SEC v. Jerry Shaw-Yau Chang, Northern District of California (Dec. 31, 2000) — Complaint

 
 
   
 
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HELANE L. MORRISON (Cal. Bar No. 127752) 
JOHN S. YUN (Cal. Bar No. 112260) 
KATHLEEN K. BISACCIA (Cal Bar No. 157324) 
VICTOR W. HONG (Cal. Bar No. 165938) 
 
44 Montgomery Street, Suite 2600 
San Francisco, California  94104 
Telephone:  (415) 705-2500 
Telecopier:  (415) 705-2501 
 
Attorneys for Plaintiff 
Securities and Exchange Commission 
SECURITIES AND EXCHANGE COMMISSION,
 
                        Plaintiff,            
 
            v.            
 
JERRY SHAW-YAU CHANG, 
 
                        Defendant.            
 
Civil Case No. C 04-4144 MHP 
 
 
COMPLAINT FOR PERMANENT 
INJUNCTION AND OTHER LEGAL AND 
EQUITABLE RELIEF 
 
DEMAND FOR JURY TRIAL 
 
 
Plaintiff Securities and Exchange Commission (“Commission”) alleges: 
SUMMARY
 OF ACTION 
1. This enforcement action arises from the false reporting by Clarent Corporation 
(“Clarent”) of approximately $13 million in revenue in its annual filing with the Commission for its 
2000 fiscal year and the overstatement of $25 million in cash assets in Clarent’s quarterly filing for 
its June 2001 fiscal quarter.  Clarent’s former president and chief executive officer, defendant Jerry 
Shaw-Yau Chang (“Chang”), instigated the company’s false revenue reporting and overstatement of 
net income and assets.  Chang also circumvented Clarent’s internal accounting controls and misled its 
outside auditors by concealing his activities from Clarent’s accounting personnel.   
2. In summary, during the fiscal year ended December 31, 2000, Chang orally promised 
D-Link Corporation (“D-Link”), a Clarent customer based in Taiwan, that if D-Link placed orders for 
UNITED STATES DISTRICT COURT 
NORTHERN DISTRICT OF CALIFORNIA 
SAN FRANCISCO DIVISION 
 

 
 
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$13 million of Clarent product but could not resell the product, Clarent would arrange for a third-
party to buy the product from D-Link.  Chang’s oral promise meant that D-Link was not currently 
obligated to pay $13 million to Clarent, and could instead wait until D-Link found its own 
customer(s) for the product or Clarent found a customer for D-Link.  In light of making D-Link’s 
payment for product contingent upon some future development, Chang knew that Clarent could not 
report the purported $13million in product “sales” as revenue in its earnings announcements and 
periodic reports filed with the Commission.  Chang nonetheless made the oral promises to D-Link, 
and then withheld information about the oral terms from Clarent’s corporate headquarters in the 
United States.  Chang therefore engaged in a fraudulent scheme to have Clarent report inflated 
product sales revenue of $13 million in violation of both Generally Accepted Accounting Principles 
(“GAAP”) and the federal securities laws.  
3. Later, during the fiscal quarter ended June 30, 2001, Chang authorized the transfer of 
$25 million from Clarent’s Taiwan bank accounts to Articula Corporation (“Articula”), an entity 
controlled by a Clarent executive and his family, without the necessary authorization from Clarent’s 
Vice President of Finance and Clarent’s Chief Financial Officer.  At about the same time, Chang had 
Clarent guarantee an $11 million loan to Articula, once again without the necessary authorizations.  
The $25 million transfer to Articula reduced Clarent’s cash assets by $25 million on June 30, 2001, 
but was not disclosed in the company quarterly report for that period.  Additionally, given the 
unauthorized character of the fund transfer to Articula – as well as the way in which the funds were 
used – the $25 million transfer should have been treated as a refund and/or expense on Clarent’s 
financial statements for the June 2001 quarter so as to reduce the company’s assets and net income. 
4. In July and August 2001, Clarent learned that funds were disbursed from its Taiwan 
accounts in violation of internal controls and that various customers were insisting upon the right to 
return their unwanted product to Clarent.  In September 2001, Clarent announced that its cash and 
revenue might have been overstated and that it had placed Chang and other high-level executives on 
administrative leave while it conducted an internal investigation.  Officials at the NASDAQ National 
Market suspended trading in Clarent’s shares on September 4, 2001 with Clarent shares trading at 
$5.37 per share.  When trading resumed on January 30, 2002, Clarent had been delisted from 

 
 
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NASDAQ and its shares opened trading on the OTC market Pink Sheets Electronic Quotation 
Service at $.50 per share.  Clarent later issued an accounting restatement that eliminated most of the 
company’s revenue for a number of periods, including those ended December 31, 2000, March 31, 
2001 and June 30, 2001.  In the end, Clarent’s shareholders lost nearly the total value of their 
investment in the company. 
5. Given the fraud perpetrated by Chang upon Clarent’s shareholders and the securities 
markets, the Commission brings this action to obtain a permanent injunction prohibiting Chang’s 
further violations of the federal securities laws, to force Chang to disgorge his ill-gotten gains, to bar 
Chang from serving as an officer or director of a publicly reporting company and to impose civil 
monetary penalties. 
JURISDICTION
 AND VENUE 
6. The Commission brings this action pursuant to Sections 21(d) and 21(e) of the 
Securities Exchange Act of 1934 (the “Exchange Act”) [15 U.S.C. §§ 78u(d) and 78u(e)].  This Court 
has jurisdiction over this action pursuant to Sections 21(e) and 27 of the Exchange Act [15 U.S.C. §§ 
78u(e) and 78aa].   
7. Chang directly or indirectly, made use of the means and instrumentalities of interstate 
commerce, of the mails, or of the facilities of a national securities exchange, in connection with the 
acts, practices, and courses of business and transactions alleged herein. 
8. This district is an appropriate venue for this action under Section 27 of the Exchange 
Act [15 U.S.C. § 78aa].  Certain of the transactions, acts, practices and courses of business 
constituting the violations alleged herein occurred within the Northern District of California. 
9. Assignment to the San Francisco Division is appropriate pursuant to Civil Local Rule 
3-2(d) because a substantial part of the events that give rise to the Commission’s claims occurred in 
San Mateo County, where Clarent was headquartered. 
BACKGROUND
 ALLEGATIONS 
A.        Clarent’s        Organization 
10. Clarent was originally organized in 1996 in the State of California under the name 
“NetiPhone, Incorporated.”  The company changed its name in May 1997 to “Clarent Corporation,” 

 
 
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and was reincorporated in June 1999 in the State of Delaware. During the relevant period, Clarent’s 
corporate headquarters were in Redwood City, California.  At the current time, Clarent is a corporate 
shell without any business operations.  Previously, Clarent developed, sold and serviced software and 
hardware products designed to manage the transmission of voice and data over the internet. 
11. Chang was a director of Clarent from July 1996 until his termination in September 
2001.  He also served as Clarent’s President from July 1996 to April 2001 and Chief Executive 
Officer from July 1996 to July 2001.  In July 2001, Chang became Clarent’s Chairman of the Board 
and Chief Strategist, and held those positions until his termination in September 2001.  Chang’s 
compensation consisted of a base salary and a performance bonus.  For 2000, Chang received a 
$185,000 bonus.  Chang also owned low-cost “founder stock” and received “regrant options” to 
purchase 41,156 shares of Clarent stock at a reduced exercise price between August 15, 2001 and 
November 15, 2001. 
12.  One of the persons reporting to Chang was Mathew Ming-Chang Chiang (“Chiang”).  
Chiang joined Clarent in 1997 as a Marketing Director.  In September 2000, Chiang became a Vice 
President and the General Manager of Clarent’s Asia Pacific Region, which had its office in Taiwan 
and which included China, Japan, Korea, Singapore and India.  During 2001, Chiang became a 
Clarent corporate officer and the President of its Asia Pacific Region. 
13. Articula is a California corporation with offices in Taipei, Taiwan and Milpitas, 
California and is affiliated with two Taiwanese firms, Great MinCom Communication Corporation 
and Great MinCom Products Corporation.  For purposes of this Complaint, the name “Articula” will 
cover the California corporation and the two affiliated Taiwanese firms.  Articula’s filings with the 
California Secretary of State in October 2000 identify Chiang as a member of Articula’s board of 
directors and Chiang’s father as Articula’s Chairman of the Board.  A listing of Articula shareholders 
identifies Chiang’s mother as Articula’s Chairman of the Board effective May 1, 2001.  Over time, 
Chang and Chiang transferred Clarent funds to Articula and exercised sufficient control over Articula 
that they could use Articula to further their sales and revenue schemes at Clarent.  Articula therefore 
functioned as a related party of Clarent in any transactions involving Clarent. 
 

