## Facts

- Motorola, Inc., a public company, sold digital cable television set-top boxes to Adelphia Communications Corporation under an existing purchase relationship.
- In fall 2000, Adelphia proposed a “marketing support” arrangement under which Adelphia would effectively pre-fund Motorola’s purported marketing-support payments through a retroactive, offsetting increase in set-top box prices.
- The parties finalized the arrangement in March 2001 but backdated it to a prior fiscal year and applied price increases retroactively to boxes already sold, as well as to future deliveries under the existing contract.
- Adelphia paid Motorola amounts characterized as funding Motorola’s future marketing-support obligations; Motorola then returned those amounts to Adelphia as “marketing support payments,” creating a round-trip of cash.
- The agreement specified no actual marketing, and no marketing was performed under the arrangement.
- The structure had little to no net economic effect on Motorola because the increased box prices were offset by the marketing-support payments returned to Adelphia.
- Adelphia used the marketing-support receipts to reduce operating expenses (increasing EBITDA) while treating the increased set-top box prices as capital expenditures, thereby inflating reported EBITDA for 2000 and 2001.

## Issues

1. Whether Motorola’s participation in a backdated, retroactive “marketing support” arrangement with round-trip cash flows caused or contributed to violations of the federal securities laws addressed through an SEC cease-and-desist proceeding.
2. Whether a public company’s engagement in sham or non-substantive support arrangements, structured to obscure economic reality, implicates Exchange Act books-and-records and internal controls obligations.
3. Whether the SEC may impose cease-and-desist relief under Exchange Act § 21C based on settled findings that the conduct enabled another issuer’s accounting misstatements.

## Decision

- The SEC instituted a public administrative cease-and-desist proceeding against Motorola under Exchange Act § 21C.
- Motorola submitted an Offer of Settlement, which the SEC accepted, with Motorola neither admitting nor denying the findings (except as to jurisdiction).
- The SEC found that the “marketing support” arrangement functioned as a round-trip of cash, lacked genuine marketing substance, and enabled Adelphia to falsify earnings through improper accounting treatment.
- The SEC imposed a cease-and-desist order directing Motorola to cease and desist from committing or causing violations (and future violations) of the relevant Exchange Act provisions implicated by the conduct.

## Legal Principles

- In SEC administrative proceedings under Exchange Act § 21C, the Commission may impose cease-and-desist relief when a respondent’s conduct is found to have caused or contributed to securities-law violations.
- Transaction labels do not control; the SEC evaluates economic substance, including whether purported support payments reflect genuine services or function as circular cash flows.
- Backdating and retroactive repricing that distort the timing or characterization of payments can indicate a transaction structured to affect reported financial results rather than to reflect bona fide business activity.
- Public companies must maintain accurate books and records and adequate internal controls and may face enforcement action for participating in arrangements that obscure economic reality or facilitate another issuer’s misleading financial reporting.

## Conclusion

The SEC concluded, on a settled record, that Motorola participated in a backdated round-trip “marketing support” arrangement with no real marketing purpose that enabled Adelphia’s improper EBITDA inflation, and the Commission ordered Motorola to cease and desist under Exchange Act § 21C.


In re Motorola, Inc., Exchange Act Release No. 55725, Accounting & Auditing Enforcement Release No. 2607 (May 8, 2007)