SEC v. Matthew Ming-Chang Chiang, 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
Fax:  (415) 705-2501
Attorneys for Plaintiff
U.S. SECURITIES AND EXCHANGE COMMISSION
UNITED STATES DISTRICT COURT
NORTHERN DISTRICT OF CALIFORNIA
SAN FRANCISCO DIVISION
____________________________________
U.S. SECURITIES AND EXCHANGE
COMMISSION,
Plaintiff,
v.
MATTHEW MING-CHANG CHIANG,
Defendant.
____________________________________
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No. C 04-04145 SI
PLAINTIFF SECURITIES AND
EXCHANGE COMMISSION'S
COMPLAINT FOR PERMANENT
INJUNCTION AND OTHER
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 about $36 million in phony revenue in its annual and quarterly filings with the Commission during
2000 and 2001 and the overstatement of $25 million in cash assets in Clarent’s quarterly filing for its
June 2001 fiscal quarter.  Defendant Matthew Ming-Chang Chiang (“Chiang”) instigated a significant
amount  of  the  company’s  false  revenue  reporting  while  managing  its  Asia  Pacific  Region.    He  also
participated in Clarent’s overstatement of net income and assets and in the violation of Clarent’s internal
controls.

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2. During the fourth fiscal quarter of the year ended December 31, 2000, Chiang participated
in oral promises to a Taiwanese customer that if the customer placed a $7.2 million order for Clarent
product, but could not sell the product, Clarent would have Articula Corporation (“Articula”), which
Chiang’s family controlled, purchase the unsold product.  During the fiscal quarter ended March 31,
2001, Chiang authorized a $6 million sales contract with another Taiwanese customer who wanted only
$500,000  in  product  and  who  received  Chiang’s  authorization  to  cancel  the  contract  and  return  the
product.  Similarly, during the fiscal quarter ended June 30, 2001, Chiang authorized sales contracts
totaling nearly $19 million with three Asian customers who told Chiang that they did not need the product
and who received his authorization to cancel their contracts.  
3. Because these contracts did not require the customers to keep and pay for the product
from Clarent, Chiang knew that those purported “sales” could not be reported as revenue by Clarent in
its earnings announcements and filings with the Commission.  Chiang nonetheless authorized those sales
contracts and then withheld information about the improper contract terms from Clarent’s corporate
headquarters in the United States.  Chiang therefore engaged in a fraudulent scheme to have Clarent
report  inflated  sales  revenue  for  his  Asia  Pacific  Region  in  violation  of  both  Generally  Accepted
Accounting Principles (“GAAP”) and the federal securities laws.  Additionally, in late June 2001, Chiang
directed the transfer of $25 million to Articula, which his family controlled, despite Clarent’s written
procedures  prohibiting  such  a  transfer  and  despite  the  lack  of  any  documentary  justification  for  the
payment.  As a result, the $25 million should have been removed from the reported cash balances on
Clarent’s June 2001 financial statements and then treated as a refund and/or expense so as to reduce the
company’s reported assets and net income.
4. Chiang’s scheme began to unravel when falsified banking documents were discovered and
when customers insisted upon returning their unwanted product to Clarent.  In September 2001, Clarent
announced that its revenue might have been overstated and that it had placed Chiang, and two other high-
level  executives,  on  administrative  leave  while  it  conducted  an  internal  investigation.    Officials  at
NASDAQ then suspended trading in Clarent’s shares, and eventually delisted the company.  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

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shareholders lost nearly the total value of their investment in the company.
5.Given the fraud perpetrated by Chiang upon Clarent’s shareholders and the securities
markets, the Commission brings this action to obtain a permanent injunction prohibiting Chiang’s further
violations of the federal securities laws, to force him to disgorge his ill-gotten gains, to bar him 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.Chiang, 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
Clarent’s Business Activities and Reporting Obligations
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,” and
was  reincorporated  in  June  1999  in  the  State  of  Delaware.  Clarent’s  corporate  headquarters  are  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.Clarent held its initial public offering on July 1, 1999, and registered its common stock

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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.
12.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.
13.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 and
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.  
14.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.  
15.During the 1999 fiscal year, Clarent reported $20,365,000 in revenue in the United States
and  $15,999,000  revenue  in  the  Asia  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.

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16.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 Asia 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. 
17.  While  under  Chiang’s  management,  the  Asia  Pacific  Region  was  therefore  reporting
virtually all of Clarent’s revenue growth.  Chiang joined Clarent in 1997 as a Marketing Director.  In
September 2000, Chiang became a Clarent Vice President and the General Manager of its Asia Pacific
Region.  During 2001, Chiang became a Clarent corporate officer and the President of its Asia Pacific
Region.  As the General Manager and then President of Clarent’s Asia Pacific Region, Chiang’s prestige
and stature increased with his Region’s growing revenue.  Chiang reported to Jerry Shaw-Yau Chang
(“Chang”), who was at various times Clarent’s President, Chief Executive Officer, Chairman of the Board
and Chief Strategist.  Chiang held his positions until September 2001, when Clarent announced that it
had launched an internal investigation of the Asia Pacific Region’s accounting and sales activities and
placed him on administrative leave.  Clarent’s internal investigation revealed that significant amounts
had been spent by the Taiwan office 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.
18.Chiang  was  a  member  of  the  board  of  directors  of  Articula,  which  is  a  California
corporation  with  offices  in  Taipei,  Taiwan  and  Milpitas,  California.    Articula  is  affiliated  with  two
Taiwanese   firms,   Great   MinCom   Communications   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.  From at least October 2000 until his death, Chiang’s father was
Articula’s  Chairman  of  the  Board.    After  Chiang’s  father  passed  away,  Chiang’s  mother  became
Articula’s  Chairman  of  the  Board  effective  May  1,  2001.    Given  Chiang’s  personal  and  familial

