Distributors for ClearOne Communications Inc. accepted millions of dollars in audio and video teleconferencing products as "favors" to the Utah company's top officer, a former ClearOne official testified Monday.
Tim Morrison, former vice president of product sales and business services, said he, at the behest of chief executive officer Frances Flood, asked industry-leading companies to purchase the products with the understanding they would not have to pay ClearOne until the products sold.
This, despite distributor agreements that the products would be paid for in full within 90 days, Morrison said.
But Morrison said the unspoken terms of the contracts were clear: "If you take products as a favor, you can pay for it as you sell it. There is no risk to you."
According to the Securities and Exchange Commission, the behavior amounts to "channel stuffing" and is against the law.
In his opening statement at the beginning of a two-day preliminary injunction hearing Monday, SEC attorney Thomas Melton said the "secret, side agreements" resulted in the distortion of financial statements filed by ClearOne.
"These were sham transactions, Your Honor, that had no economic impact whatsoever except to inflate the books of ClearOne," Melton told U.S. District Judge Dale A. Kimball.
In a January complaint, the SEC accuses ClearOne of overstating its income, revenues and accounts receivable; misleading outside accountants; making illegal deals with distributors; and hiding merchandise from spring 2001 through late summer 2002. Flood and chief financial officer Susie Strohm are named individually in the complaint.
The government agency has asked Kimball to issue an injunction against ClearOne and appoint a special monitor to oversee the company, citing ClearOne's failure to withdraw and refile its financial statements as proof the company is likely to reoffend.
Not so, ClearOne attorney Neil Kaplan countered. The company has initiated its own investigation and intends to fully "scrutinize this issue."
ClearOne never modified its legal agreements with distributors, Kaplan said. Instead, it offered to "work with" customers who were having a hard time paying because of the sliding economy and industry slump after Sept. 11, 2001.
"The auditors knew specifically that one of the primary reasons why the distributors were late in paying is because they were having trouble selling the product," Kaplan said.
Flood's attorney, Max Wheeler, said his client never tried to hide the fact she was accommodating distributors who couldn't pay within 90 days.
"The evidence is going to show that there was no secret agreement. Everyone knew we were extending credit," Wheeler said. "That's what was going on at ClearOne, and that's what was going on in the industry as a whole."
The distribution-based model came about through a massive revamp in June 2001, the same month Morrison began working at ClearOne. But things didn't work as planned, Morrison said, because distributors became inundated with products they couldn't sell.
Under their agreements with ClearOne, distributors were required to take at least $500,000 in products each quarter.
Still, ClearOne continued under the model, Morrison testified, because, "To stop would be very damaging to our stock value."
Morrison was terminated in February 2003 and has filed claims against ClearOne with the Equal Employment Opportunity Commission, including sexual harassment and gender discrimination — proof, Wheeler said, that Morrison is not a credible witness.
"It shows that this witness has an agenda," Wheeler said. "It shows he had an agenda before he went to the SEC."
The hearing resumed Tuesday, with both Flood and Strohm expected to take the stand. It was unknown whether Kimball will rule on the motion for preliminary injunction Tuesday afternoon or issue a ruling at a later date.
E-mail: awelling@desnews.com