People Have Been Thrown in Prison for the Kinds of Stuff Carly Fiorina Engaged in as Lucent’s CEO

While Carly Fiorina has unquestionable debate skills, the more I research her background, the more troubled I become. While it's clear that she is -- politically speaking -- somewhere to the left of Jeb Bush on policy, it is her business record that is most alarming.

Let me start with a little history lesson and a company called Lernout & Houspie. Founded in 1987 by two Belgians, L&H went public in 1995 on NASDAQ and operated from U.S. headquarters in Burlington, MA. Specializing in voice recognition software, L&H rode the tech boom to a peak market valuation of $10 billion.

L&H, despite its rise, was dogged by rumors of financial fraud. By early 1999, The Wall Street Journal reported that its earnings had been inflated. A subsequent WSJ investigation led to revelations in August of 2000 that much of the company's value had been achieved by booking imaginary sales through a wide range of accounting gimmicks.

In April 2001, the founders -- Jo Lernout and Pol Hauspie, as well as former CEO Gaston Bastiaens -- were arrested in what was then one of the largest accounting scandals in history.

What were the accounting gimmicks that L&H used? Among them, "investing" in companies that were then required to turn those investments around to "purchase" L&H products and services. As the WSJ reported:

The company ... appears to have improperly reported revenue from barter deals with other software firms in which no cash changed hands; immediately recognized revenue for sales that were contingent on L&H later performing development work for the customer; and sometimes reported sales before contracts were signed, when it was unclear the customer had the ability to pay or when the customer's ability to pay depended on investment from L&H... In all, tens of millions of dollars in revenue over the past several years may have been improperly recorded...

Thousands of individual shareholders have lost a collective fortune in the fall of a company whose market value was nearly $10 billion nine months ago...

...Michael Faherty, a former L&H salesman in the U.S., says he and others were encouraged to refer potential but cash-poor customers to FLV Fund. "If FLV invests $1 million" in the customer, he says, "it was understood that we'd get about $300,000" in the form of license fees paid by that customer to L&H...

... In 1995, for example, FLV took a 49% stake in the Belgian unit of Quarterdeck Corp., a highflying California software company headed by another Belgian, Gaston Bastiaens. This Belgian unit became L&H's largest customer, accounting for 30% of revenue that year, and Quarterdeck itself chipped in 6.5% of L&H's sales...

In simple terms, L&H laundered loans and investments to other companies, which it then booked as phony sales.

And what happened to the founders, Lernout and Houspie? In 2010, they "were found guilty by a Belgian court of fraud violations in the accounting scandal [and] each given sentences of five years..."

So what does all of this have to do with Carly Fiorina?

Well, Fiorina ran the telecom giant Lucent as it was imploding, a fact that she was able to conceal until after she'd jumped ship to HP with over $60 million in performance-based pay.

A series of major orders were announced under Fiorina that subsequently turned out to be completely fraudulent. In 1999, for example, Fiorina trumpeted a huge sale of up to $2.1 billion of equipment to a company called PathNet. Problem was, however, that PathNet's annual revenue was $1.6 million and it could ill afford such a massive purchase. In other words, Fiorina's PathNet deal was as crooked as a corkscrew:

In the giant PathNet deal that Fiorina oversaw, Lucent agreed to fund more than 100% of the company’s equipment purchases, meaning the small company would get both Lucent gear at no money down and extra cash to boot. Yet how could such a loan to PathNet make sense for Lucent, even based on the world as it appeared in the heady days of 1999?

It didn't make any financial sense. Just after Fiorina's departure, Lucent revealed that it had written $7 billion of loan deals to customers, many of them unviable startups like PathNet, which itself went bankrupt in 2001. Post-Fiorina, Lucent also collapsed as the nature of her vendor-financing deals became obvious; but she walked away with upwards of $60 million.

In short, Fiorina used the same fraudulent tactics that L&H employed, investing in companies in order to massively inflate sales numbers.

Unlike Lernout and Houspie, though, Fiorina jumped ship before the implosion and walked away with tens of millions of dollars.

Fiorina, based upon these reports, has a distinctly unsavory background and has as much business running for president as Hillary Clinton does. Which is to say, none.


Related: Top 9 Fun Facts About Carly Fiorina.