September 24, 2004 J. E. Stickel
8385 S.E. 173rd Hendricks Lane
The Villages, Florida 32162
Ms. Patricia F. Russo, Chairman and CEO
600 Mountain Avenue
Murray Hill, New Jersey 07974-0636
Dear Ms. Russo:
I am a shareholder of Lucent Technologies stock and I have submitted a proxy proposal for consideration at the Lucent 2005 shareholder meeting. The essence of my proposal is to prevent the auditors of the company’s corporate books from also being the auditors of the pension and benefit plans. My proposal was reviewed by the officers of the Lucent Retirees Organization (LRO) and has their support. As I’m sure you know, the LRO is an organization representing several thousand retirees who receive their pensions from the Lucent pension fund (‘Lucent retirees’).
My proposal calls for basic fairness in the management of the Lucent retirees’ pension and benefit trusts. We retirees paid our dues during our working years with the full knowledge of, and confidence in, the company’s commitment to providing pensions and benefits in our retirement years. Now that we have earned our retirement and have begun to draw on that commitment, we should not have to worry that those funds are not secure. As long as the auditors of the company’s books provide the same for our pension funds, there will always be an overhanging cloud of suspicion regarding their objectivity. The news media has reported cases where corporations have walked away from their pension obligations and, in some cases, claimed that their obligations were fully funded -- only for it to be discovered otherwise when their pension obligations were assumed by the Pension Benefit Guaranty Corporation (PBGC).
I sincerely hope that Lucent will never have to join those corporations that decided they could no longer afford “legacy” costs, and used creative auditing in an attempt to relieve their obligations. Surely you must know that Lucent’s track record in reporting financial information has not been without blemish. I’m reminded of the $˝B settlement imposed by the courts in a class action suit for financial improprieties; the $25M fine imposed by the SEC and paid by Lucent; and the American Institute of Certified Public Accountants training course entitled “Lucent Technologies: A study in Fraud and Earnings Management”. As a retiree with significant dependency on my pension, I must admit to having fears as to the pension fund’s safety.
A year ago, I wrote a letter to Pamela Kimmet, asking about the safety of the pension funds and its compliance with ERISA laws. Nancy Edmond, a Lucent manager, responded for Ms. Kimmet and wrote “ERISA and the Code also contain protected benefit rules that prohibit the company or any successor of the company from reducing accrued benefits. Therefore, in the event of a potential corporation transaction such as bankruptcy, takeover or merger, depending on the transaction, either Lucent’s Pension Plans would retain the liability with respect to your accrued benefit payable from the pension trust or a successor plan would inherit this liability. Either way, the protected benefit rules ensure that your benefits would not be reduced as a result of such a potential transaction. This protection also extends to survivor annuity benefits payable under the Plans.” It’s interesting to note that Ms. Edmond stated twice, in the same paragraph, that the company or a potential successor is prohibited from reducing accrued benefits. Her assurance however seems to be in contradiction to a statement made earlier this month by Frank D’Amelio who was quoted as saying, “we must reduce our retiree-benefit costs. Spending levels have to come down. Most of our competitors don’t have these legacy issues”. I am not comforted by the contradiction. Lucent has demonstrated a disregard for their pensioners and to assume that the officers of the pension trusts and the auditors of the company’s books would act equitably and objectively to assure that the interests of company officers, shareholders, and retirees are fairly and consistently met is truly a stretch. I understand also that a second pension fund, for highly compensated employees, is also managed in confidence by the same officers as the pension and post-retirement funds. Since Lucent officers’ certify annually that they will operate in an ethical manner and avoid conflicts of interest, I assume that if the opportunity arises to arbitrage positions in the highly compensated pension fund based on known transactions in the pension and post-retirement benefit trusts, that the officers wouldn’t take advantage.
An overall review of Lucent’s annual report shows an alarming fall in pension assets from a high water mark of $50B in October 2001 and a reported $32B in October 2003. The auditors gave no explanation for that loss of $18B in the fair value of plan assets. The first paragraph of the 2003 annual report boasts a profitable quarter as a bellwether milestone—not one scintilla of mention was given to the $594M charge against equity in the pension fund that enabled that to be shown as a profit. How can the pension funds be considered a burden Lucent can no longer afford when it was the inclusion of equity from the pension fund that enabled Lucent to show a profit?
The retirees aren’t the only folks who want an independent audit; I understand the PBGC wants a look at the books too. If they can examine the books then, most certainly, retirees should be accorded the same opportunity. Congress is now holding hearings to pass that initiative into law. Lucent, as a good corporate citizen, should take the initiative and separate the auditors on its own. It’s the honest way to do business.
Your candid response to the foregoing is requested – including your rationale as to why Lucent has refused in the past to have an independent auditor of the pension trust funds, and why they have refused to allow detailed examinations of past pension fund procedures and activities.