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connections with Articula and ability to exercise sufficient control over Articula to use it to further his
sales and revenue schemes at Clarent, Articula functioned as a related party of Clarent in any transaction
involving Clarent.
Matthew Chiang’s Compensation and Financial Incentive to Commit Fraud
The 2001 Sales Compensation Plan
19.Chiang  had  a  significant  financial  incentive  to  report  higher  sales  in  his  Asia  Pacific
Region, even if those sales were improper.  Chiang’s monetary compensation included a base salary and
a bonus opportunity.  Additionally, Chiang participated in Clarent’s 2001 Sales Compensation Plan (the
“Compensation Plan”).  According to the Compensation Plan, Clarent set a $120,000,000 revenue quota
for Chiang’s Asia Pacific Region for the 2001 fiscal year.  For revenue up to his $120 million quota,
Chiang would receive a commission equal to 0.20% of the net revenue, payable thirty days after the
revenue was recorded.  For revenue that was 101% to 150% of that quota amount, Chiang would receive
a commission equal to 0.70% of such net revenue.  And for revenue that was over 151% of the annual
quota amount, Chiang would receive a commission of 1.20% of such net revenue.
20.The  Compensation  Plan  specifically  informed  Chiang,  however,  that  the  “booking  of
revenue will be consistent with [GAAP] and the revenue recognition practices of the Company.”  The
Compensation Plan also stated that the “Company must have a signed contract or valid purchase orders
that  have  no  contingencies  attached  and  are  consistent  with  the  Company’s  standard  terms  unless
approved by the President, Worldwide Sales of the Company.”  Additionally, the Compensation Plan
provided that lost revenue due to product returns would be deducted from Chiang’s commissions.
The Stock Regrant Program
21.Chiang also participated in Clarent’s employee stock option program.  In August 1997,
Clarent awarded Chiang options on 144,000 shares at an exercise price of $0.05 per share.  In August
1998, Clarent awarded Chiang options on another 50,000 shares at an exercise price of $0.75 per share.
In June 1999, Chiang received options on another 10,000 shares at a $15.00 per share exercise price.
Subsequently, in July 2000, Clarent awarded Chiang options on another 50,000 shares at an exercise price
of $42.875 per share.
22.By late 2000 and early 2001, however, Clarent’s stock price had fallen from over $100

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per share to a price in the low teens.  Because many of its employee stock options were now “underwater”
due  to  the  falling  share  price,  Clarent  adopted  a  “Regrant  Program”  in  December  2000.    Under  the
Regrant Program, certain officers and other employees were allowed to cancel their “underwater” options
on February 14, 2001 and receive a lesser number of regrant options on February 15, 2001 with a $13.625
exercise price.  The regrant options vested on August 15, 2001 and expired unless exercised by November
15, 2001. 
23.Under the Regrant Program, Chiang elected to cancel his options on the 50,000 Clarent
shares with an exercise price of $42.875 per share.  In exchange for canceling those “underwater” options,
Chiang received regrant options on 10,937 Clarent shares with an exercise price of $13.625.  Because
Chiang could exercise his regrant options from only August 15, 2001 to November 15, 2001, the Regrant
Program provided Chiang with a financial incentive to have Clarent’s stock trade at a high price during
that time period by reporting ever increasing revenue.
CHIANG’S FRAUDULENT ACTIVITIES
The False Revenue for the Fourth Quarter of the 2000 Fiscal Year
24.Shortly before the end of Clarent’s fourth fiscal quarter in December 2000, Chiang and
Chang met for dinner with a representative of D-Link Corporation (“D-Link”), a high technology firm
based  in  Taiwan.    At  the  meeting,  Chiang  and  Chang  promised  D-Link  that  if  it  purchased  Clarent
software, they would have Articula buy that software from D-Link if it could not find its own customer.
Chiang and Chang provided D-Link with four purchase orders for 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 totaled $7.2 million, and were signed on the last business day of the year, December 29,
2000.  Without Chiang’s and Chang’s promise to have Articula purchase any unsold software, D-Link
would not have purchased the product because D-Link would have risked paying for product that it did
not need.
25.Clarent shipped the software to D-Link on December 30, 2000.  After D-Link failed to
find a customer for the Clarent software, Articula issued purchase orders for the unsold product on March
30, 2001.  Soon after receiving Articula’s purchase orders, D-Link paid Clarent for the unsold product.
Later, at the end of June 2001, Articula paid D-Link for the unsold Clarent product.  Just before making

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that payment, Articula received $25 million from Clarent’s Asia Pacific Office at the direction of Chiang
and Chang.  Articula therefore used Clarent funds to pay D-Link for the unused Clarent product.
26.Articula did not, in fact, have any business need for the Clarent product that it supposedly
purchased from D-Link.  Chiang refused to provide D-Link with instructions for shipping the product to
Articula.    D-Link  attempted  to  ship  via  messenger  to  Articula  the  software  product  purchased  from
Clarent, but the shipment was returned to D-Link.
27.Neither  Chiang  nor  Chang  informed  Clarent’s  finance  or  sales  order  administration
department about their oral promises to D-Link or of Articula’s subsequent “purchases” from D-Link.
As a result of his improper conduct, Chiang improperly induced Clarent to recognize revenue on the $7.2
million in software orders from D-Link.  Clarent subsequently included that revenue in its Form 10-K
annual report for the period ended December 31, 2000.  By including that $7.2 million in revenue, Clarent
materially overstated its fourth quarter revenue by about 15%.
The False Revenue in the Quarter Ended March 31, 2001
The Contingent $6.1 Million D-Link Transaction
28.At the end of March 2001, Chiang asked D-Link to buy another $6.1 million of software.
D-Link told Chiang that D-Link still had Clarent product on-hand and did not want any additional risk
from the purchase of additional product.  D-Link would issue a purchase order only if Clarent agreed to
give D-Link the right to return the product if D-Link could not resell the product to another customer.
Chiang agreed to giving D-Link the right to return the Clarent product.
29.D-Link's right of return was set forth in a separate purchase agreement, which provided
that "the Buyer may, with a prior notice and in addition to its other rights and remedies, exercise its
discretion to immediately return such software, either in part or in full, within 210 days of delivery."  
30.Chiang did not disclose the right of return to accountants and others in Clarent's finance
or sales order departments.  To conceal the contingent sales arrangement, Chiang withheld the agreement
and  other  information  about  the  transaction  from  Clarent's  sales  order  administration  and  finance
departments in Redwood City, California.  By letter dated September 14, 2001, D-Link exercised the
return right contained in the purchase agreement.
31.Chiang's agreement made the purchase order from D-Link a contingent sale that could not