 
 
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B. Clarent’s Business and Reporting Obligations 
14. Clarent held its initial public offering on July 1, 1999, and registered its common stock 
with the Commission pursuant to Section 12(g) of the Exchange Act.  Clarent’s shares traded on the 
NASDAQ National Market under the symbol “CLRN” until NASDAQ suspended trading in 
September 2001 and delisted the shares in January 2002.  Subsequently, Clarent’s shares have traded 
on the “Pink Sheets” over-the-counter market.  Clarent filed a Form 15 with the Commission 
terminating its registration on April 20, 2004. 
15. As a publicly traded company, Clarent was required to comply with various 
Commission regulations designed to ensure that the company accurately recorded and reported its 
financial results to investors.  Those Commission regulations obligated Clarent to report its financial 
results on a quarterly basis in a Form 10-Q quarterly report and on an annual basis in a Form 10-K 
annual report.  Those regulations also required Clarent to comply with GAAP in reporting its 
financial results. 
16. The Commission’s regulations and accounting guidelines moreover required Clarent 
to adopt critical accounting policies.  Clarent therefore has the following revenue recognition policy, 
which was disclosed in its Form 10-K annual report for the year ended December 31, 2000: “Revenue 
is recognized at the time of shipment of the products when persuasive evidence of an arrangement 
exists, the fee is fixed and determinable, when no significant contractual obligations or acceptance 
terms, if any, remain outstanding and collection of the resulting receivable is deemed probable.”  
Under that policy as well as the requirements of GAAP, Clarent could not recognize revenue for any 
“contingent sale” whereby the customer did not have a binding obligation to pay for, and keep, the 
product purchased. 
17. At the end of each quarter, the sales force held meetings in which they discussed what 
steps needed to occur in order to make an order “clean” for revenue recognition purposes.  Chang 
participated in these meetings, especially as the end of the quarter approached.  Clarent’s Chief 
Financial Officer also discussed revenue recognition issues at all sales meetings.  Clarent’s Chief 
Financial Officer also specifically instructed Chang in December 2000 that if a payment contingency 
remained as a term of the deal, “the deal is not done” until the contingency is removed. 

 
 
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18. Chang signed Clarent’s Forms S-1s for its initial public offering and secondary 
offering and Form 10-K annual reports for 1999 and 2000, each of which contained a description of 
Clarent’s revenue recognition policy.  Chang also signed numerous Form 10-Q quarterly reports, 
including the Form 10-Q for the quarter ended March 31, 2001.  In the management representation 
letter to Ernst & Young (“E&Y”) dated February 15, 2001, Chang represented that all revenue had 
been properly recorded in the Form 10-K in accordance with Statement of Position 97-2, Statement 
of Position 98-9 and interpretations of Staff Accounting Bulletin 101.    
19. In its quarterly and annual filings with the Commission, Clarent reported its revenue 
on a consolidated basis for all of its worldwide sales regions.  Clarent’s filings also provided a 
breakdown of the company’s revenue for each of its geographic sales areas – the United States, the 
Other Americas, the Asia Pacific Region and the combined Europe, Middle East and Africa Region.  
According to that geographic breakdown, most of Clarent’s revenue initially came from sales to 
customers in North America.  Over time, however, a rapidly increasing percentage of Clarent’s 
revenue supposedly came from sales to customers in its Asia Pacific Region.   
20. During the 1999 fiscal year, Clarent reported $20,365,000 in revenue in the United 
States and $15,999,000 revenue in the Asian Pacific Region.  During the 2000 fiscal year, Clarent 
reported $34,695,000 in revenue in the United States and a much higher $67,172,000 in revenue in 
the Asia Pacific Region. 
21. The purported growth in Clarent’s sales in the Asia Pacific Region supposedly 
continued during the 2001 fiscal year.  In the Form 10-Q quarterly report for the fiscal quarter ended 
March 31, 2001, Clarent reported total quarterly revenue of $61,192,000.  When broken out by 
region, Clarent’s quarterly revenue in the United States was $6,916,000, while its quarterly revenue 
in the Asian Pacific Region was $47,496,000.  Similarly, in its Form 10-Q quarterly report for the 
quarter ended June 30, 2001, Clarent reported total quarterly revenue of $63,152,000.  Broken out by 
region, Clarent’s quarterly revenue for the United States had declined to $4,114,000, while quarterly 
revenue for the Asia Pacific Region had increased to $49,078,000.  
 
 

 
 
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CHANG’S
 FRAUDULENT ACTIVITIES 
A. The False Revenue in the Year Ended December 31, 2000 
22. In mid-December 2000, Chang met with D-Link, a Taiwanese technology firm, and 
convinced D-Link to place an order with Clarent for $7.8 million of Clarent hardware and services.  
Chang agreed on behalf of Clarent agreed that if D-Link could not sell the Clarent product and 
services, Clarent would arrange for Articula to buy that product and services from D-Link.  D-Link 
then issued a purchase order for $7.8 million of Clarent hardware and services.   
23. Shortly before the end of the quarter in December 2000, Chang and Chiang met with 
D-Link and obtained a second purchase order for Clarent software.  At a dinner meeting, Chang and 
Chiang promised D-Link that if it purchased Clarent software, they would again arrange to have 
Articula buy that software from D-Link if it could not find a customer.  Chang and Chiang provided 
D-Link with four purchase orders for the Clarent software at the dinner meeting.  A day or so later, an 
officer of D-Link signed the purchase orders for the Clarent software.  Those purchase orders, which 
totaled $7.2 million, were signed on December 29, 2000, the last business day of the year.   
24. Without Chang’s promises to have Articula purchase the Clarent product and services 
if D-Link could not find its own customer(s), D-Link would not have purchased any product or 
services from Clarent.  Chang’s promises removed D-Link’s risk that it would be paying Clarent for 
unneeded product and services if D-Link could not find a buyer.  A memo by Clarent’s Chief 
Financial Officer, dated December 29, 2000, stated that the D-Link order and another sales order 
“were delivered, making our street numbers.  This was a surprise and relief to the entire group.”   
25. Clarent shipped the hardware and software to D-Link on December 28 and 30, 2000, 
respectively.  The hardware order was shipped to D-Link in California because an end-user customer 
had not yet been identified to buy the product from D-Link.  D-Link believed that it would be cheaper 
and easier to ship to that location, rather than Taiwan. 
26. After D-Link failed to find a customer for the product, Articula issued purchase orders 
to D-Link for the product and services that D-Link bought from Clarent.  On March 30, 2001, D-Link 
received five purchase orders from Articula for the $15 million of hardware, services and software 
purchased by D-Link from Clarent.  D-Link paid Clarent at around the same time it received the 

 
 
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Articula orders.  Later, Articula paid D-Link for the product and services with wire transfers of $10 
million on June 28, 2001 and $5 million on June 29, 2001.  Just before making those payments to D-
Link, Articula received $25 million for Clarent (in the unauthorized cash transfer by Chang and 
Chiang alleged below), and therefore used Clarent’s funds to pay D-Link for the unsold Clarent 
product and services. 
27. Articula did not, in fact, have any business need for the Clarent product and services 
that it supposedly purchased from D-Link.  D-Link asked Chiang several times for shipping 
instructions for the product purchased by Articula, but Chiang never provided D-Link with the 
instructions.  D-Link attempted to ship via messenger to Articula the software product purchased 
from Clarent.  This shipment was returned to D-Link.  As of February 2003, the Clarent hardware 
that D-Link had purchased was still being stored by D-Link in a warehouse in California despite 
Articula’s supposed purchase order for the hardware. 
28. Neither Chang nor Chiang informed Clarent’s finance or sales order administration 
department of their oral promises to D-Link or of Articula’s subsequent “purchases” from D-Link.  
Chang also concealed the side arrangements with D-Link from Clarent’s outside auditors, Ernst & 
Young.  He signed a management representation letter to E&Y dated February 15, 2001, in which he 
represented, “We have made available to you all significant contracts[.]” He also represented in that 
letter that “There are no material transactions that have been improperly recorded in the accounting 
records underlying the financial statements.”  In addition, the letter stated that all revenue had been 
properly recorded and that “[w]e are not aware of any alternative arrangements, verbal or written, 
made with customers.”  Those representations were false because he and Chiang had promised D-
Link to find a buyer for any product and services that D-Link purchased from Clarent but could not 
sell. 
29. As a result of his improper conduct, Chang improperly induced Clarent to recognize 
revenue on the $13.2 million in product orders from D-Link (while the $1.8 million in service 
revenues were properly deferred by the company).  Clarent subsequently included that $13.2 million 
in contingent product revenue in its Form 10-K filed for the quarter ended December 31, 2000.  
Clarent reported revenue of $53.2 million for the three months ended December 31, 2000.  By 

 
 
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including $13.2 million of contingent product revenue from the fraudulent D-Link orders, Clarent 
materially overstated its fourth quarter revenue by 33%. 
 
