News Release Lucent Retirees Organization
(Contact Information At End of News Release)
LUCENT RETIREES ORGANIZATION ASKS SEC TO INCLUDE LUCENT TECHNOLOGIES IN ITS EXAMINATION OF FINANCIAL TRANSACTIONS OF CORPORATE PENSION PLANS
FOR IMMEDIATE RELEASE – TUESDAY, OCTOBER 19, 2004
NEW YORK – Looking to the investigative and enforcement powers of the Securities and Exchange Commission, the Lucent Retirees Organization has requested the agency include Lucent Technologies in its examination of financial transactions of corporate pension plans.
"The SEC is the only authority capable of unraveling the mystery of what has happened to Lucent's pension plan and to issue corrections for needed change," said Ken Raschke, LRO president. “Lucent has rejected our repeated requests to gain an independent audit of the pension trusts. PricewaterhouseCoopers, the firm that audits both Lucent’s corporate books and the pension trusts, has declined to provide answers. And, the Employee Benefits Security Administration, the federal agency with ERISA enforcement authority, has been non-responsive to our pleas for assistance.”
Raschke said 235,000 Lucent retirees and their dependents rely on the pension assets for their future financial security.
In a letter to SEC Enforcement Division Director Stephen Cutler, Raschke stated that the LRO is concerned whether Lucent has properly exercised its fiduciary obligations in regard to the pension plan. “I want to request that you or a member of your staff meet with leaders of the LRO in the immediate future so that we can share our concerns with you,” Raschke wrote in the October 19 letter.
“Lucent could be a ‘poster child’ for the SEC’s inquiry,” Raschke said.
“As you know, Lucent agreed to settle a case with the SEC by paying a $25 million penalty for its ‘lack of cooperation’,” Raschke wrote. “The LRO has experienced a similar lack of cooperation from Lucent as we have endeavored to gain information about the management of the pension trust funds.”
Raschke’s letter outlined some of the concerns that the LRO is prepared to discuss with the SEC in detail. The letter cited information from a newly published book, Optical Illusions, Lucent And The Crash Of Telecom, as the latest basis for Lucent retirees’ concerns. The book documents “two manipulations Lucent made to its pension fund.”
In the letter, Raschke raised questions about Lucent’s loss of $9.3 billion of pension fund
assets in 2001 and 2002, a deficit three times larger than comparable pension funds, such as Verizon. The LRO, the letter noted, has expressed its concerns to Lucent that these losses were related to unanswered asset transfers and excessive investments in Private Equity Ventures, overseen by the Finance and Audit Committee of the Lucent Board.
“The SEC found in the Enron case that auditors had a conflict of interest because they also provided consulting services,” Raschke noted. “At Lucent, the actuaries also have provided consulting services. Therefore, a critical element of the pension stewardship is not truly arms length.”
At Lucent, the named fiduciaries of the pension funds are Lucent executives whose compensation, including bonuses, depend on corporate earnings, which in turn benefit from reduced, or no, payments to the pension trusts.
“Lucent has never contributed a penny to the pension trusts transferred from AT&T when the company was created in 1996,” Raschke said. “Yet, according to a report in The Wall Street Journal, $929 million has been added to Lucent's bottom line over its eight-year history as a result of pension and benefit plans accounting rules.”
In closing the letter, Raschke wrote he believes the SEC shares the LRO’s goal to have “Trustworthy Trusts” that serve the interest of employees, retirees, shareholders and the taxpaying public.
For More Information Contact:
Ken Raschke Ed Beltram
LRO President LRO Communications Director
Phone: 336-765-9765 Phone: 719-687-6157
231 Pinetuck Lane Winston-Salem, NC 27104 Phone: 336-765-9765
October 19, 2004
Division of Enforcement
U.S. Securities and Exchange Commission
450 Fifth Street, NW
Washington, DC 20549-0609
Dear Mr. Cutler:
I want to commend the SEC on its investigation into the assumptions made by corporations with regard to their pension accounting. It is heartening for retirees and investors to read news reports that the SEC is looking into potential abuses in the way some corporations have manipulated pension trust funds.
The Lucent Retiree Organization, which embodies the interests of 235,000 Lucent retirees and their dependents, is concerned whether Lucent Technologies has properly exercised its fiduciary obligations in regard to the pension plan. I want to request that you or a member of your staff meet with leaders of the LRO in the immediate future so that we can share our concerns with you.