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be recorded as revenue for that quarter.  Clarent retained the risks of ownership until the 210 day return
period lapsed.  As a result, Chiang improperly induced Clarent to recognize $5.7 million in revenue on
the D-Link transaction for the quarter ended March 31, 2001.
The Contingent $6 Million Cradle Transaction
32.Chiang submitted a $6 million purchase order to Clarent’s accounting department on or
about March 29, 2001, from a Taiwanese company called Cradle Technologies (“Cradle”).  When he
submitted the order, Chiang knew that the “sale” to Cradle was phony because Cradle had told him that
it only desired about $500,000 in Clarent product.  Chiang therefore told Cradle during the contract
negotiations that Cradle could cancel its order.  Chiang also signed a letter, dated March 15, 2001, to
Cradle giving that customer until February 28, 2002 to return the product or cancel its order.  
33.Chiang’s letter made the $6 million purchase order from Cradle a contingent sale that
could not be recorded as revenue.  To conceal the contingent sales arrangement, Chiang withheld the
letter  and  other  information  about  the  transaction  from  Clarent’s  sales  order  administration  and
accounting departments in Redwood City, California.  As a result, Chiang improperly induced Clarent
to recognize revenue on the $6 million purchase order from Cradle.  Clarent subsequently included that
revenue and the D-Link revenue in its Form 10-Q filed for the quarter ended March 31, 2001.
The False Revenue in the Quarter Ended June 30, 2001
34.Chiang continued his fraudulent scheme during the fiscal quarter ended June 30, 2001 by
authorizing another three phony sales contracts totaling nearly $19 million.  Those contracts were with
three  Asia  Pacific  Region  customers  –  Cradle,  Landsat  Communications  Pte  Ltd.  (“Landsat”)  and
Mitracomm Ekasara (“Mitracomm”).
The Contingent $8 Million Transaction with Cradle
35.In late June 2001, Chiang sought another large purchase order from Cradle.  Because it
was still carrying unsold Clarent product from its prior purchase order, Cradle did not want to place an
additional order.  To induce Cradle to issue another purchase order, Chiang signed a letter, dated June
25, 2001, granting Cradle the right to alter or cancel its order.  Shortly afterwards, on June 29, 2001,
Cradle issued software purchase orders totaling $8 million.  Chiang did not disclose the letter or its terms
to Clarent's sales order administration or finance departments.  

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36.Because he gave Cradle the right to alter or cancel its orders, Chiang knew that the $8
million “sale” to Cradle could not be recognized as revenue.  By concealing the June 25, 2001 letter from
Clarent's sales order administration and finance departments, Chiang fraudulently induced Clarent to
recognize revenue on the $7.7 million Cradle transaction.  That in turn caused Clarent to include $8
million in phony revenue in its Form 10-Q filing and earnings press release for the quarter ended June
30, 2001.
The Contingent $5.73 Million Transaction with Landsat
37.Near the end of the June 2001 quarter, Chiang told the head of Clarent's South Asia Sales
Division that the quarter was not going well and that the Division needed to obtain another $5 to $10
million in purchase orders.  Chiang also said that such deals could include the following contingent
terms: (1) no down payment by the customer; (2) the customer could cancel the deal within 90 days; and
(3) no product would actually be shipped to the customer.  
38.Chiang  and  the  head  of  Clarent's  South  Asia  Sales  Division  then  asked  Landsat,  a
Singapore company, to place a large order before the end of the quarter.  Because it did not need the
product, Landsat did not want to incur the risk of issuing a purchase order.  Chiang told Landsat that he
needed a purchase order to fill his quota for the quarter.  Chiang also told Landsat that it could cancel the
order in July 2001.  Chiang did not disclose this arrangement to Clarent's sales order administration or
finance departments.
39.On  June  29,  2001,  an  employee  at  Clarent’s  Asia  Pacific  Region  faxed  a  Sales  and
Purchase Order form to Landsat.  Because Landsat did not know what products to include in the purchase
order, Chiang and another Clarent employee determined what products Landsat would purchase.  The
next day, Landsat faxed a purchase order to Clarent for $5.73 million in software that had been specified
by Chiang.
40.Because the purchase order was contingent upon Landsat’s right of cancellation, Chiang
knew that Clarent could not recognize revenue on its transaction with Landsat.  Chiang also knew that
concealing  Landsat’s  cancellation  right  from  Clarent's  sales  order  administration  and/or  finance
departments would induce the company to recognize revenue improperly on Clarent's books and records.

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Chiang  further  knew  that  such  revenue  would  be  improperly  reported  by  Clarent  in  its  earning
announcements and reports filed with the Commission.
41.Subsequently,  in  July  2001  Clarent  shipped  approximately  $5  million  in  product  to
Landsat.  Landsat’s principal was upset about receiving that shipment because Chiang and the head of
Clarent's South Asia Sales Division had told him that Landsat could cancel the order and that no product
would be shipped.  When Chiang learned of Landsat's concern, he authorized Landsat’s reshipment of
the product to Hong Kong for storage.  Chiang also told Landsat’s principal that Articula would purchase
the Clarent product from Landsat.  
42.In September 2001, Articula sent to Landsat a purchase order, backdated to June 25, 2001
by Articula, for the Clarent software sent to Landsat.  That backdated purchase order represented the
resale by Landsat of the undesired Clarent shipment.  At the same time, however, Articula sent to Landsat
a  cancellation  notice,  dated  September  13,  2001,  of  its  June  25  purchase  order.    Because  these
th
documents nullified the transfer of any product, Landsat was not making an actual sale of the Clarent
product  to  Articula.    This  led  Landsat  to  demand  the  actual  cancellation  of  its  order  with  Clarent.
Eventually, in a letter dated October 4, 2001, the head of Clarent's South Asia Sales Division accepted
Landsat's cancellation of the order.  Through these various shipments and off-setting purchase orders,
Chiang was attempting to conceal from Clarent’s headquarters his agreement to allow Landsat to cancel
its order at any time and to refuse to allow shipment of the Clarent product.
43.Later, in December 2002, when the Commission and the United States Attorney were
conducting their investigation, Chiang tried to convince Landsat's principal to lie about the circumstances
of Landsat's order and cancellation.  In particular, Chiang asked Landsat’s principal to say falsely that
Landsat  had  returned  the  product  because  it  was  defective,  rather  than  pursuant  to  the  oral  right  of
cancellation.
The Contingent $5.3 Million Transaction with Mitracomm
44.The head of Clarent's South Asia Sales Division asked another customer, Mitracomm, to
place a multi-million dollar software order before the end of the June 2001 quarter to help Chiang meet
his sales quota.  The head of sales proposed that Mitracomm buy the product from Clarent before June

