Orange County Register

A federal judge has fined Steven V. Cotton, former chief financial officer and chief operating officer of Irvine-based Lantronix Inc., for inflating the company’s revenues.

Cotton agreed to disgorge $344,976.98 in ill-gotten gains plus $62,629.03 interest. He also agreed to pay a $120,000 fine. The Huntington Beach resident was barred from serving as an officer or director of a public company for 10 years.

The judgment, issued Sept. 29 by U.S. District Judge Andrew Guilford in Santa Ana and announced today, concludes a lawsuit brought in September 2006 by the Securities and Exchange Commission. 

The SEC alleged that Cotton inflated Lantronix’s revenues and earnings by “channel stuffing” — deliberately shipping too many products to distributors while granting them unusual, and undisclosed, payment terms and rights to return unsold product. He also allegedly arranged for Lantronix to loan money to a third party, which then bought Lantronix products from one of the distributors.

As a result, Lantronix overstated its revenues by as much as 21 percent and understated its pre-tax losses by up to 98 percent in the second and third quarters of 2001 and the first quarter of 2002. The fake results appeared in the company’s public reports and in a public stock offering.

Lantronix restated the results in 2002, reducing its previously reported revenue by $7.4 million. The restatement caused the company’s stock to fall from $10 to 36 cents per share.

The SEC alleged that Cotton personally profited through bonuses and by selling stock at artificially high prices.

Lantronix agreed in September 2006 to an SEC order to cease and desist from future securities law violations. That December it paid $15.2 million to settle a shareholder class-action lawsuit over the revenue restatement.

 Read the SEC news release HERE.

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