Former executives of Nortel Networks operated a “cookie jar” of funds used to tailor the network equipment maker’s profits and losses so they could qualify for “lucrative” cash and stock bonuses, a prosecutor has alleged.
Crown attorney Robert Hubbard made the accusation Monday as the fraud trial against former Nortel CEO Frank Dunn, CFO Douglas Beatty and controller Michael Gollogly finally opened in Toronto, three and a half years after they were charged.
The trio pleaded not guilty to two counts of fraud committed between Jan. 1, 2002 and April, 2004 before a standing room courtroom filled with reporters and former Nortel shareholders and employees.
In some cases the set aside funds were used to turn what would have been a pro forma (or unofficial) profit into a loss, Hubbard said, to meet the terms of the executive bonus plan.
The funds were accrued liabilities, certain items (such as possible costs in a lawsuit) that have to be allocated to a corporate balance sheet as under Generally Accepted Accounting Principles (GAAP). Eventually the provisions are released to the profit and loss statement, which can increase or decrease a company’s revenue.
GAAP rules are firm, Hubbard said he will show, in how these accruals are to be calculated and recorded. In fact, he called them “accounting 101.”
The accused, he stressed, are accountants. “They understood accounting 101,” he said. They also understood, he added, that Nortel’s profitability could only be achieved through the improper release of hundreds of millions of dollars on the company’s quarterly financials.
In particular, Hubbard said, he will show that some $216 million of $731 million in accruals in 2003 put on the books were in excess of what GAAP allows.
As he said in a pre-trial hearing last week, Hubbard acknowledged that the accused didn’t create the accrual pool scheme, but during the period of the charges “they’re the ones controlling it.”
“This case is not about accounting,” the prosecutor said, but the deliberate misrepresentation of the financial documents of Nortel.
Hubbard, who will continue his opening statement on Tuesday, will call 28 witnesses, including former Nortel audit committee chair John Cleghorn.
Most of them, however, will be people who worked on Nortel’s books. Some of these witnesses “could be accomplices” to the alleged fraud, Hubbard warned Justice Frank Marrocco. But, he added, that doesn’t undermine the responsibilities of the accused.
Much of the trial is expected to concern how Nortel and its auditors applied GAAP accounting rules for the compilation of quarterly financial statements. The defence signaled last week at a pre-trial hearing that it will argue the rules have some elasticity.
The trial is being held in a high-ceiling courtroom in a downtown courthouse.
There are so many documents that the prosecution has set up a wired local area network to display electronic copies of what is being referred to on desktop monitors for the judge and defence lawyers.
For others in the room, there are also two large screen monitors that face the public gallery.
Before the trial started, Justice Marrocco dismissed a defence demand that Hubbard add more details to the charges to expressly identify which actions of the accused were fraudulant. However, the accused have known since their dismissalthat their management of Nortel’s earnings during the four years cited in the charges is at the heart of not only these criminal charges but also regulatory procedings in the U.S. and Canada. “Any other conclusion is unrealistic,” the judge said.