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30, 2001, and then subsequently resell the product to the intended user, O'Connor's Singapore Pte Ltd.
("O'Connor's"), which was working on a project in Vietnam.
45.Mitracomm was concerned about the size of the order and wanted some assurance that
it could cancel the order.  Chiang then authorized the head of Clarent's South Asia Sales Division to
promise Mitracomm that it could, among other things, cancel the order within 90 days.  Chiang did not
disclose this arrangement to Clarent's sales order administration or finance department in Redwood City.
On June 29, 2001, Mitracomm faxed a purchase order for $5.3 million to Clarent.
46.Because the transaction was contingent on Mitracomm’s cancellation rights, Chiang knew
that Clarent could not recognize revenue on the purchase order.  Chiang also knew that concealing the
cancellation right from Clarent's sales order administration and finance departments would cause Clarent
to  recognize  revenue  improperly  on  the  Mitracomm  transaction  and  to  include  such  revenue  in  its
earnings announcements and Form 10-Q filing for the quarter ended June 30, 2001.
47.Afterwards,  Articula  had  discussions  with  Mitracomm  about  purchasing  the  unsold
Clarent product.  Mitracomm decided, however, to cancel its order with Clarent.  By letter dated October
4, 2001, the head of Clarent's South Asia Sales Division confirmed that Mitracomm had cancelled its $5.3
million order and replaced it with a $304,270 order – i.e., the amount that Mitracomm really needed for
the project in Vietnam.
48.Subsequently, on October 27, 2001, Mitracomm sent a letter to Ernst & Young, Clarent's
outside audit firm, stating that Chiang had asked Mitracomm to issue the purchase order for a project
"somewhere in Vietnam, where the deal, so called, will be financed by Articula."  The letter also stated
that if Articula could not issue a purchase order and pay Mitracomm, Mitracomm could cancel its order
with Clarent.  Mitracomm stated that it issued the purchase order because of Chiang's position at Clarent
and "without realizing that the thing has gone too far."  Mitracomm also stated that it believed the product
from the order "was stored in Clarent's/Articula's warehouse in Hong Kong."
49.Mitracomm’s letter to Ernst & Young led to an internal Clarent investigation into whether
revenue had been properly recognized in Chiang’s region.  When interviewed during Clarent's internal
investigation, Chiang admitted that he told Clarent’s salespeople that they could grant rights of return on

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deals such as Mitracomm and Landsat.  The cancellation right was confirmed in a letter, dated October
4, 2001, signed by the head of Clarent's South Asia Sales Division.
The Improper Transfer of $25 Million to Articula in Late June 2001
50.In May and June 2001, Chang and Chiang requested that Clarent send $35 million from
its headquarters in Redwood City, California to the Asia Pacific Region.  Chang falsely represented to
Clarent officials that he wanted the Asia Pacific Region 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 the Asia Pacific Region 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 the Asia Pacific Region.
51.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 supposed 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 specified additional internal controls in the Financial
Control Procedures Agreement.  Chang, Chiang, Clarent's Chief Financial Officer and the Controller of
the Asia Pacific Office 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.
52.On June 22, 2001, the board approved the new procedures and the transfer of funds from
Clarent headquarters to Clarent’s 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.
53.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

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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.  After receiving $25 million from Clarent’s Asia Pacific Office, Articula paid
$15 million to D-Link to cover its "purchase" of the product that Clarent "sold" to D-Link.
54.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.
55.Because 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, 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.  Chiang 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.  Chiang 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.

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Clarent’s Restatement of Revenue for the December 2000, March 2001 and June 2001 Quarters
56.Clarent’s internal investigation revealed that revenue had been improperly recognized for
the entire fiscal year ended December 31, 2000, as well as for the quarters ended March 31, 2001 and
June 30, 2001.  Clarent’s restatement of the fourth quarter of the fiscal year ended December 31, 2000
eliminated all of the D-Link revenue.  In its Amended Form 10-K filed on May 8, 2002, Clarent stated:
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.
57.In the original Form 10-Q filed by Clarent on May 15, 2001 for the quarter ended March
31, 2001, the Company reported total revenue of $61.2 million and a net loss of $13.9 million for the
quarter.  In May 2002, Clarent restated the financial statements included in the Form 10-Q for the quarter
ended  March  31,  2001.    The  restatement  reduced  total  revenue  to  $21  million.    Thus,  revenue  was
overstated by 191%. 
58.In the original Form 10-Q that Clarent filed on August 14, 2001 for the quarter ended June
30, 2001, the Company reported total revenue of $63.2 million and a net loss of $41.6 million.  In May
2002, Clarent restated the financial statements included in the Form 10-Q for the quarter ended June 30,
2001.  The restatement reduced total revenue by $45.6 million, down to $17.6 million.  Thus, revenue
was  overstated  by  259%.    In  addition,  Clarent  informed  investors  that  the  company’s  internal
investigation  had  discovered  that  over  $35  million  had  been  transferred  from  Clarent’s  Asia  Pacific
Region at the end of June 2001 without authorization or disclosure:
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

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in  a  $36.5  million  overstatement  of  the  cash  balance  for  the  quarterly
period ended June 30, 2001.
59. The restated amounts for the quarters ended March 31, 2001 and June 30, 2001 included
the elimination of the revenue recognized for the D-Link, Cradle, Landsat and Mitracomm transactions
alleged above.  Chiang’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.
60.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 a third
party.  
FIRST CLAIM FOR RELIEF
Violations of Section 10(b) of the Exchange Act and Rule 10b-5 
61.The Commission realleges and incorporates by reference Paragraphs 1 through 60 above.
62.Chiang, 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
©)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.
63.Chiang 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].
SECOND CLAIM FOR RELIEF
Aiding and Abetting Violations of Section 10(b) of the Exchange Act  and Rule 10b-5
64.The Commission realleges and incorporates by reference Paragraphs 1 through 60 above.
65.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;

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(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
©)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.Chiang 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.Chiang 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 60 above.
69.Chiang  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)]. 
70.Chiang  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)]  and  Rules  13b2-1  and  13b2-2  [17  C.F.R.  §§
240.13b2-1, 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
71.The Commission realleges and incorporates by reference Paragraphs 1 through 60 above.
72.Clarent filed with the Commission an annual report for the year ended December 31, 2000
and  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

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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, 13a-1 and 13a-13 thereunder [17 C.F.R. §§ 240.12b-20,
240.13a-1, 240.13a-13].
73.Chiang 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 C.F.R.
§§ 240.12b-20, 240.13a-1, 240.13a-13], in violation of Section 20(e) of the Exchange Act [15 U.S.C. §
78t(e)].
74.Chiang 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 13a-13 thereunder [17
C.F.R. §§ 240.12b-20, 240.13a-1 240.13a-13].
FIFTH CLAIM FOR RELIEF
Aiding and Abetting Violations of Section 13b(2)(A) of the Exchange Act
75.The Commission realleges and incorporates by reference Paragraphs 1 through 60 above.
76.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)].
77.Chiang  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)].
78.Chiang 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 defendant Chiang 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 defendant Chiang to disgorge all ill-gotten gains received from his illegal conduct,
including prejudgment interest.