B. Chang Transfers $35 Million to Articula Without Authorization 
30. In May and June 2001, Chang and Chiang requested that Clarent send $35 million 
from its headquarters in Redwood City, California to the Clarent Asia Pacific Region.  Chang falsely 
represented to Clarent officials that he wanted Clarent Asia Pacific to have its own working capital 
and to be a separate profit-and-loss entity so that it could eventually be listed on the Hong Kong or 
Taiwan Stock Exchange.  Chang also represented that unless the money was transferred to Clarent 
Asia Pacific by the end of June 2001, Clarent would fail to close large transactions for the June 2001 
quarter.  Similarly, Chiang falsely represented that the money was needed to run the Asian operations 
and for a possible stock offering by Clarent Asia Pacific.   
31. Chang presented the funding request to Clarent’s board of directors.  The board agreed 
to transfer the funds, but imposed additional internal controls to ensure headquarters’ oversight over 
the use of the funds.  Such controls were needed because in June 2001, Clarent’s Chief Financial 
Officer and in-house legal counsel had determined that Clarent’s Asia Pacific Office had previously 
disbursed funds for consulting services to Articula without obtaining any written formal agreement 
for those services.  Clarent’s Chief Financial Officer had therefore warned Chang and Chiang in June 
2001 that such undocumented payments were improper and that the money should be recovered.  
Clarent’s board of directors therefore specified additional internal controls in the Financial Control 
Procedures Agreement.  Chang, Chiang, Clarent’s Chief Financial Officer and the Controller of 
Clarent Asia Pacific signed the Financial Control Procedures Agreement on June 22, 2001.  The new 
procedures stated that approval by the Vice President of Finance at Clarent’s headquarters was 
required for transfers between $1 million and $5 million.  Clarent’s Chief Financial Officer’s 
approval was required for transfers exceeding $5 million.   
32. On June 22, 2001, the board approved the new procedures and the transfer of funds 
from Clarent headquarters to the Clarent Asia Pacific Office, which was located in Taiwan.  On June 
26, 2001, Clarent headquarters transferred $35 million to the Clarent Asia Pacific Office’s bank 
accounts.  

 
 
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33.       Notwithstanding       the       internal       controls procedures imposed by Clarent’s board and the 
warnings by Clarent’s Chief Financial Officer that undocumented payments were improper, Chang 
and Chiang almost immediately disbursed the funds from the Clarent Asia Pacific Office to Articula 
without the necessary approval of Clarent’s Vice President of Finance or Clarent’s Chief Financial 
Officer.  Chang and Chiang also failed to follow the Chief Financial Officer’s earlier warning that 
funds could not be disbursed without documentation establishing the obligation by Articula to repay 
the money or the purpose for transferring the money.  Of the $35 million that it received on June 26, 
2001, the Clarent Asia Pacific Office promptly transferred $25 million to Articula on June 27, 2001 
and the remaining $10 million in early July 2001.  One day after receiving $25 million from the 
Clarent Asia Pacific Office, Articula paid $10 million to D-Link on June 28, 2001 to cover part of its 
“purchase” of the product and services that Clarent “sold” to D-Link in December 2000.  The 
following day, June 29, 2001, Articula paid another $5 million to D-Link to cover the balance of its 
“purchase” of the product and services that Clarent “sold” to D-Link in December 2000. 
34. Chang authorized the Clarent Asia Pacific Office to transfer the funds to Articula.  
When interviewed by Clarent’s outside counsel and audit committee during Clarent’s internal 
investigation of the fund transfer, Chang admitted that he did not obtain the Chief Financial Officer’s 
required approval or the board of director’s approval before the money was transferred to Articula.   
35. During Clarent’s internal investigation, Chiang admitted knowing about the transfer of 
the funds from the Clarent Asia Pacific Office to Articula.  Chiang also stated that he understood his 
obligations under the Financial Controls Procedure Agreement and knew that he needed approval 
from Clarent’s finance department for any expenditure over $1 million.  Chiang also said that Chang 
authorized the release of the fund transfer to Articula. 
36.  Because Chang and Chiang failed to inform Clarent about the improperly transferred 
$25 million from the Clarent Asia Pacific Office’s bank accounts to Articula, Clarent’s Form 10-Q 
quarterly report for the period ended June 30, 2001 falsely included the $25 million on the balance 
sheet’s presentation of the company’s “cash” assets and failed to disclose the related party transaction 
with Articula.  Additionally, because the $25 million transfer did not take place in accordance with 
the Financial Control Procedures Agreement, Clarent had not authorized the transfer and, moreover, 

 
 
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did not reach any fixed and determinable agreement on or before June 30, 2001 with Articula for 
repayment of the money.  Furthermore, at the time of transfer, Articula did not provide Clarent with 
any documentation for the use of the $25 million.  Chang therefore induced Clarent to materially 
overstate its cash by $25 million in the Form 10-Q filing and earnings release for the quarter ended 
June 30, 2001.  Chang also induced Clarent’s material overstatement of net assets and income for the 
June 2001 quarter because the $15 million that went to Articula and then went to D-Link in late June 
2001 should have treated as a disguised customer refund for unused Clarent product, while the 
remaining $10 million that went to Articula in late June 2001 should have be written off as an 
employee theft loss or some other expense. 
 
C. Chang Has Clarent Guarantee an $11 Million Loan Without Disclosing the 
Resulting Liability 
37. During a telephone call in June 2001, Chiang told D-Link that Clarent was going to 
make an investment in Articula.  Chiang said that they were waiting for approval from Clarent’s 
board of directors, but that Articula needed the money immediately to make a deposit on a project in 
India.  Chiang asked D-Link to loan the $11 million to Articula until Clarent’s board of directors 
approved the investment.  Once approved by the board of directors, Clarent would make the 
investment in Articula and Articula would repay D-Link.  D-Link called Chang, who described the 
loan from D-Link as a bridge loan until Clarent’s board approved the investment.   
38. D-Link agreed to lend $11 million to Articula but wanted Clarent to guarantee 
repayment of D-Link’s loan.  Chang signed a loan guarantee agreement, effective as of June 30, 
2001, in which Clarent guaranteed to repay D-Link the $11 million in the event that Articula failed to 
repay D-Link.  The loan was due to be paid in full on July 20, 2001. 
39. Articula defaulted on the loan by failing to repay D-Link on July 20, 2001.  D-Link 
then demanded repayment of the loan under the guarantee issued by Clarent.  On December 31, 2001, 
D-Link sued Clarent for payment under the loan guarantee. 
40. Chang failed to disclose the existence of the guarantee to accountants and others at 
Clarent.  When interviewed during Clarent’s internal investigation, Chang admitted that no one at 
Clarent knew that he had gone to D-Link to obtain the financing for a purported bid deposit for D-

 
 
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Link India.  Chang also admitted that he did not tell Chief Financial Officer Simon Wong, Co-
founder Mike Vargo or anyone on Clarent’s board of directors about his intention to sign the 
guarantee.  As a result, Clarent failed to fulfill its requirements under the securities laws and GAAP 
to disclose the guarantee in its second quarter earnings release and the Form 10-Q quarterly report for 
the quarter ended June 30, 2001.  Furthermore, when Clarent filed its Form 10-Q on August 14, 2001 
it failed to disclose that the Articula loan was in default and that Clarent had become liable to D-Link 
for $11 million.   
 
D. Clarent’s Restatement of Revenue for the December 2000 Quarter 
41. In the original Form 10-K filed by Clarent on March 29, 2001 for the year ended 
December 31, 2000, Clarent reported total revenue of $53.2 million and a net loss of $14.1 million 
for the three month period ended December 31, 2000.  By including the D-Link orders as revenue, 
Clarent overstated its fourth quarter revenue by 33%. 
42.  On May 8, 2002, Clarent filed an amended annual report on Form 10-K for the year 
ended December 31, 2000, in which it restated its financial statements.  In its Amended Form 10-K, 
Clarent reported that its internal investigation revealed that significant amounts had been spent by 
Clarent Asia Pacific without the necessary authorizations and that much of the revenue reported by 
the Asia Pacific Region was, in reality, improper and violated the company’s revenue recognition 
policy: 
 
The Company discovered that its revenue had been overstated for certain periods because 
revenue from sales in the Asia-Pacific region had been recognized in situations where 
customers had indirectly received Company funds from third parties, by means of 
arrangements effected through unauthorized acts of Company employees. These arrangements 
were entered into in violation of Company procedures and were not reported to the 
appropriate personnel within the Company. 
 