Below, we describe many of the concerns and issues we would discuss with you in more detail. Lucent could be a “poster child” for your inquiries, given the recently published history referenced in the attachment from the book “Optical Illusions,” which states:
The second alteration Lucent made to its pension fund came when the company decided to revalue the fund with more aggressive assumptions about the expected rate of return. By assuming a higher rate of return on pension fund assets, the company was able to move even more money into income… These adjustments reflected an optimistic scenario for a stock market at its peak but reflected little about Lucent’s status as an ongoing business. Investors believed they were paying a lofty premium for earnings that came from building and selling technology.
As you know, Lucent agreed to settle a case with the SEC by paying a $25 million penalty for its “lack of cooperation.” The LRO has experienced a similar lack of cooperation from Lucent as we have endeavored to gain information about the management of our pension trust funds.
The SEC is the only authority capable of unraveling the mystery of what has happened to Lucent’s pension plan and to issue corrections for needed change. We are prepared to go into more details with you when we meet face-to-face.
According to Lucent 10-k’s, in 2001 the actual loss on plan assets was $6.8 billion, followed in 2002 by an additional $2.5 billion, for a total of $9.3 billion. In 2001, this amounted to over 19% of assets. This loss rate was more than three times larger than comparable pension funds, such as Verizon.
These astounding losses cannot be simply or naively attributed to stock market woes; the losses
are far too precipitous. The LRO has expressed its concerns to Lucent that these losses
were related to unanswered asset transfers and excessive investments in Private
Equity Ventures, overseen by the Finance and Audit Committee of the Lucent Board.
Our concerns are compounded by the fact that these questionable managerial decisions
were made during the leadership and tenure of Paul Allaire, as Chairman of the Lucent
Finance And Audit Committee. You may recall Mr. Allaire, former chief executive of
Xerox, agreed to be disbarred from the Lucent Board of Directors as part of a settlement
of fraud and auditor manipulation charges brought by the SEC against Xerox. To our
knowledge, the Lucent Board never investigated whether Paul Allaire’s actions at Lucent
had any impact on Lucent’s own books or operations.
As both shareholders and retirees, we have asked Lucent for assurance that these investments clearly met the “arms length” requirements of a fiduciary. Lucent’s answer of April 2003 was inconsistent with the ERISA standards for “fiduciary duties” and “prohibited transactions.”
The movement of billions of dollars in pension fund surplus under the aegis of IRS rule Section 420 has exacerbated and compounded the threat of under-funding of the Lucent pension trust since 1999. It is our view this rule has outlived its justification and treats surplus as a company asset (cash) rather than an asset of the plan participants. Removal of assets under Section 420 by Lucent, Dupont, SBC and others was documented in a Wall Street Journal article on October 14, 2004. The effect of this unwarranted gift of funds is understated operating expense and raided pension trusts.
The SEC should be concerned about acts between the IRS and companies seeking to amend pension plans to enable pension funds to pay operating expenses. For example, Lucent and the IRS exchanged request and approval documents granting Lucent the right to over $1 Billion in pension trust money for the purpose of paying “separation or layoff allowances.” This money was used to pay lump sum inducements to retire, not pension enhancements, and was featured in Lucent’s 10-K as a meritorious management accomplishment. In prior years, these expenses had been paid as current operating expense or from restructuring reserves as visible NI affecting transactions. Despite LRO requests, neither the IRS nor Lucent have produced copies of the request and approval documents. Perhaps the SEC can get them. ERISA loopholes must be closed.
A consultant to the LRO has found that the details of the Trust Owned Life Insurance (TOLI) in the health care management trusts have not been audited. Moreover, these assets have been commingled with other trust assets in the only audit of the health care trust funds. Lucent has refused to provide an accounting of the TOLI, transferred from AT&T for the health benefits of management retirees.
Lucent has denied the LRO’s repeated requests for an independent “second opinion” audit of the pension trusts. Given the fact that Lucent has refused to provide any information about the status of our pension plan beyond the reports required by law, I sent letters to PricewaterhouseCoopers Chairman Samuel A. DiPiazza, Jr. on July 8 and August 5, 2004 requesting his comments on the security of our pension trusts and to provide assurances on the thoroughness of PwC’s audits. PwC declined to provide any information and forwarded my letters to Lucent.
The fact that PwC audits both the corporate books and the pension trusts presents the potential for a conflict of interest. Our anxiety was further increased on August 27, 2004 when the Washington Post published an article stating that initial reviews of the nation's largest accounting firms have turned up numerous rule violations and shoddy recordkeeping practices. PwC was among the Big Four firms cited in the reviews by the Public Accounting Oversight Board for lapses in accounting rules and failures to preserve documents that back up auditors’ work.