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III.Order defendant Chiang to pay civil penalties pursuant to Section 21(d) of the Exchange
Act. [15 U.S.C. § 78u].
IV.  Prohibit  Chiang  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 the 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
Helane L. Morrison
John S. Yun
Kathleen K. Bisaccia
Victor W. Hong
By: _____________________
       John S. Yun
Attorneys for the Plaintiff
SECURITIES AND EXCHANGE COMMISSION

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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
Fax:  (415) 705-2501

Attorneys for Plaintiff
U.S. SECURITIES AND EXCHANGE COMMISSION

UNITED STATES DISTRICT COURT

NORTHERN DISTRICT OF CALIFORNIA

SAN FRANCISCO DIVISION

____________________________________

U.S. SECURITIES AND EXCHANGE
COMMISSION,

Plaintiff,

v.

MATTHEW MING-CHANG CHIANG,

Defendant.
____________________________________

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No. C 04-04145 SI

PLAINTIFF SECURITIES AND
EXCHANGE COMMISSION'S
COMPLAINT FOR PERMANENT
INJUNCTION AND OTHER
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 about $36 million in phony revenue in its annual and quarterly filings with the Commission during

2000 and 2001 and the overstatement of $25 million in cash assets in Clarent’s quarterly filing for its

June 2001 fiscal quarter.  Defendant Matthew Ming-Chang Chiang (“Chiang”) instigated a significant

amount of the company’s false revenue reporting while managing its Asia Pacific Region.  He also

participated in Clarent’s overstatement of net income and assets and in the violation of Clarent’s internal

controls.



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2. During the fourth fiscal quarter of the year ended December 31, 2000, Chiang participated

in oral promises to a Taiwanese customer that if the customer placed a $7.2 million order for Clarent

product, but could not sell the product, Clarent would have Articula Corporation (“Articula”), which

Chiang’s family controlled, purchase the unsold product.  During the fiscal quarter ended March 31,

2001, Chiang authorized a $6 million sales contract with another Taiwanese customer who wanted only

$500,000 in product and who received Chiang’s authorization to cancel the contract and return the

product.  Similarly, during the fiscal quarter ended June 30, 2001, Chiang authorized sales contracts

totaling nearly $19 million with three Asian customers who told Chiang that they did not need the product

and who received his authorization to cancel their contracts.  

3. Because these contracts did not require the customers to keep and pay for the product

from Clarent, Chiang knew that those purported “sales” could not be reported as revenue by Clarent in

its earnings announcements and filings with the Commission.  Chiang nonetheless authorized those sales

contracts and then withheld information about the improper contract terms from Clarent’s corporate

headquarters in the United States.  Chiang therefore engaged in a fraudulent scheme to have Clarent

report inflated sales revenue for his Asia Pacific Region in violation of both Generally Accepted

Accounting Principles (“GAAP”) and the federal securities laws.  Additionally, in late June 2001, Chiang

directed the transfer of $25 million to Articula, which his family controlled, despite Clarent’s written

procedures prohibiting such a transfer and despite the lack of any documentary justification for the

payment.  As a result, the $25 million should have been removed from the reported cash balances on

Clarent’s June 2001 financial statements and then treated as a refund and/or expense so as to reduce the

company’s reported assets and net income.

4. Chiang’s scheme began to unravel when falsified banking documents were discovered and

when customers insisted upon returning their unwanted product to Clarent.  In September 2001, Clarent

announced that its revenue might have been overstated and that it had placed Chiang, and two other high-

level executives, on administrative leave while it conducted an internal investigation.  Officials at

NASDAQ then suspended trading in Clarent’s shares, and eventually delisted the company.  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



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shareholders lost nearly the total value of their investment in the company.

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

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

violations of the federal securities laws, to force him to disgorge his ill-gotten gains, to bar him 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. Chiang, 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

Clarent’s Business Activities and Reporting Obligations

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,” and

was reincorporated in June 1999 in the State of Delaware. Clarent’s corporate headquarters are 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. Clarent held its initial public offering on July 1, 1999, and registered its common stock



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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.

12. 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.

13. 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 and

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.  

14. 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.  

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

and $15,999,000 revenue in the Asia 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.



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16. 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 Asia 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. 

17. While under Chiang’s management, the Asia Pacific Region was therefore reporting

virtually all of Clarent’s revenue growth.  Chiang joined Clarent in 1997 as a Marketing Director.  In

September 2000, Chiang became a Clarent Vice President and the General Manager of its Asia Pacific

Region.  During 2001, Chiang became a Clarent corporate officer and the President of its Asia Pacific

Region.  As the General Manager and then President of Clarent’s Asia Pacific Region, Chiang’s prestige

and stature increased with his Region’s growing revenue.  Chiang reported to Jerry Shaw-Yau Chang

(“Chang”), who was at various times Clarent’s President, Chief Executive Officer, Chairman of the Board

and Chief Strategist.  Chiang held his positions until September 2001, when Clarent announced that it

had launched an internal investigation of the Asia Pacific Region’s accounting and sales activities and

placed him on administrative leave.  Clarent’s internal investigation revealed that significant amounts

had been spent by the Taiwan office 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.

18. Chiang was a member of the board of directors of Articula, which is a California

corporation with offices in Taipei, Taiwan and Milpitas, California.  Articula is affiliated with two

Taiwanese firms, Great MinCom Communications 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.  From at least October 2000 until his death, Chiang’s father was

Articula’s Chairman of the Board.  After Chiang’s father passed away, Chiang’s mother became

Articula’s Chairman of the Board effective May 1, 2001.  Given Chiang’s personal and familial



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connections with Articula and ability to exercise sufficient control over Articula to use it to further his

sales and revenue schemes at Clarent, Articula functioned as a related party of Clarent in any transaction

involving Clarent.