Revenue also had been overstated for certain periods because revenue had been recognized 
from certain sales in the Asia-Pacific region where customers now claim to have return rights 
or that the Company has repurchase obligations. The Company now believes that certain 
Company personnel may have entered into agreements with customers in the Asia-Pacific 
region purporting to provide such return rights or repurchase obligations. These agreements 
were entered into in violation of Company procedures and were not reported to the 
appropriate personnel within the Company. 
43. Clarent’s amended Form 10-K also stated that its internal investigation found that 
Clarent funds had been transferred to the Articula entities, which may have been under the control of 

 
 
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Chiang and Chiang’s family and in which Chang may have had an indirect financial interest.  In 
addition, the amended Form 10-K reported that the internal investigation discovered that over $35 
million had been transferred from Clarent Asia Pacific at the end of June 2001: 
 
As a result of the investigation, the Company has now determined that $36.5 million had been 
transferred prior to the end of the second quarter of 2001 but not reported to the appropriate 
Company personnel, resulting in a $36.5 million overstatement of the cash balance for the 
quarterly period ended June 30, 2001. 
44. The restated amounts for the year ended December 31, 2000 included the elimination 
of the revenue recognized for the D-Link transactions alleged above.  Chang’s devices and schemes 
for the illegal recognition of revenue therefore led to material misstatements in Clarent’s public 
reports and filings and to a significant injury, or potential injury, to Clarent’s investors. 
45. In December 2002, Clarent voluntarily filed for Chapter 11 bankruptcy.  Later, on 
February 13, 2003, a bankruptcy court approved the sale of substantially all of Clarent’s assets to the 
third party. 
FIRST CLAIM FOR RELIEF
 
Violations of Section 10(b) of the Exchange Act and Rule 10b-5 
46. The Commission realleges and incorporates by reference Paragraphs 1 through 45 
above. 
47. By engaging in the conduct alleged above, Chang directly or indirectly, in connection 
with the purchase or sale of securities, by the use of means or instrumentalities of interstate 
commerce, or of the mails, with scienter: 
(a) employed devices, schemes, or artifices to defraud; 
(b) made untrue statements of material facts or omitted to state material facts necessary in 
order to make the statements made, in the light of the circumstances under which they 
were made, not misleading; and 
(c) engaged in acts, practices, or courses of business which operated or would operate as a 
fraud or deceit upon other persons, including purchasers and sellers of securities. 
48. Chang violated and, unless restrained and enjoined, will continue to violate Section 
10(b) of the Exchange Act [15 U.S.C. § 78j(b)] and Rule 10b-5 [17 C.F.R. § 240.10b-5]. 

 
 
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SECOND CLAIM FOR RELIEF
 
Aiding and Abetting Violations of Section 10(b) of the Exchange Act and Rule 10b-5 
49. The Commission realleges and incorporates by reference Paragraphs 1 through 45 
above. 
50. Clarent, directly or indirectly, in connection with the purchase or sale of securities, by 
the use of means or instrumentalities of interstate commerce, or of the mails, with scienter: 
(a) employed devices, schemes, or artifices to defraud; 
(b) made untrue statements of material facts or omitted to state material facts necessary in 
order to make the statements made, in the light of the circumstances under which they 
were made, not misleading; and 
(c) engaged in acts, practices, or courses of business which operated or would operate as a 
fraud or deceit upon other persons, including purchasers and sellers of securities. 
66. Chang knowingly provided substantial assistance to Clarent's violations of Section 
10(b) of the Exchange Act [15 U.S.C. § 78j(b)] and Rule 10b-5 [17 C.F.R. § 240.10b-5], in violation 
of Section 20(e) of the Exchange Act [15 U.S.C. § 78t(e)]. 
67. Chang aided and abetted, and unless enjoined will continue to violate and to aid and 
abet, violations of Section 10(b) of the Exchange Act [15 U.S.C. § 78j(b)] and Rule 10b-5 [17 C.F.R. 
§ 240.10b-5]. 
THIRD CLAIM FOR RELIEF 
Violations of Section 13(b)(5) of the Exchange Act and Rules 13b2-1 and 13b2-2 
68. The Commission realleges and incorporates by reference Paragraphs 1 through 45 
above. 
69. Chang knowingly circumvented Clarent’s system of internal accounting controls and 
knowingly falsified or caused to be falsified Clarent’s books, records and accounts within the 
meaning of Section 13(b)(2)(A) of the Exchange Act [15 U.S.C. § 78m(b)(2)(A)], in violation of 
Rule 13b2-1 [17 C.F.R. § 240.13b2-1]. 
70. Chang, directly or indirectly, (a) made or caused to be made a materially false or 
misleading statement, or (b) omitted to state, or caused another person to omit to state, any material 

 
 
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fact necessary in order to make statements made, in light of the circumstances under which such 
statements were made, not misleading to an accountant in connection with (1) any audit or 
examination of the financial statements of the issuer required to be made or (2) the preparation or 
filing of any document or report required to be filed with the Commission , in violation of Rule 13b2-
2 of the Exchange Act [17 C.F.R. § 13b2-2].  
71. Chang violated and, unless restrained and enjoined, will continue to violate Section 
13(b)(5) of the Exchange Act [15 U.S.C. § 78m(b)(5)] , Rule 13b2-1 [17 C.F.R. § 240.13b2-1], and 
Rule 13b2-2 [17 C.F.R § 240.13b2-2]. 
FOURTH CLAIM FOR RELIEF
 
Aiding and Abetting Violations of Section 13(a) of the Exchange Act and  
Rules 12b-20, 13a-1 and 13a-13 
72. The Commission realleges and incorporates by reference Paragraphs 1 through 45 
above. 
73. Clarent filed with the Commission quarterly reports on Form 10-K for the year ended 
December 31, 2000 that contained untrue statements of material fact and omitted to state material 
information required to be stated therein or necessary in order to make the required statements made, 
in the light of the circumstances under which they were made, not misleading, in violation of Section 
13(a) of the Exchange Act [15 U.S.C. § 78m(a)] and Rules 12b-20 and 13a-1 thereunder [17 C.F.R. 
§§ 240.12b-20 and 240.13a-1]. 
74. Clarent filed with the Commission quarterly reports on Form 10-Q for the quarters 
ended March 31, 2001 and June 30, 2001 that contained untrue statements of material fact and 
omitted to state material information required to be stated therein or necessary in order to make the 
required statements made, in the light of the circumstances under which they were made, not 
misleading, in violation of Section 13(a) of the Exchange Act [15 U.S.C. § 78m(a)] and Rules 12b-20 
and 13a-13 thereunder [17 C.F.R. §§ 240.12b-20 and 240.13a-13]. 
75. Chang knowingly provided substantial assistance to Clarent’s violation of Section 
13(a) of the Exchange Act [15 U.S.C. § 78m(a)] and Rules 12b-20, 13a-1 and 13a-13 thereunder [17 

 
 
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C.F.R. §§ 240.12b-20, 240.13a-1 and 240.13a-13], in violation of Section 20(e) of the Exchange Act 
[15 U.S.C. § 78t(e)]. 
76. Chang aided and abetted, and unless enjoined will continue to aid and abet, violations 
of Section 13(a) of the Exchange Act [15 U.S.C. § 78m(a)] and Rules 12b-20, 13a-1 and 13a-13 
thereunder [17 C.F.R. §§ 240.12b-20, 240.13a-1 and 240.13a-13]. 
FIFTH CLAIM FOR RELIEF
 
Aiding and Abetting Violations of Section 13(b)(2)(A) of the Exchange Act 
77. The Commission realleges and incorporates by reference Paragraphs 1 through 45 
above. 
78. Clarent failed to make and keep books, records, and accounts which, in reasonable 
detail, accurately and fairly reflected the transactions and dispositions of the assets of the company, in 
violation of Section 13(b)(2)(A) of the Exchange Act [15 U.S.C. § 78m(b)(2)(A)]. 
79. Chang knowingly provided substantial assistance to Clarent’s violation of Section 
13(b)(2)(A) of the Exchange Act [15 U.S.C. § 78m(b)(2)(A)], in violation of Section 20(e) of the 
Exchange Act [15 U.S.C. § 78t(e)]. 
80. Chang aided and abetted, and unless enjoined will continue to aid and abet, violations 
of Section 13(b)(2)(A) of the Exchange Act [15 U.S.C. § 78m(b)(2)(A)]. 
PRAYER FOR RELIEF 
WHEREFORE, the Commission respectfully requests that this Court: 
I. 
Permanently enjoin Chang from violating, directly or indirectly, Sections 10(b), 13(a), 
13(b)(2)(A) and 13(b)(5) of the Exchange Act, and Rules 10b-5, 12b-20, 13a-1, 13a-13, 13b2-1 and 
13b2-2 thereunder. 
II. 
Order Chang to disgorge all ill-gotten gains received from his illegal conduct, including 
prejudgment interest. 
 
 

 
 
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III. 
Order Chang to pay civil penalties pursuant to Section 21(d) of the Exchange Act. [15 U.S.C. 
§ 78u]. 
IV. 
Prohibit Chang from acting as an officer or director of any issuer that has a class of securities 
described in Section 21(d)(2) of the Exchange Act [15 U.S.C. § 78u(d)(2)]. 
V. 
Retain jurisdiction of this action in accordance with the principles of equity and the Federal 
Rules of Civil Procedure in order to implement and carry out the terms of all orders and decrees that 
may be entered, or to entertain any suitable application or motion for additional relief within the 
jurisdiction of this Court. 
VI. 
Grant such other and further relief as this Court may determine to be just and necessary. 
 
Dated:    September 30, 2004   Helane L. Morrison 
                                                                        John            S.            Yun            
                                                                        Kathleen            K.            Bisaccia            
                                                                        Victor            W.            Hong            
 
 
 
 
                                                                        By:            _____________________________________            
             John S. Yun   
 Attorneys for Plaintiff 
      SECURITIES AND EXCHANGE COMMISSION 
 
 
 

 
 
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DEMAND FOR JURY TRIAL
 
 
 Plaintiff Securities and Exchange Commission requests a trial by jury. 
 
