UTStarcom CEO Gets Notice of Likely Securities Violation Action

UTStarcom (UTSI) on Friday afternoon disclosed that Hong Lu, the company’s president and CEO, received a “Wells Notice” from the SEC on Monday indicating that the SEC staff intends to recommend that the Commission file a civil action against him “in connection with an ongoing investigation into trading activities by third parties.” (Sounds like insider trading, although it is a little hard to tell from this description.) According to the company the notice states that “the staff intends to recommend to the Commission that it file a civil injunctive action alleging that Mr. Lu violated Section 10(b) of the Securities Exchange Act of 1934,” a section covering securities fraud.

This is just the latest in a long string of legal issues for the telecom hardware company, including a stock-options backdating probe and potential violations of statutes concerning bribery of foreign officials.

There are several remarkable things about this latest development.

• This disturbing disclosure comes in a news release with the headline : “UTStarcom Provides Update on Strategic Alternatives Process and Leadership Transition”. Sneaky, eh?
• The release also says that Lu has been asked by the UT board “to continue as the company’s president and chief executive officer and remain a member of the board of directors” while the company “continue[s] to move forward on the strategic alternatives process we announced on October 11th.” On that day, the company had said that Lu would be leaving the company as scheduled on January 1. Are you following this? The guy about to be sued by the SEC is having his tenure extended.
• The company waited until Friday to announce something that it learned on Monday - the Friday afternoon before the long Christmas weekend.
• The company provides no additional detail on what Lu allegedly did, or what third party might be involved.

The mind boggles.

Meanwhile, the company also announced that it is asking holders of its 7/8% convertible subordinated noted due 2008 to waive their rights in the event of a default. As the company disclosed last month, the trustees for the converts contends that the company’s failure to file its 10-Q for the September 30 quarter constitutes a default. The company doesn’t agree with that view, but nonetheless is asking covert holders to give them until May 31, 2007 to become current on its filings. In exchange for their consents, the company will pay them “a consent fee” of $5,492,000 divided pro rata among consenting holders. In other words, they are going to pay up to get the debt holders to agree not to disagree.

As of the company’s 10-Q for the June quarter, the company had $274.6 million of the notes outstanding. The notes are convertible into common at $23.79 a share, far above the current stock price. At June 30, the company had $647 million in cash.