Matthew Chiang’s Compensation and Financial Incentive to Commit Fraud

The 2001 Sales Compensation Plan

19. Chiang had a significant financial incentive to report higher sales in his Asia Pacific

Region, even if those sales were improper.  Chiang’s monetary compensation included a base salary and

a bonus opportunity.  Additionally, Chiang participated in Clarent’s 2001 Sales Compensation Plan (the

“Compensation Plan”).  According to the Compensation Plan, Clarent set a $120,000,000 revenue quota

for Chiang’s Asia Pacific Region for the 2001 fiscal year.  For revenue up to his $120 million quota,

Chiang would receive a commission equal to 0.20% of the net revenue, payable thirty days after the

revenue was recorded.  For revenue that was 101% to 150% of that quota amount, Chiang would receive

a commission equal to 0.70% of such net revenue.  And for revenue that was over 151% of the annual

quota amount, Chiang would receive a commission of 1.20% of such net revenue.

20. The Compensation Plan specifically informed Chiang, however, that the “booking of

revenue will be consistent with [GAAP] and the revenue recognition practices of the Company.”  The

Compensation Plan also stated that the “Company must have a signed contract or valid purchase orders

that have no contingencies attached and are consistent with the Company’s standard terms unless

approved by the President, Worldwide Sales of the Company.”  Additionally, the Compensation Plan

provided that lost revenue due to product returns would be deducted from Chiang’s commissions.

The Stock Regrant Program

21. Chiang also participated in Clarent’s employee stock option program.  In August 1997,

Clarent awarded Chiang options on 144,000 shares at an exercise price of $0.05 per share.  In August

1998, Clarent awarded Chiang options on another 50,000 shares at an exercise price of $0.75 per share.

In June 1999, Chiang received options on another 10,000 shares at a $15.00 per share exercise price.

Subsequently, in July 2000, Clarent awarded Chiang options on another 50,000 shares at an exercise price

of $42.875 per share.

22. By late 2000 and early 2001, however, Clarent’s stock price had fallen from over $100



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per share to a price in the low teens.  Because many of its employee stock options were now “underwater”

due to the falling share price, Clarent adopted a “Regrant Program” in December 2000.  Under the

Regrant Program, certain officers and other employees were allowed to cancel their “underwater” options

on February 14, 2001 and receive a lesser number of regrant options on February 15, 2001 with a $13.625

exercise price.  The regrant options vested on August 15, 2001 and expired unless exercised by November

15, 2001. 

23. Under the Regrant Program, Chiang elected to cancel his options on the 50,000 Clarent

shares with an exercise price of $42.875 per share.  In exchange for canceling those “underwater” options,

Chiang received regrant options on 10,937 Clarent shares with an exercise price of $13.625.  Because

Chiang could exercise his regrant options from only August 15, 2001 to November 15, 2001, the Regrant

Program provided Chiang with a financial incentive to have Clarent’s stock trade at a high price during

that time period by reporting ever increasing revenue.

CHIANG’S FRAUDULENT ACTIVITIES

The False Revenue for the Fourth Quarter of the 2000 Fiscal Year

24. Shortly before the end of Clarent’s fourth fiscal quarter in December 2000, Chiang and

Chang met for dinner with a representative of D-Link Corporation (“D-Link”), a high technology firm

based in Taiwan.  At the meeting, Chiang and Chang promised D-Link that if it purchased Clarent

software, they would have Articula buy that software from D-Link if it could not find its own customer.

Chiang and Chang provided D-Link with four purchase orders for 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 totaled $7.2 million, and were signed on the last business day of the year, December 29,

2000.  Without Chiang’s and Chang’s promise to have Articula purchase any unsold software, D-Link

would not have purchased the product because D-Link would have risked paying for product that it did

not need.

25. Clarent shipped the software to D-Link on December 30, 2000.  After D-Link failed to

find a customer for the Clarent software, Articula issued purchase orders for the unsold product on March

30, 2001.  Soon after receiving Articula’s purchase orders, D-Link paid Clarent for the unsold product.

Later, at the end of June 2001, Articula paid D-Link for the unsold Clarent product.  Just before making



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that payment, Articula received $25 million from Clarent’s Asia Pacific Office at the direction of Chiang

and Chang.  Articula therefore used Clarent funds to pay D-Link for the unused Clarent product.

26. Articula did not, in fact, have any business need for the Clarent product that it supposedly

purchased from D-Link.  Chiang refused to provide D-Link with instructions for shipping the product to

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

Clarent, but the shipment was returned to D-Link.

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

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

As a result of his improper conduct, Chiang improperly induced Clarent to recognize revenue on the $7.2

million in software orders from D-Link.  Clarent subsequently included that revenue in its Form 10-K

annual report for the period ended December 31, 2000.  By including that $7.2 million in revenue, Clarent

materially overstated its fourth quarter revenue by about 15%.

The False Revenue in the Quarter Ended March 31, 2001

The Contingent $6.1 Million D-Link Transaction

28. At the end of March 2001, Chiang asked D-Link to buy another $6.1 million of software.

D-Link told Chiang that D-Link still had Clarent product on-hand and did not want any additional risk

from the purchase of additional product.  D-Link would issue a purchase order only if Clarent agreed to

give D-Link the right to return the product if D-Link could not resell the product to another customer.

Chiang agreed to giving D-Link the right to return the Clarent product.

29. D-Link's right of return was set forth in a separate purchase agreement, which provided

that "the Buyer may, with a prior notice and in addition to its other rights and remedies, exercise its

discretion to immediately return such software, either in part or in full, within 210 days of delivery."  

30. Chiang did not disclose the right of return to accountants and others in Clarent's finance

or sales order departments.  To conceal the contingent sales arrangement, Chiang withheld the agreement

and other information about the transaction from Clarent's sales order administration and finance

departments in Redwood City, California.  By letter dated September 14, 2001, D-Link exercised the

return right contained in the purchase agreement.

31. Chiang's agreement made the purchase order from D-Link a contingent sale that could not



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be recorded as revenue for that quarter.  Clarent retained the risks of ownership until the 210 day return

period lapsed.  As a result, Chiang improperly induced Clarent to recognize $5.7 million in revenue on

the D-Link transaction for the quarter ended March 31, 2001.