Dated:  September 30, 2004     SECURITIES AND EXCHANGE COMMISSION 
 
 
 
                                                                        By:            ____________________________________            
              John S. Yun 
       Attorneys for Plaintiff 

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HELANE L. MORRISON (Cal. Bar No. 127752) 
JOHN S. YUN (Cal. Bar No. 112260) 
KATHLEEN K. BISACCIA (Cal Bar No. 157324) 
VICTOR W. HONG (Cal. Bar No. 165938) 
 
44 Montgomery Street, Suite 2600 
San Francisco, California  94104 
Telephone:  (415) 705-2500 
Telecopier:  (415) 705-2501 
 
Attorneys for Plaintiff 
Securities and Exchange Commission 

SECURITIES AND EXCHANGE COMMISSION,
 
  Plaintiff, 
 
 v. 
 
JERRY SHAW-YAU CHANG, 
 
  Defendant. 
 

Civil Case No. C 04-4144 MHP 
 
 
COMPLAINT FOR PERMANENT 
INJUNCTION AND OTHER LEGAL AND 
EQUITABLE RELIEF 
 
DEMAND FOR JURY TRIAL  

 

Plaintiff Securities and Exchange Commission (“Commission”) alleges: 

SUMMARY OF ACTION 

1. This enforcement action arises from the false reporting by Clarent Corporation 

(“Clarent”) of approximately $13 million in revenue in its annual filing with the Commission for its 

2000 fiscal year and the overstatement of $25 million in cash assets in Clarent’s quarterly filing for 

its June 2001 fiscal quarter.  Clarent’s former president and chief executive officer, defendant Jerry 

Shaw-Yau Chang (“Chang”), instigated the company’s false revenue reporting and overstatement of 

net income and assets.  Chang also circumvented Clarent’s internal accounting controls and misled its 

outside auditors by concealing his activities from Clarent’s accounting personnel.   

2. In summary, during the fiscal year ended December 31, 2000, Chang orally promised 

D-Link Corporation (“D-Link”), a Clarent customer based in Taiwan, that if D-Link placed orders for 

UNITED STATES DISTRICT COURT 

NORTHERN DISTRICT OF CALIFORNIA 

SAN FRANCISCO DIVISION 

 



  

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$13 million of Clarent product but could not resell the product, Clarent would arrange for a third-

party to buy the product from D-Link.  Chang’s oral promise meant that D-Link was not currently 

obligated to pay $13 million to Clarent, and could instead wait until D-Link found its own 

customer(s) for the product or Clarent found a customer for D-Link.  In light of making D-Link’s 

payment for product contingent upon some future development, Chang knew that Clarent could not 

report the purported $13million in product “sales” as revenue in its earnings announcements and 

periodic reports filed with the Commission.  Chang nonetheless made the oral promises to D-Link, 

and then withheld information about the oral terms from Clarent’s corporate headquarters in the 

United States.  Chang therefore engaged in a fraudulent scheme to have Clarent report inflated 

product sales revenue of $13 million in violation of both Generally Accepted Accounting Principles 

(“GAAP”) and the federal securities laws.  

3. Later, during the fiscal quarter ended June 30, 2001, Chang authorized the transfer of 

$25 million from Clarent’s Taiwan bank accounts to Articula Corporation (“Articula”), an entity 

controlled by a Clarent executive and his family, without the necessary authorization from Clarent’s 

Vice President of Finance and Clarent’s Chief Financial Officer.  At about the same time, Chang had 

Clarent guarantee an $11 million loan to Articula, once again without the necessary authorizations.  

The $25 million transfer to Articula reduced Clarent’s cash assets by $25 million on June 30, 2001, 

but was not disclosed in the company quarterly report for that period.  Additionally, given the 

unauthorized character of the fund transfer to Articula – as well as the way in which the funds were 

used – the $25 million transfer should have been treated as a refund and/or expense on Clarent’s 

financial statements for the June 2001 quarter so as to reduce the company’s assets and net income. 

4. In July and August 2001, Clarent learned that funds were disbursed from its Taiwan 

accounts in violation of internal controls and that various customers were insisting upon the right to 

return their unwanted product to Clarent.  In September 2001, Clarent announced that its cash and 

revenue might have been overstated and that it had placed Chang and other high-level executives on 

administrative leave while it conducted an internal investigation.  Officials at the NASDAQ National 

Market suspended trading in Clarent’s shares on September 4, 2001 with Clarent shares trading at 

$5.37 per share.  When trading resumed on January 30, 2002, Clarent had been delisted from 



  

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NASDAQ and its shares opened trading on the OTC market Pink Sheets Electronic Quotation 

Service at $.50 per share.  Clarent later issued an accounting restatement that eliminated most of the 

company’s revenue for a number of periods, including those ended December 31, 2000, March 31, 

2001 and June 30, 2001.  In the end, Clarent’s shareholders lost nearly the total value of their 

investment in the company. 

5. Given the fraud perpetrated by Chang upon Clarent’s shareholders and the securities 

markets, the Commission brings this action to obtain a permanent injunction prohibiting Chang’s 

further violations of the federal securities laws, to force Chang to disgorge his ill-gotten gains, to bar 

Chang from serving as an officer or director of a publicly reporting company and to impose civil 

monetary penalties. 

JURISDICTION AND VENUE 

6. The Commission brings this action pursuant to Sections 21(d) and 21(e) of the 

Securities Exchange Act of 1934 (the “Exchange Act”) [15 U.S.C. §§ 78u(d) and 78u(e)].  This Court 

has jurisdiction over this action pursuant to Sections 21(e) and 27 of the Exchange Act [15 U.S.C. §§ 

78u(e) and 78aa].   

7. Chang directly or indirectly, made use of the means and instrumentalities of interstate 

commerce, of the mails, or of the facilities of a national securities exchange, in connection with the 

acts, practices, and courses of business and transactions alleged herein. 

8. This district is an appropriate venue for this action under Section 27 of the Exchange 

Act [15 U.S.C. § 78aa].  Certain of the transactions, acts, practices and courses of business 

constituting the violations alleged herein occurred within the Northern District of California. 

9. Assignment to the San Francisco Division is appropriate pursuant to Civil Local Rule 

3-2(d) because a substantial part of the events that give rise to the Commission’s claims occurred in 

San Mateo County, where Clarent was headquartered. 

BACKGROUND ALLEGATIONS 

A. Clarent’s Organization 

10. Clarent was originally organized in 1996 in the State of California under the name 

“NetiPhone, Incorporated.”  The company changed its name in May 1997 to “Clarent Corporation,” 



  

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and was reincorporated in June 1999 in the State of Delaware. During the relevant period, Clarent’s 

corporate headquarters were in Redwood City, California.  At the current time, Clarent is a corporate 

shell without any business operations.  Previously, Clarent developed, sold and serviced software and 

hardware products designed to manage the transmission of voice and data over the internet. 

11. Chang was a director of Clarent from July 1996 until his termination in September 

2001.  He also served as Clarent’s President from July 1996 to April 2001 and Chief Executive 

Officer from July 1996 to July 2001.  In July 2001, Chang became Clarent’s Chairman of the Board 

and Chief Strategist, and held those positions until his termination in September 2001.  Chang’s 

compensation consisted of a base salary and a performance bonus.  For 2000, Chang received a 

$185,000 bonus.  Chang also owned low-cost “founder stock” and received “regrant options” to 

purchase 41,156 shares of Clarent stock at a reduced exercise price between August 15, 2001 and 

November 15, 2001. 

12.  One of the persons reporting to Chang was Mathew Ming-Chang Chiang (“Chiang”).  

Chiang joined Clarent in 1997 as a Marketing Director.  In September 2000, Chiang became a Vice 

President and the General Manager of Clarent’s Asia Pacific Region, which had its office in Taiwan 

and which included China, Japan, Korea, Singapore and India.  During 2001, Chiang became a 

Clarent corporate officer and the President of its Asia Pacific Region. 

13. Articula is a California corporation with offices in Taipei, Taiwan and Milpitas, 

California and is affiliated with two Taiwanese firms, Great MinCom Communication Corporation 

and Great MinCom Products Corporation.  For purposes of this Complaint, the name “Articula” will 

cover the California corporation and the two affiliated Taiwanese firms.  Articula’s filings with the 

California Secretary of State in October 2000 identify Chiang as a member of Articula’s board of 

directors and Chiang’s father as Articula’s Chairman of the Board.  A listing of Articula shareholders 

identifies Chiang’s mother as Articula’s Chairman of the Board effective May 1, 2001.  Over time, 

Chang and Chiang transferred Clarent funds to Articula and exercised sufficient control over Articula 

that they could use Articula to further their sales and revenue schemes at Clarent.  Articula therefore 

functioned as a related party of Clarent in any transactions involving Clarent. 

 



  

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B. Clarent’s Business and Reporting Obligations 

14. Clarent held its initial public offering on July 1, 1999, and registered its common stock 

with the Commission pursuant to Section 12(g) of the Exchange Act.  Clarent’s shares traded on the 

NASDAQ National Market under the symbol “CLRN” until NASDAQ suspended trading in 

September 2001 and delisted the shares in January 2002.  Subsequently, Clarent’s shares have traded 

on the “Pink Sheets” over-the-counter market.  Clarent filed a Form 15 with the Commission 

terminating its registration on April 20, 2004. 

