The accounting fraud is Lernout and Hauspi

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U.S. Securities and Exchange Commission Washington, D.C.

Litigation Release No. 17782 / October 10, 2002

Accounting and Auditing Enforcement Release No. 1648 / October 10, 2002

The Commission Files Accounting Fraud Action against Lernout & Hauspie Speech Products

Securities and Exchange Commission v. Lernout & Hauspie Speech Products, N.V. Civ. No. 1:02CV01992 (D.D.C.)

Today the Commission announced the filing of a civil injunctive action in United States District Court for the District of Columbia against Lernout & Hauspie Speech Products, N.V., a developer, licensor, and provider of speech and language technologies, headquartered in Ieper, Belgium and Burlington, Massachusetts. The complaint alleges that, from 1996 through the second quarter of 2000, while its common stock was listed on the Nasdaq National Market System and Nasdaq Europe, Lernout & Hauspie engaged in a variety of fraudulent schemes to inflate its reported revenue and income. The result of this conduct was an international financial scandal, the destruction of Lernout & Hauspie as an operating company, and a loss of at least $8.6 billion dollars in market capitalization, borne by investors in Belgium, the United States and elsewhere.

According to the Commission's complaint:

The Dictation Consortium and Brussels Translation Group Transactions

Between 1996 and 1999, Lernout & Hauspie improperly recorded over $60 million in revenue from transactions with two Belgian entities: Dictation Consortium, N.V. and Brussels Translation Group N.V. These entities were formed for the specific purpose of engaging in transactions to allow Lernout & Hauspie to claim revenue from its own research and development activities, which otherwise would not have resulted in reported revenue unless and until the projects resulted in marketed products. Lernout & Hauspie subsequently acquired both of these companies on terms that repaid the amounts they had previously paid to Lernout & Hauspie, plus a substantial profit. Because the transactions were, in substance, disguised loans and not sales or service transactions, Lernout & Hauspie should not have recognized revenue from those transactions under Generally Accepted Accounting Principles.

The Language Development Companies

By late 1998, the revenue boost obtained by Lernout & Hauspie from the Dictation and BTG transactions had waned. To bolster its reported

revenue, Lernout & Hauspie launched a new and elaborate fraudulent scheme to, in essence, create additional customers. These new customers, dubbed "Language Development Companies" (or "LDCs"), enabled Lernout & Hauspie to claim revenue of $102 million in license fees and $8.5 million in prepaid royalties in 1998 and 1999 combined, giving the false impression of exponential growth. The LDC revenues were not separately identified by Lernout & Hauspie in its financial statements, but instead were buried in overall revenue figures. The LDCs were structured in a manner that masked their actual role at the time of their creation. All were private companies. Most were incorporated in Singapore, although they had no actual operations in that country. The "managing director" of many of the Singapore LDCs was a Belgian national associated with Lernout & Hauspie. Lernout & Hauspie, in its public disclosure, contended that the LDCs were formed to develop speech recognition and translation software applicable to various regional languages. In actuality, the LDCs were little more than shell companies created, like Dictation and BTG, as a means for Lernout & Hauspie to improperly fabricate revenue. The LDCs had few, if any, employees, and were dependent on Lernout & Hauspie personnel for research and development activities. None of the LDCs ever produced any significant product. Lernout & Hauspie supplied or arranged for others to supply financing for at least certain of the LDCs. For example, in late 1999, Lernout & Hauspie solicited an investment bank in Bahrain to help in the search for investors for two LDCs. The investment bank advanced Lernout & Hauspie $8 million for technology licenses for the LDCs, with the understanding that Lernout & Hauspie would repurchase the licenses at a substantial premium (representing a 25% internal rate of return) should the investment bank be unable to locate investors to fund the LDCs. Thus, to the extent Lernout & Hauspie obtained funds from the LDCs, these funds were subject to material conditions imposing significant potential liabilities on Lernout & Hauspie. Lernout & Hauspie, however, did not disclose these arrangements and did not reflect its potential liabilities to the LDCs on its balance sheet.

The Fraudulent Korean Transactions

From September 1999 to June 2000, L&H reported approximately $175 million in sales revenue from its Korean operations ("L&H Korea"). The purported dramatic growth in sales from its Korean subsidiary accompanied the inflation of the price of L&H stock. The majority of this revenue was fraudulent. L&H Korea engaged in "sales" subject to written and oral side agreements that did not appear in the L&H Korea contract files. These terms included, in some instances, agreements by L&H Korea not to pursue collection of license fees unless and until the "customer" generated sufficient revenue from use of the L&H software to cover those fees. To prevent uncollectible receivables from remaining on L&H Korea's books, thereby raising questions about the quality of the company's

reported earnings, a series of transactions with four Korean banks were staged to give the impression that the receivables had been factored to those banks on a non-recourse basis. In fact, L&H Korea entered into side agreements with the banks requiring L&H Korea to maintain blocked deposits to cover the amounts of the "factored" receivables, which the banks could apply to satisfy any collection shortfalls. Thus, these transactions were essentially fully secured loans from the banks to L&H Korea, rather than sales of receivables from L&H Korea to the banks. In another scheme to disguise that its escalating accounts receivable did not reflect genuine sales, L&H Korea arranged to have third parties "purchase" the licensing agreements from the original customers. The transferees would then obtain loans, collateralized by L&H Korea assets but not reflected in L&H Korea's books, and use the proceeds to pay L&H Korea through the original customers. By this means, L&H Korea was, in effect, paying down its own receivables, while creating the appearance of successfully collecting payments from customers.

