were created to "create additional customers" and "improperly fabricate revenue".

Since L&H's troubles emerged, it has been legally pursued by US and Belgian regulators, as well KPMG, its own auditor, over the accounting irregularities. Its founding executives spent time in jail last year. The company's assets were sold to ScanSoft Inc, an unrelated firm, last December.

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