15. As a publicly traded company, Clarent was required to comply with various 

Commission regulations designed to ensure that the company accurately recorded and reported its 

financial results to investors.  Those Commission regulations obligated Clarent to report its financial 

results on a quarterly basis in a Form 10-Q quarterly report and on an annual basis in a Form 10-K 

annual report.  Those regulations also required Clarent to comply with GAAP in reporting its 

financial results. 

16. The Commission’s regulations and accounting guidelines moreover required Clarent 

to adopt critical accounting policies.  Clarent therefore has the following revenue recognition policy, 

which was disclosed in its Form 10-K annual report for the year ended December 31, 2000: “Revenue 

is recognized at the time of shipment of the products when persuasive evidence of an arrangement 

exists, the fee is fixed and determinable, when no significant contractual obligations or acceptance 

terms, if any, remain outstanding and collection of the resulting receivable is deemed probable.”  

Under that policy as well as the requirements of GAAP, Clarent could not recognize revenue for any 

“contingent sale” whereby the customer did not have a binding obligation to pay for, and keep, the 

product purchased. 

17. At the end of each quarter, the sales force held meetings in which they discussed what 

steps needed to occur in order to make an order “clean” for revenue recognition purposes.  Chang 

participated in these meetings, especially as the end of the quarter approached.  Clarent’s Chief 

Financial Officer also discussed revenue recognition issues at all sales meetings.  Clarent’s Chief 

Financial Officer also specifically instructed Chang in December 2000 that if a payment contingency 

remained as a term of the deal, “the deal is not done” until the contingency is removed. 



  

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18. Chang signed Clarent’s Forms S-1s for its initial public offering and secondary 

offering and Form 10-K annual reports for 1999 and 2000, each of which contained a description of 

Clarent’s revenue recognition policy.  Chang also signed numerous Form 10-Q quarterly reports, 

including the Form 10-Q for the quarter ended March 31, 2001.  In the management representation 

letter to Ernst & Young (“E&Y”) dated February 15, 2001, Chang represented that all revenue had 

been properly recorded in the Form 10-K in accordance with Statement of Position 97-2, Statement 

of Position 98-9 and interpretations of Staff Accounting Bulletin 101.    

19. In its quarterly and annual filings with the Commission, Clarent reported its revenue 

on a consolidated basis for all of its worldwide sales regions.  Clarent’s filings also provided a 

breakdown of the company’s revenue for each of its geographic sales areas – the United States, the 

Other Americas, the Asia Pacific Region and the combined Europe, Middle East and Africa Region.  

According to that geographic breakdown, most of Clarent’s revenue initially came from sales to 

customers in North America.  Over time, however, a rapidly increasing percentage of Clarent’s 

revenue supposedly came from sales to customers in its Asia Pacific Region.   

20. During the 1999 fiscal year, Clarent reported $20,365,000 in revenue in the United 

States and $15,999,000 revenue in the Asian Pacific Region.  During the 2000 fiscal year, Clarent 

reported $34,695,000 in revenue in the United States and a much higher $67,172,000 in revenue in 

the Asia Pacific Region. 

21. The purported growth in Clarent’s sales in the Asia Pacific Region supposedly 

continued during the 2001 fiscal year.  In the Form 10-Q quarterly report for the fiscal quarter ended 

March 31, 2001, Clarent reported total quarterly revenue of $61,192,000.  When broken out by 

region, Clarent’s quarterly revenue in the United States was $6,916,000, while its quarterly revenue 

in the Asian Pacific Region was $47,496,000.  Similarly, in its Form 10-Q quarterly report for the 

quarter ended June 30, 2001, Clarent reported total quarterly revenue of $63,152,000.  Broken out by 

region, Clarent’s quarterly revenue for the United States had declined to $4,114,000, while quarterly 

revenue for the Asia Pacific Region had increased to $49,078,000.  

 

 



  

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CHANG’S FRAUDULENT ACTIVITIES 

A. The False Revenue in the Year Ended December 31, 2000 

22. In mid-December 2000, Chang met with D-Link, a Taiwanese technology firm, and 

convinced D-Link to place an order with Clarent for $7.8 million of Clarent hardware and services.  

Chang agreed on behalf of Clarent agreed that if D-Link could not sell the Clarent product and 

services, Clarent would arrange for Articula to buy that product and services from D-Link.  D-Link 

then issued a purchase order for $7.8 million of Clarent hardware and services.   

23. Shortly before the end of the quarter in December 2000, Chang and Chiang met with 

D-Link and obtained a second purchase order for Clarent software.  At a dinner meeting, Chang and 

Chiang promised D-Link that if it purchased Clarent software, they would again arrange to have 

Articula buy that software from D-Link if it could not find a customer.  Chang and Chiang provided 

D-Link with four purchase orders for the Clarent software at the dinner meeting.  A day or so later, an 

officer of D-Link signed the purchase orders for the Clarent software.  Those purchase orders, which 

totaled $7.2 million, were signed on December 29, 2000, the last business day of the year.   

24. Without Chang’s promises to have Articula purchase the Clarent product and services 

if D-Link could not find its own customer(s), D-Link would not have purchased any product or 

services from Clarent.  Chang’s promises removed D-Link’s risk that it would be paying Clarent for 

unneeded product and services if D-Link could not find a buyer.  A memo by Clarent’s Chief 

Financial Officer, dated December 29, 2000, stated that the D-Link order and another sales order 

“were delivered, making our street numbers.  This was a surprise and relief to the entire group.”   

25. Clarent shipped the hardware and software to D-Link on December 28 and 30, 2000, 

respectively.  The hardware order was shipped to D-Link in California because an end-user customer 

had not yet been identified to buy the product from D-Link.  D-Link believed that it would be cheaper 

and easier to ship to that location, rather than Taiwan. 

26. After D-Link failed to find a customer for the product, Articula issued purchase orders 

to D-Link for the product and services that D-Link bought from Clarent.  On March 30, 2001, D-Link 

received five purchase orders from Articula for the $15 million of hardware, services and software 

purchased by D-Link from Clarent.  D-Link paid Clarent at around the same time it received the 



  

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Articula orders.  Later, Articula paid D-Link for the product and services with wire transfers of $10 

million on June 28, 2001 and $5 million on June 29, 2001.  Just before making those payments to D-

Link, Articula received $25 million for Clarent (in the unauthorized cash transfer by Chang and 

Chiang alleged below), and therefore used Clarent’s funds to pay D-Link for the unsold Clarent 

product and services. 

27. Articula did not, in fact, have any business need for the Clarent product and services 

that it supposedly purchased from D-Link.  D-Link asked Chiang several times for shipping 

instructions for the product purchased by Articula, but Chiang never provided D-Link with the 

instructions.  D-Link attempted to ship via messenger to Articula the software product purchased 

from Clarent.  This shipment was returned to D-Link.  As of February 2003, the Clarent hardware 

that D-Link had purchased was still being stored by D-Link in a warehouse in California despite 

Articula’s supposed purchase order for the hardware. 

28. Neither Chang nor Chiang informed Clarent’s finance or sales order administration 

department of their oral promises to D-Link or of Articula’s subsequent “purchases” from D-Link.  

Chang also concealed the side arrangements with D-Link from Clarent’s outside auditors, Ernst & 

Young.  He signed a management representation letter to E&Y dated February 15, 2001, in which he 

represented, “We have made available to you all significant contracts[.]” He also represented in that 

letter that “There are no material transactions that have been improperly recorded in the accounting 

records underlying the financial statements.”  In addition, the letter stated that all revenue had been 

properly recorded and that “[w]e are not aware of any alternative arrangements, verbal or written, 

made with customers.”  Those representations were false because he and Chiang had promised D-

Link to find a buyer for any product and services that D-Link purchased from Clarent but could not 

sell. 

29. As a result of his improper conduct, Chang improperly induced Clarent to recognize 

revenue on the $13.2 million in product orders from D-Link (while the $1.8 million in service 

revenues were properly deferred by the company).  Clarent subsequently included that $13.2 million 

in contingent product revenue in its Form 10-K filed for the quarter ended December 31, 2000.  

Clarent reported revenue of $53.2 million for the three months ended December 31, 2000.  By 



  

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including $13.2 million of contingent product revenue from the fraudulent D-Link orders, Clarent 

materially overstated its fourth quarter revenue by 33%. 
 
B. Chang Transfers $35 Million to Articula Without Authorization 

30. In May and June 2001, Chang and Chiang requested that Clarent send $35 million 

from its headquarters in Redwood City, California to the Clarent Asia Pacific Region.  Chang falsely 

represented to Clarent officials that he wanted Clarent Asia Pacific to have its own working capital 

and to be a separate profit-and-loss entity so that it could eventually be listed on the Hong Kong or 

Taiwan Stock Exchange.  Chang also represented that unless the money was transferred to Clarent 

Asia Pacific by the end of June 2001, Clarent would fail to close large transactions for the June 2001 

quarter.  Similarly, Chiang falsely represented that the money was needed to run the Asian operations 

and for a possible stock offering by Clarent Asia Pacific.   

