Read our latest coverage on the scramble to get American law firms � and lawyers � into China.
“It’s not a notion they’re shocked at,” agreed Scott Kline, a corporate and securities lawyer at Thelen Reid Brown Raysman & Steiner who has represented several dozen Chinese companies.
But he cautioned against drawing conclusions from the differences in corporate culture.
“It’s not that they’re not as upfront and loyal and ethical as U.S. officers and directors,” Kline said. “It’s just they’ve not had to perform under the same kind of full disclosure. It’s just different.”
MOUNTING PROBLEMS
UTStarcom’s situation touches on a wide range of these pitfalls as it continues its effort to dig out of its compliance mess.
The company is deep into a securities fraud class action filed by Coughlin Stoia Geller Rudman & Robbins seeking recompense on behalf of burned investors. It’s also facing a multifaceted effort by the SEC to figure out whether its problems are the result of fraud or, as the company has said, a lack of proper internal controls.
Walter Brown, an Orrick partner who has represented a board committee investigating some of the conduct, declined to comment, as did a lawyer for CEO Lu.
And Boris Feldman, a partner at Wilson Sonsini who represents UTStarcom in the securities fraud litigation, declined to answer a list of questions about the company.
Carmen Chang, the Wilson partner who helped the company with its IPO � and brought the client with her when she moved to Shearman & Sterling and back a few years ago � didn’t respond to an e-mail message seeking comment. Chang’s assistant said she was in China on business.
When it comes to the options problems, it’s difficult to tell in exact dollar amounts how much former and current executives benefited, since the company hasn’t itemized which past options were improperly handled. But SEC filings show that around the same time executives were dining on snake offal, several top officers sold millions of dollars in stock. During late 2003 and early 2004, they cashed in options that were awarded at quarterly low share prices between 2000 and 2004, the period during which the company acknowledges backdating.
As a result of the backdating, the company had to restate its expenses for 1998 to 2006 by about $27 million. That’s in addition to the more than $300 million in restatements stemming from problems with how Asian offices booked revenue. UTStarcom’s market cap is about $400 million.
Before its problems arose, UTStarcom trumpeted in an early 2004 press release its “continued ability to deliver market-leading products” as “a testament to the strength of our technological innovation and dedication.”
In hindsight, technological innovation � or a lack thereof � was one of the company’s first obstacles. Much of UTStarcom’s business in Asia was based on “personal access system” technology that connected portable handsets with land lines, a stop-gap for fast-growing economies where the demand for mobile phones outstripped the growth of cellular infrastructure. But by late 2003, PAS phones were on their way out.
“It looked like everything was falling off a cliff in terms of shipments,” said one former insider involved in the preparation of public revenue numbers.
CFO Mike Sophie left the company last year. In 2005 CEO Lu submitted his resignation, though he has since decided to remain in the role until sometime next year.
NEW MATH
In February, UTStarcom said in SEC filings, it began a review of “approximately 1,200 contracts in all of our five regions in China” after an employee reported that revenue was routinely being reported earlier than was proper.
In its quarterly report earlier this month, the company’s audit committee blamed its $270 million restatement on a “lack of proper management oversight, unclear record retention policies and procedures relating to systems contracts, and inadequate employee training.”
“As a result,” it added “certain employees in China have either been terminated or placed on suspension for failure to provide adequate oversight of activities.”That came atop a separate $49.6 million restatement last year for premature recording of income from a contract in India as well as several other transactions.
The Department of Justice’s reviews of foreign bribes and possible violations of U.S. immigration laws continues, the company reported, as does the SEC’s probe of whether Lu tipped off Shey, the former board member who settled insider trading charges with the commission. A lawyer for Lu declined to comment.
Litigators expect such failures of oversight � especially when it comes to foreign bribery � to continue dogging U.S.-regulated companies over the next few years as they make aggressive pushes to expand in Asia. Past practices can often come to light during the due diligence phase prior to an IPO.
But looking beyond the immediate future, corporate attorneys working in China say things should improve. They say that as Chinese officials try to crack down on corrupt government employees, companies like UTStarcom will have less of an opportunity to engage in practices that get them in trouble in the United States.
“The Chinese are very eager to be seen as wanting to address corruption because it causes a lot of problems,” Orrick’s Stephens said.
Last year, said Sheppard, Mullin, Richter & Hampton’s William Zheng, a government investigation brought down a top Shanghai official and numerous others, causing government employees to grow more skittish when offered the favors that used to be commonplace.
“Now, they’re saying they can take a look,” Zheng said. “Before, they could promise the sky.”