The Contingent $6 Million Cradle Transaction

32. Chiang submitted a $6 million purchase order to Clarent’s accounting department on or

about March 29, 2001, from a Taiwanese company called Cradle Technologies (“Cradle”).  When he

submitted the order, Chiang knew that the “sale” to Cradle was phony because Cradle had told him that

it only desired about $500,000 in Clarent product.  Chiang therefore told Cradle during the contract

negotiations that Cradle could cancel its order.  Chiang also signed a letter, dated March 15, 2001, to

Cradle giving that customer until February 28, 2002 to return the product or cancel its order.  

33. Chiang’s letter made the $6 million purchase order from Cradle a contingent sale that

could not be recorded as revenue.  To conceal the contingent sales arrangement, Chiang withheld the

letter and other information about the transaction from Clarent’s sales order administration and

accounting departments in Redwood City, California.  As a result, Chiang improperly induced Clarent

to recognize revenue on the $6 million purchase order from Cradle.  Clarent subsequently included that

revenue and the D-Link revenue in its Form 10-Q filed for the quarter ended March 31, 2001.

The False Revenue in the Quarter Ended June 30, 2001

34. Chiang continued his fraudulent scheme during the fiscal quarter ended June 30, 2001 by

authorizing another three phony sales contracts totaling nearly $19 million.  Those contracts were with

three Asia Pacific Region customers – Cradle, Landsat Communications Pte Ltd. (“Landsat”) and

Mitracomm Ekasara (“Mitracomm”).

The Contingent $8 Million Transaction with Cradle

35. In late June 2001, Chiang sought another large purchase order from Cradle.  Because it

was still carrying unsold Clarent product from its prior purchase order, Cradle did not want to place an

additional order.  To induce Cradle to issue another purchase order, Chiang signed a letter, dated June

25, 2001, granting Cradle the right to alter or cancel its order.  Shortly afterwards, on June 29, 2001,

Cradle issued software purchase orders totaling $8 million.  Chiang did not disclose the letter or its terms

to Clarent's sales order administration or finance departments.  



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36. Because he gave Cradle the right to alter or cancel its orders, Chiang knew that the $8

million “sale” to Cradle could not be recognized as revenue.  By concealing the June 25, 2001 letter from

Clarent's sales order administration and finance departments, Chiang fraudulently induced Clarent to

recognize revenue on the $7.7 million Cradle transaction.  That in turn caused Clarent to include $8

million in phony revenue in its Form 10-Q filing and earnings press release for the quarter ended June

30, 2001.

The Contingent $5.73 Million Transaction with Landsat

37. Near the end of the June 2001 quarter, Chiang told the head of Clarent's South Asia Sales

Division that the quarter was not going well and that the Division needed to obtain another $5 to $10

million in purchase orders.  Chiang also said that such deals could include the following contingent

terms: (1) no down payment by the customer; (2) the customer could cancel the deal within 90 days; and

(3) no product would actually be shipped to the customer.  

38. Chiang and the head of Clarent's South Asia Sales Division then asked Landsat, a

Singapore company, to place a large order before the end of the quarter.  Because it did not need the

product, Landsat did not want to incur the risk of issuing a purchase order.  Chiang told Landsat that he

needed a purchase order to fill his quota for the quarter.  Chiang also told Landsat that it could cancel the

order in July 2001.  Chiang did not disclose this arrangement to Clarent's sales order administration or

finance departments.

39. On June 29, 2001, an employee at Clarent’s Asia Pacific Region faxed a Sales and

Purchase Order form to Landsat.  Because Landsat did not know what products to include in the purchase

order, Chiang and another Clarent employee determined what products Landsat would purchase.  The

next day, Landsat faxed a purchase order to Clarent for $5.73 million in software that had been specified

by Chiang.

40. Because the purchase order was contingent upon Landsat’s right of cancellation, Chiang

knew that Clarent could not recognize revenue on its transaction with Landsat.  Chiang also knew that

concealing Landsat’s cancellation right from Clarent's sales order administration and/or finance

departments would induce the company to recognize revenue improperly on Clarent's books and records.



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Chiang further knew that such revenue would be improperly reported by Clarent in its earning

announcements and reports filed with the Commission.

41. Subsequently, in July 2001 Clarent shipped approximately $5 million in product to

Landsat.  Landsat’s principal was upset about receiving that shipment because Chiang and the head of

Clarent's South Asia Sales Division had told him that Landsat could cancel the order and that no product

would be shipped.  When Chiang learned of Landsat's concern, he authorized Landsat’s reshipment of

the product to Hong Kong for storage.  Chiang also told Landsat’s principal that Articula would purchase

the Clarent product from Landsat.  

42. In September 2001, Articula sent to Landsat a purchase order, backdated to June 25, 2001

by Articula, for the Clarent software sent to Landsat.  That backdated purchase order represented the

resale by Landsat of the undesired Clarent shipment.  At the same time, however, Articula sent to Landsat

a cancellation notice, dated September 13, 2001, of its June 25  purchase order.  Because theseth

documents nullified the transfer of any product, Landsat was not making an actual sale of the Clarent

product to Articula.  This led Landsat to demand the actual cancellation of its order with Clarent.

Eventually, in a letter dated October 4, 2001, the head of Clarent's South Asia Sales Division accepted

Landsat's cancellation of the order.  Through these various shipments and off-setting purchase orders,

Chiang was attempting to conceal from Clarent’s headquarters his agreement to allow Landsat to cancel

its order at any time and to refuse to allow shipment of the Clarent product.

43. Later, in December 2002, when the Commission and the United States Attorney were

conducting their investigation, Chiang tried to convince Landsat's principal to lie about the circumstances

of Landsat's order and cancellation.  In particular, Chiang asked Landsat’s principal to say falsely that

Landsat had returned the product because it was defective, rather than pursuant to the oral right of

cancellation.

The Contingent $5.3 Million Transaction with Mitracomm

44. The head of Clarent's South Asia Sales Division asked another customer, Mitracomm, to

place a multi-million dollar software order before the end of the June 2001 quarter to help Chiang meet

his sales quota.  The head of sales proposed that Mitracomm buy the product from Clarent before June



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30, 2001, and then subsequently resell the product to the intended user, O'Connor's Singapore Pte Ltd.

("O'Connor's"), which was working on a project in Vietnam.

45. Mitracomm was concerned about the size of the order and wanted some assurance that

it could cancel the order.  Chiang then authorized the head of Clarent's South Asia Sales Division to

promise Mitracomm that it could, among other things, cancel the order within 90 days.  Chiang did not

disclose this arrangement to Clarent's sales order administration or finance department in Redwood City.