31. Chang presented the funding request to Clarent’s board of directors.  The board agreed 

to transfer the funds, but imposed additional internal controls to ensure headquarters’ oversight over 

the use of the funds.  Such controls were needed because in June 2001, Clarent’s Chief Financial 

Officer and in-house legal counsel had determined that Clarent’s Asia Pacific Office had previously 

disbursed funds for consulting services to Articula without obtaining any written formal agreement 

for those services.  Clarent’s Chief Financial Officer had therefore warned Chang and Chiang in June 

2001 that such undocumented payments were improper and that the money should be recovered.  

Clarent’s board of directors therefore specified additional internal controls in the Financial Control 

Procedures Agreement.  Chang, Chiang, Clarent’s Chief Financial Officer and the Controller of 

Clarent Asia Pacific signed the Financial Control Procedures Agreement on June 22, 2001.  The new 

procedures stated that approval by the Vice President of Finance at Clarent’s headquarters was 

required for transfers between $1 million and $5 million.  Clarent’s Chief Financial Officer’s 

approval was required for transfers exceeding $5 million.   

32. On June 22, 2001, the board approved the new procedures and the transfer of funds 

from Clarent headquarters to the Clarent Asia Pacific Office, which was located in Taiwan.  On June 

26, 2001, Clarent headquarters transferred $35 million to the Clarent Asia Pacific Office’s bank 

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33. Notwithstanding the internal controls procedures imposed by Clarent’s board and the 

warnings by Clarent’s Chief Financial Officer that undocumented payments were improper, Chang 

and Chiang almost immediately disbursed the funds from the Clarent Asia Pacific Office to Articula 

without the necessary approval of Clarent’s Vice President of Finance or Clarent’s Chief Financial 

Officer.  Chang and Chiang also failed to follow the Chief Financial Officer’s earlier warning that 

funds could not be disbursed without documentation establishing the obligation by Articula to repay 

the money or the purpose for transferring the money.  Of the $35 million that it received on June 26, 

2001, the Clarent Asia Pacific Office promptly transferred $25 million to Articula on June 27, 2001 

and the remaining $10 million in early July 2001.  One day after receiving $25 million from the 

Clarent Asia Pacific Office, Articula paid $10 million to D-Link on June 28, 2001 to cover part of its 

“purchase” of the product and services that Clarent “sold” to D-Link in December 2000.  The 

following day, June 29, 2001, Articula paid another $5 million to D-Link to cover the balance of its 

“purchase” of the product and services that Clarent “sold” to D-Link in December 2000. 

34. Chang authorized the Clarent Asia Pacific Office to transfer the funds to Articula.  

When interviewed by Clarent’s outside counsel and audit committee during Clarent’s internal 

investigation of the fund transfer, Chang admitted that he did not obtain the Chief Financial Officer’s 

required approval or the board of director’s approval before the money was transferred to Articula.   

35. During Clarent’s internal investigation, Chiang admitted knowing about the transfer of 

the funds from the Clarent Asia Pacific Office to Articula.  Chiang also stated that he understood his 

obligations under the Financial Controls Procedure Agreement and knew that he needed approval 

from Clarent’s finance department for any expenditure over $1 million.  Chiang also said that Chang 

authorized the release of the fund transfer to Articula. 

36.  Because Chang and Chiang failed to inform Clarent about the improperly transferred 

$25 million from the Clarent Asia Pacific Office’s bank accounts to Articula, Clarent’s Form 10-Q 

quarterly report for the period ended June 30, 2001 falsely included the $25 million on the balance 

sheet’s presentation of the company’s “cash” assets and failed to disclose the related party transaction 

with Articula.  Additionally, because the $25 million transfer did not take place in accordance with 

the Financial Control Procedures Agreement, Clarent had not authorized the transfer and, moreover, 



  

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did not reach any fixed and determinable agreement on or before June 30, 2001 with Articula for 

repayment of the money.  Furthermore, at the time of transfer, Articula did not provide Clarent with 

any documentation for the use of the $25 million.  Chang therefore induced Clarent to materially 

overstate its cash by $25 million in the Form 10-Q filing and earnings release for the quarter ended 

June 30, 2001.  Chang also induced Clarent’s material overstatement of net assets and income for the 

June 2001 quarter because the $15 million that went to Articula and then went to D-Link in late June 

2001 should have treated as a disguised customer refund for unused Clarent product, while the 

remaining $10 million that went to Articula in late June 2001 should have be written off as an 

employee theft loss or some other expense. 
 
C. Chang Has Clarent Guarantee an $11 Million Loan Without Disclosing the 

Resulting Liability 

37. During a telephone call in June 2001, Chiang told D-Link that Clarent was going to 

make an investment in Articula.  Chiang said that they were waiting for approval from Clarent’s 

board of directors, but that Articula needed the money immediately to make a deposit on a project in 

India.  Chiang asked D-Link to loan the $11 million to Articula until Clarent’s board of directors 

approved the investment.  Once approved by the board of directors, Clarent would make the 

investment in Articula and Articula would repay D-Link.  D-Link called Chang, who described the 

loan from D-Link as a bridge loan until Clarent’s board approved the investment.   

38. D-Link agreed to lend $11 million to Articula but wanted Clarent to guarantee 

repayment of D-Link’s loan.  Chang signed a loan guarantee agreement, effective as of June 30, 

2001, in which Clarent guaranteed to repay D-Link the $11 million in the event that Articula failed to 

repay D-Link.  The loan was due to be paid in full on July 20, 2001. 

39. Articula defaulted on the loan by failing to repay D-Link on July 20, 2001.  D-Link 

then demanded repayment of the loan under the guarantee issued by Clarent.  On December 31, 2001, 

D-Link sued Clarent for payment under the loan guarantee. 

40. Chang failed to disclose the existence of the guarantee to accountants and others at 

Clarent.  When interviewed during Clarent’s internal investigation, Chang admitted that no one at 

Clarent knew that he had gone to D-Link to obtain the financing for a purported bid deposit for D-



  

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Link India.  Chang also admitted that he did not tell Chief Financial Officer Simon Wong, Co-

founder Mike Vargo or anyone on Clarent’s board of directors about his intention to sign the 

guarantee.  As a result, Clarent failed to fulfill its requirements under the securities laws and GAAP 

to disclose the guarantee in its second quarter earnings release and the Form 10-Q quarterly report for 

the quarter ended June 30, 2001.  Furthermore, when Clarent filed its Form 10-Q on August 14, 2001 

it failed to disclose that the Articula loan was in default and that Clarent had become liable to D-Link 

for $11 million.   
 
D. Clarent’s Restatement of Revenue for the December 2000 Quarter 

41. In the original Form 10-K filed by Clarent on March 29, 2001 for the year ended 

December 31, 2000, Clarent reported total revenue of $53.2 million and a net loss of $14.1 million 

for the three month period ended December 31, 2000.  By including the D-Link orders as revenue, 

Clarent overstated its fourth quarter revenue by 33%. 

42.  On May 8, 2002, Clarent filed an amended annual report on Form 10-K for the year 

ended December 31, 2000, in which it restated its financial statements.  In its Amended Form 10-K, 

Clarent reported that its internal investigation revealed that significant amounts had been spent by 

Clarent Asia Pacific without the necessary authorizations and that much of the revenue reported by 

the Asia Pacific Region was, in reality, improper and violated the company’s revenue recognition 

policy: 
 
The Company discovered that its revenue had been overstated for certain periods because 
revenue from sales in the Asia-Pacific region had been recognized in situations where 
customers had indirectly received Company funds from third parties, by means of 
arrangements effected through unauthorized acts of Company employees. These arrangements 
were entered into in violation of Company procedures and were not reported to the 
appropriate personnel within the Company. 
 
Revenue also had been overstated for certain periods because revenue had been recognized 
from certain sales in the Asia-Pacific region where customers now claim to have return rights 
or that the Company has repurchase obligations. The Company now believes that certain 
Company personnel may have entered into agreements with customers in the Asia-Pacific 
region purporting to provide such return rights or repurchase obligations. These agreements 
were entered into in violation of Company procedures and were not reported to the 
appropriate personnel within the Company. 

43. Clarent’s amended Form 10-K also stated that its internal investigation found that 

Clarent funds had been transferred to the Articula entities, which may have been under the control of 



  

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Chiang and Chiang’s family and in which Chang may have had an indirect financial interest.  In 

addition, the amended Form 10-K reported that the internal investigation discovered that over $35 

million had been transferred from Clarent Asia Pacific at the end of June 2001: 
 
As a result of the investigation, the Company has now determined that $36.5 million had been 
transferred prior to the end of the second quarter of 2001 but not reported to the appropriate 
Company personnel, resulting in a $36.5 million overstatement of the cash balance for the 
quarterly period ended June 30, 2001. 

