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In re Motorola, Inc.

Accounting and Auditing Enforcement Release No. 2607 (May 8, 2007)

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In re Motorola, Inc.

Securities and Exchange Commission

Accounting and Auditing Enforcement Release No. 2607 (May 8, 2007)

Facts

Adelphia purchased cable set-top boxes from Motorola, Inc. (defendant) for Adelphia subscribers to use with its cable-television system. In 2001, at Adelphia’s request, Motorola signed a backdated marketing-support agreement. Under the agreement, Adelphia made payments to Motorola that Motorola immediately returned to Adelphia as marketing-support payments. On paper, Adelphia prefunded Motorola’s purported marketing-support-payment obligation by increasing the price of cable set-top boxes that Motorola had sold and was to sell to Adelphia. Because the agreement was backdated, it resulted in retroactive price increases. But no actual marketing was contemplated in the agreement, and Adelphia never conducted any such marketing. Adelphia recorded the payments in a way that decreased its operating expenses, thereby increasing its EBITDA. At the same time, Adelphia recorded the increased set-top-box prices as capital expenditures, which did not impact its EBTIDA. The result was an artificial increase in Adelphia’s EBITDA in violation of Securities and Exchange Commission (SEC) regulations. The agreement had no financial impact on Motorola. The SEC (plaintiff) instituted an enforcement action against Motorola, alleging that Adelphia’s accounting of the transactions violated generally accepted accounting principles (GAAP) and various SEC regulations.

Rule of Law

Issue

Holding and Reasoning

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