On June 29, 2001, Mitracomm faxed a purchase order for $5.3 million to Clarent.

46. Because the transaction was contingent on Mitracomm’s cancellation rights, Chiang knew

that Clarent could not recognize revenue on the purchase order.  Chiang also knew that concealing the

cancellation right from Clarent's sales order administration and finance departments would cause Clarent

to recognize revenue improperly on the Mitracomm transaction and to include such revenue in its

earnings announcements and Form 10-Q filing for the quarter ended June 30, 2001.

47. Afterwards, Articula had discussions with Mitracomm about purchasing the unsold

Clarent product.  Mitracomm decided, however, to cancel its order with Clarent.  By letter dated October

4, 2001, the head of Clarent's South Asia Sales Division confirmed that Mitracomm had cancelled its $5.3

million order and replaced it with a $304,270 order – i.e., the amount that Mitracomm really needed for

the project in Vietnam.

48. Subsequently, on October 27, 2001, Mitracomm sent a letter to Ernst & Young, Clarent's

outside audit firm, stating that Chiang had asked Mitracomm to issue the purchase order for a project

"somewhere in Vietnam, where the deal, so called, will be financed by Articula."  The letter also stated

that if Articula could not issue a purchase order and pay Mitracomm, Mitracomm could cancel its order

with Clarent.  Mitracomm stated that it issued the purchase order because of Chiang's position at Clarent

and "without realizing that the thing has gone too far."  Mitracomm also stated that it believed the product

from the order "was stored in Clarent's/Articula's warehouse in Hong Kong."

49. Mitracomm’s letter to Ernst & Young led to an internal Clarent investigation into whether

revenue had been properly recognized in Chiang’s region.  When interviewed during Clarent's internal

investigation, Chiang admitted that he told Clarent’s salespeople that they could grant rights of return on



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deals such as Mitracomm and Landsat.  The cancellation right was confirmed in a letter, dated October

4, 2001, signed by the head of Clarent's South Asia Sales Division.

The Improper Transfer of $25 Million to Articula in Late June 2001

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

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

Clarent officials that he wanted the Asia Pacific Region 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 the Asia Pacific Region 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 the Asia Pacific Region.

51. 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 supposed 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 specified additional internal controls in the Financial

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

the Asia Pacific Office 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.

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

Clarent headquarters to Clarent’s 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.

53. 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



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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.  After receiving $25 million from Clarent’s Asia Pacific Office, Articula paid

$15 million to D-Link to cover its "purchase" of the product that Clarent "sold" to D-Link.

54. 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.

55. Because 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, 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.  Chiang 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.  Chiang 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.



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Clarent’s Restatement of Revenue for the December 2000, March 2001 and June 2001 Quarters

56. Clarent’s internal investigation revealed that revenue had been improperly recognized for

the entire fiscal year ended December 31, 2000, as well as for the quarters ended March 31, 2001 and

June 30, 2001.  Clarent’s restatement of the fourth quarter of the fiscal year ended December 31, 2000

eliminated all of the D-Link revenue.  In its Amended Form 10-K filed on May 8, 2002, Clarent stated:

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.

57. In the original Form 10-Q filed by Clarent on May 15, 2001 for the quarter ended March

31, 2001, the Company reported total revenue of $61.2 million and a net loss of $13.9 million for the

quarter.  In May 2002, Clarent restated the financial statements included in the Form 10-Q for the quarter

ended March 31, 2001.  The restatement reduced total revenue to $21 million.  Thus, revenue was

overstated by 191%. 

58. In the original Form 10-Q that Clarent filed on August 14, 2001 for the quarter ended June

30, 2001, the Company reported total revenue of $63.2 million and a net loss of $41.6 million.  In May

2002, Clarent restated the financial statements included in the Form 10-Q for the quarter ended June 30,

2001.  The restatement reduced total revenue by $45.6 million, down to $17.6 million.  Thus, revenue

was overstated by 259%.  In addition, Clarent informed investors that the company’s internal

investigation had discovered that over $35 million had been transferred from Clarent’s Asia Pacific

Region at the end of June 2001 without authorization or disclosure:

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



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in a $36.5 million overstatement of the cash balance for the quarterly
period ended June 30, 2001.

59. The restated amounts for the quarters ended March 31, 2001 and June 30, 2001 included

the elimination of the revenue recognized for the D-Link, Cradle, Landsat and Mitracomm transactions

alleged above.  Chiang’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.

60. 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 a third

party.  

FIRST CLAIM FOR RELIEF

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

61. The Commission realleges and incorporates by reference Paragraphs 1 through 60 above.

62. Chiang, 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

©) 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.

63. Chiang 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].

SECOND CLAIM FOR RELIEF

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

64. The Commission realleges and incorporates by reference Paragraphs 1 through 60 above.

65. 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;



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(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

©) 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. Chiang 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. Chiang 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 60 above.

69. Chiang 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)]. 

70. Chiang 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)] and Rules 13b2-1 and 13b2-2 [17 C.F.R. §§

240.13b2-1, 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

71. The Commission realleges and incorporates by reference Paragraphs 1 through 60 above.

72. Clarent filed with the Commission an annual report for the year ended December 31, 2000

and 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



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

240.13a-1, 240.13a-13].

73. Chiang 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 C.F.R.

§§ 240.12b-20, 240.13a-1, 240.13a-13], in violation of Section 20(e) of the Exchange Act [15 U.S.C. §

78t(e)].

74. Chiang 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 13a-13 thereunder [17

C.F.R. §§ 240.12b-20, 240.13a-1 240.13a-13].

FIFTH CLAIM FOR RELIEF

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

75. The Commission realleges and incorporates by reference Paragraphs 1 through 60 above.

76. 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)].

77. Chiang 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)].

78. Chiang 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 defendant Chiang 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 defendant Chiang to disgorge all ill-gotten gains received from his illegal conduct,

including prejudgment interest.



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III. Order defendant Chiang to pay civil penalties pursuant to Section 21(d) of the Exchange

Act. [15 U.S.C. § 78u].

IV. Prohibit Chiang 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 the 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

Helane L. Morrison
John S. Yun
Kathleen K. Bisaccia
Victor W. Hong

By: _____________________
       John S. Yun
Attorneys for the Plaintiff
SECURITIES AND EXCHANGE COMMISSION


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