Subsequent Events

The Commission's complaint further alleges that:

During the last quarter of 2000, as information about the company's financial fraud became public through the press, the price of Lernout & Hauspie stock declined dramatically, falling from a high of $72.50 in March 2000 to $.76 on December 29, 2000. On December 6, 2000, the common stock of Lernout & Hauspie was de-listed by Nasdaq. Thereafter, Lernout & Hauspie voluntarily de-listed from Nasdaq Europe in March 2001. Lernout & Hauspie common stock is currently quoted on the "Pink Sheets" disseminated by Pink Sheets LLC. On November 29, 2000, Lernout & Hauspie filed a voluntary petition for reorganization under Chapter 11 of the U.S. Bankruptcy Code in the District of Delaware. On December 27, 2000, Lernout & Hauspie filed a voluntary petition under Belgium's insolvency statutes. Both courts determined that reorganization and recovery were not possible, and the company is currently in liquidation proceedings in the U.S. and Belgium.

According to the Commission's complaint, the conduct described above violated the anti-fraud, reporting, books and records and internal controls provisions of the federal securities laws: Section 17(a) of the Securities Act of 1933 and Sections 10(b), 13(a), 13(b)(2)(A) and 13(b)(2)(B) of the Securities Exchange Act of 1934 and Rules 10b-5, 12b-20, 13a-1, 13a-13, and 13a-16 thereunder. The Commission seeks a permanent injunction against future violations by Lernout & Hauspie of the above provisions of the federal securities laws.

The Commission acknowledges the assistance of the United States Attorney for the Southern District of New York; the Belgian Ministry of Justice (pursuant to the provisions of the Mutual Legal Assistance Treaty in effect between the United States and Belgium); and the Jersey Attorney General.

The Commission's investigation is continuing with respect to other persons and entities.

SEC Complaint in this matter

http://www.sec.gov/litigation/litreleases/lr17782.htm

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UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Litigation Release No. 14776 / January 4, 1996 Accounting and Auditing Enforcement Release No. 750

SECURITIES AND EXCHANGE COMMISSION v. RONALD A. ROMITO, United States District Court for the Northern District of California, Civil Action No. 95 20857 (EAI) (December 19, 1995).

The Securities and Exchange Commission today announced the filing of a complaint with the United States District Court for the Northern District of California against Ronald A. Romito, former Chief Accounting Officer of California Micro Devices Corporation ("Cal Micro").

The Commission's complaint sets forth a series of violations by Romito of the antifraud, periodic reporting, books and records, and internal accounting controls provisions of federal securities laws. The Commission's complaint alleges that during Cal Micro's fiscal year ended June 30, 1994, Romito, together with other officers and employees of the Company, fraudulently inflated Cal Micro's reported revenue by, among other things, knowingly recognizing revenue on certain product that had not been shipped or, in some cases, even manufactured, in violation of Generally Accepted Accounting Principles ("GAAP"). In order to conceal the improper revenue recognition, Romito and others falsified the Company's books and records, overrode the Company's internal accounting controls and misled its outside auditors. As a result of the fraud, Cal Micro's quarterly reports on Forms 10- Q for at least the periods ended December 31, 1993 and March 31, 1994, and its annual report on Form 10-K for the year ended June 30, 1994, were materially false and misleading.

The complaint also alleges that Romito engaged in illegal insider trading by selling Cal Micro stock while in possession of material non-public information. The Commission alleges that Romito sold his entire holdings of 7,500 shares of Cal Micro stock during May 1994 knowing that material amounts of Cal Micro's reported revenue for the second and third fiscal quarters did not qualify for revenue recognition under GAAP, that the Company's books and records were materially inaccurate, that the Company's internal accounting controls were being overridden, and that the Company was planning to write-off a large portion of its false revenue in the fourth quarter ended June 30, 1994. Romito avoided losses of $86,000 as a result of his sales.

As a result of a series of press releases from August 4, 1994 through January 10, 1995 describing the fraud and its impact on the Company's financial results, the price of Cal Micro's common shares dropped from $22 to $3.88 per share. The Company restated its results for fiscal year 1994 on February 6, 1995, restating product revenue from $38.3 million to $22.4 million.

Romito has consented, without admitting or denying the allegations of the complaint, to the entry of an order: (1) enjoining him from future violations of Section 17(a) of the Securities Act of 1933 and Sections 10(b), 13(a), 13(b)(2)(A), 13(b)(2)(B) and 13(b)(5) of the Securities Exchange Act of 1934 and Rules 10b-5, 12b-20, 13a-1, 13a-13, 13b2-1 and 13b2-2 thereunder; (2) requiring him to disgorge $86,000, plus prejudgment interest of $8,552, which represents losses avoided

by his sales of Cal Micro stock; (3) imposing a one-time civil penalty of $86,000 pursuant to the Insider Trading and Securities Fraud Enforcement Act of 1988, but not assessing a portion of the

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penalty due to his demonstrated inability to pay; and (4) prohibiting him from serving as an officer or director of any public company. In addition, Romito has consented to the entry of an order in a separate administrative proceeding which will prohibit him from practicing as an accountant before the Commission. �