This report causes retirees additional concern about whether auditors who are counted on to protect our pension trust funds are properly doing their job. Even giving PwC the benefit of the doubt, the auditor is at the mercy of Lucent executives and its investment advisors in evaluating large chunks of the pension assets.
The SEC found in the Enron case that auditors had a conflict of interest because they also provided consulting services. At Lucent, the actuaries also have provided consulting services. Therefore, a critical element of the pension stewardship is not truly arms length.
At Lucent, the named fiduciaries of the pension funds are Lucent executives whose compensation, including bonuses, depend on corporate earnings, which in turn benefit from reduced (or no) payments to the pension trusts. Lucent has never contributed a penny to the pension trusts transferred from AT&T when the company was created in 1996. Yet, according to a report in The Wall Street Journal, $929 million has been added to Lucent's bottom line over its eight-year history as a result of pension and benefit plans accounting rules.
The LRO believes the SEC should have a vested interested in meeting with us because of the broad impact of Lucent’s pension fund management.
· Employees, retirees and their dependents must rely on pension assets for their future financial security, including cost-of-living;
· Shareholders and prospective investors must rely on realistic financial reporting;
· The Public, because poorly performing pension funds become the taxpayers’ liability through the Pension Benefit Guaranty Corporation.
Based on your current investigations, I believe the SEC shares the LRO’s goal to have “Trustworthy Trusts” in which both the rules of how pension fund decisions are made and the independence of individuals (the named fiduciaries and investment managers) who make them are fully accountable to all stakeholders. Please reply as to when we can meet with you or your staff to share our background and concerns on these critical issues. If you conclude that a meeting is not appropriate, I would appreciate it if you would provide your reasoning as to why a look into the trustworthiness of Lucent’s pension plan is not merited.
K. O. Raschke
Excerpt From “Optical Illusions: Lucent and the Crash of Telecom” by Lisa Endlich
Simon & Schuster – Copyright 2004 - Pages 175 – 177
Another troubling accounting change came from two manipulations Lucent made to its pension fund. Ordinarily pensions are a cost for corporations, as they have to contribute to their employees’ retirement costs. Lucent departed from AT&T with an overfunded pension plan. Under GAAP accounting rules Lucent was able to record some of this surplus as income. As the stock market rose, this pension surplus became greater and ever-larger amounts were taken into net income. In the second fiscal quarter of 1999, approximately 21 percent of the company’s reported earnings came from pension income. The problem is twofold. First, although these funds may be recorded as income, they have little to do with the telecommunications business. While it may be argued that a rising stock market is suggestive of robust business conditions, this says nothing about the company’s ability to provide products and services. Second, and equally troubling from a later vantage point, what goes up comes down. A bull market may have given Lucent an overfunded pension fund, but a bear market would do the opposite. Lucent was in the very best company when it boosted income in this manner, as dozens of other companies took similar adjustments, collectively misleading the public about the true state of their businesses. The pension funds of the S&P 500 companies were overfunded to the tune of $253 billion in 1998; by 2001 assets roughly equaled obligations, and in 2002 these same companies were facing an underfunding of $243 billion.
The second alteration Lucent made to its pension fund came when the company decided to revalue the fund with more aggressive assumptions about the expected rate of return. By assuming a higher rate of return on pension fund assets, the company was able to move even more money into income. This gave Lucent a one-time after-tax gain of $1.3 billion (noted as a one-time non-operating gain) in the first fiscal quarter of 1999 and reflected the cumulative effect of making this change retroactively from 1986 to 1998. More important, this change in outlook allowed Lucent to lower its pension expense (or increase the amount of pension income) in the future by assuming a more cooperative investment climate. The problems with this accounting device are similar to those just noted. These adjustments reflected an optimistic scenario for a stock market at its peak but said little about Lucent’s status as an ongoing business. Investors believed they were paying a lofty premium for earnings that came from building and selling technology. While Lucent never hid the fact that a portion of income was from pensions—it could not, as SEC rules made such a disclosure necessary—the information was buried in the footnotes of the annual report and the SEC filings. As might be expected, when the market turned down, droves of companies began to reverse their optimistic assumptions about future pension gains and cash generated by the underlying businesses was redirected back into the pension funds. When Lucent announced a $4 billion restructuring charge in October 2002, it made clear that $3 billion of this was a charge to equity (rather than a cash contribution, which it still may need to make at a later date) because of the decline in the value of its pension assets.