44. The restated amounts for the year ended December 31, 2000 included the elimination 

of the revenue recognized for the D-Link transactions alleged above.  Chang’s devices and schemes 

for the illegal recognition of revenue therefore led to material misstatements in Clarent’s public 

reports and filings and to a significant injury, or potential injury, to Clarent’s investors. 

45. In December 2002, Clarent voluntarily filed for Chapter 11 bankruptcy.  Later, on 

February 13, 2003, a bankruptcy court approved the sale of substantially all of Clarent’s assets to the 

third party. 

FIRST CLAIM FOR RELIEF 

Violations of Section 10(b) of the Exchange Act and Rule 10b-5 

46. The Commission realleges and incorporates by reference Paragraphs 1 through 45 

above. 

47. By engaging in the conduct alleged above, Chang directly or indirectly, in connection 

with the purchase or sale of securities, by the use of means or instrumentalities of interstate 

commerce, or of the mails, with scienter: 

(a) employed devices, schemes, or artifices to defraud; 

(b) made untrue statements of material facts or omitted to state material facts necessary in 

order to make the statements made, in the light of the circumstances under which they 

were made, not misleading; and 

(c) engaged in acts, practices, or courses of business which operated or would operate as a 

fraud or deceit upon other persons, including purchasers and sellers of securities. 

48. Chang violated and, unless restrained and enjoined, will continue to violate Section 

10(b) of the Exchange Act [15 U.S.C. § 78j(b)] and Rule 10b-5 [17 C.F.R. § 240.10b-5]. 



  

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SECOND CLAIM FOR RELIEF 

Aiding and Abetting Violations of Section 10(b) of the Exchange Act and Rule 10b-5 

49. The Commission realleges and incorporates by reference Paragraphs 1 through 45 

above. 

50. Clarent, directly or indirectly, in connection with the purchase or sale of securities, by 

the use of means or instrumentalities of interstate commerce, or of the mails, with scienter: 

(a) employed devices, schemes, or artifices to defraud; 

(b) made untrue statements of material facts or omitted to state material facts necessary in 

order to make the statements made, in the light of the circumstances under which they 

were made, not misleading; and 

(c) engaged in acts, practices, or courses of business which operated or would operate as a 

fraud or deceit upon other persons, including purchasers and sellers of securities. 

66. Chang knowingly provided substantial assistance to Clarent's violations of Section 

10(b) of the Exchange Act [15 U.S.C. § 78j(b)] and Rule 10b-5 [17 C.F.R. § 240.10b-5], in violation 

of Section 20(e) of the Exchange Act [15 U.S.C. § 78t(e)]. 

67. Chang aided and abetted, and unless enjoined will continue to violate and to aid and 

abet, violations of Section 10(b) of the Exchange Act [15 U.S.C. § 78j(b)] and Rule 10b-5 [17 C.F.R. 

§ 240.10b-5]. 

THIRD CLAIM FOR RELIEF 

Violations of Section 13(b)(5) of the Exchange Act and Rules 13b2-1 and 13b2-2 

68. The Commission realleges and incorporates by reference Paragraphs 1 through 45 

above. 

69. Chang knowingly circumvented Clarent’s system of internal accounting controls and 

knowingly falsified or caused to be falsified Clarent’s books, records and accounts within the 

meaning of Section 13(b)(2)(A) of the Exchange Act [15 U.S.C. § 78m(b)(2)(A)], in violation of 

Rule 13b2-1 [17 C.F.R. § 240.13b2-1]. 

70. Chang, directly or indirectly, (a) made or caused to be made a materially false or 

misleading statement, or (b) omitted to state, or caused another person to omit to state, any material 



  

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fact necessary in order to make statements made, in light of the circumstances under which such 

statements were made, not misleading to an accountant in connection with (1) any audit or 

examination of the financial statements of the issuer required to be made or (2) the preparation or 

filing of any document or report required to be filed with the Commission , in violation of Rule 13b2-

2 of the Exchange Act [17 C.F.R. § 13b2-2].  

71. Chang violated and, unless restrained and enjoined, will continue to violate Section 

13(b)(5) of the Exchange Act [15 U.S.C. § 78m(b)(5)] , Rule 13b2-1 [17 C.F.R. § 240.13b2-1], and 

Rule 13b2-2 [17 C.F.R § 240.13b2-2]. 

FOURTH CLAIM FOR RELIEF 

Aiding and Abetting Violations of Section 13(a) of the Exchange Act and  

Rules 12b-20, 13a-1 and 13a-13 

72. The Commission realleges and incorporates by reference Paragraphs 1 through 45 

above. 

73. Clarent filed with the Commission quarterly reports on Form 10-K for the year ended 

December 31, 2000 that contained untrue statements of material fact and omitted to state material 

information required to be stated therein or necessary in order to make the required statements made, 

in the light of the circumstances under which they were made, not misleading, in violation of Section 

13(a) of the Exchange Act [15 U.S.C. § 78m(a)] and Rules 12b-20 and 13a-1 thereunder [17 C.F.R. 

§§ 240.12b-20 and 240.13a-1]. 

74. Clarent filed with the Commission quarterly reports on Form 10-Q for the quarters 

ended March 31, 2001 and June 30, 2001 that contained untrue statements of material fact and 

omitted to state material information required to be stated therein or necessary in order to make the 

required statements made, in the light of the circumstances under which they were made, not 

misleading, in violation of Section 13(a) of the Exchange Act [15 U.S.C. § 78m(a)] and Rules 12b-20 

and 13a-13 thereunder [17 C.F.R. §§ 240.12b-20 and 240.13a-13]. 

75. Chang knowingly provided substantial assistance to Clarent’s violation of Section 

13(a) of the Exchange Act [15 U.S.C. § 78m(a)] and Rules 12b-20, 13a-1 and 13a-13 thereunder [17 



  

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C.F.R. §§ 240.12b-20, 240.13a-1 and 240.13a-13], in violation of Section 20(e) of the Exchange Act 

[15 U.S.C. § 78t(e)]. 

76. Chang aided and abetted, and unless enjoined will continue to aid and abet, violations 

of Section 13(a) of the Exchange Act [15 U.S.C. § 78m(a)] and Rules 12b-20, 13a-1 and 13a-13 

thereunder [17 C.F.R. §§ 240.12b-20, 240.13a-1 and 240.13a-13]. 

FIFTH CLAIM FOR RELIEF 

Aiding and Abetting Violations of Section 13(b)(2)(A) of the Exchange Act 

77. The Commission realleges and incorporates by reference Paragraphs 1 through 45 

above. 

78. Clarent failed to make and keep books, records, and accounts which, in reasonable 

detail, accurately and fairly reflected the transactions and dispositions of the assets of the company, in 

violation of Section 13(b)(2)(A) of the Exchange Act [15 U.S.C. § 78m(b)(2)(A)]. 

79. Chang knowingly provided substantial assistance to Clarent’s violation of Section 

13(b)(2)(A) of the Exchange Act [15 U.S.C. § 78m(b)(2)(A)], in violation of Section 20(e) of the 

Exchange Act [15 U.S.C. § 78t(e)]. 

80. Chang aided and abetted, and unless enjoined will continue to aid and abet, violations 

of Section 13(b)(2)(A) of the Exchange Act [15 U.S.C. § 78m(b)(2)(A)]. 

PRAYER FOR RELIEF 

WHEREFORE, the Commission respectfully requests that this Court: 

I. 

Permanently enjoin Chang from violating, directly or indirectly, Sections 10(b), 13(a), 

13(b)(2)(A) and 13(b)(5) of the Exchange Act, and Rules 10b-5, 12b-20, 13a-1, 13a-13, 13b2-1 and 

13b2-2 thereunder. 

II. 

Order Chang to disgorge all ill-gotten gains received from his illegal conduct, including 

prejudgment interest. 

 

 



  

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III. 

Order Chang to pay civil penalties pursuant to Section 21(d) of the Exchange Act. [15 U.S.C. 

§ 78u]. 

IV. 

Prohibit Chang from acting as an officer or director of any issuer that has a class of securities 

described in Section 21(d)(2) of the Exchange Act [15 U.S.C. § 78u(d)(2)]. 

V. 

Retain jurisdiction of this action in accordance with the principles of equity and the Federal 

Rules of Civil Procedure in order to implement and carry out the terms of all orders and decrees that 

may be entered, or to entertain any suitable application or motion for additional relief within the 

jurisdiction of this Court. 

VI. 

Grant such other and further relief as this Court may determine to be just and necessary. 

 
Dated:    September 30, 2004   Helane L. Morrison 
      John S. Yun 
      Kathleen K. Bisaccia 
      Victor W. Hong 
 
 
 
 
      By: _____________________________________ 
             John S. Yun   

 Attorneys for Plaintiff 
      SECURITIES AND EXCHANGE COMMISSION 
 
 
 



  

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DEMAND FOR JURY TRIAL 
 

 Plaintiff Securities and Exchange Commission requests a trial by jury. 
 
Dated:  September 30, 2004   SECURITIES AND EXCHANGE COMMISSION 
 
 
 
      By: ____________________________________ 
              John S. Yun 
       Attorneys for Plaintiff