U.S. and Canadian stock regulators filed fraud charges on Monday against several former executives of Nortel Networks Corp., accusing them of twisting accounting practices to make it seem that the company was meeting Wall Street expectations.
The U.S. Securities and Exchange Commission charged Frank Dunn, Nortel’s former CEO and CFO, Douglas Beatty, the former CFO and controller, Michael Gollogly, the former controller and MaryAnne Pahapill, the former assistant controller.
Meanwhile, the Ontario Securities Commission announced it would hold a hearing on May 1 to consider sanctions against Dunn, Beatty and Gollogly.
The charges come as Nortel struggles to recover from the scandal. The company had fired or accepted resignations from all four managers by 2005, but is still repairing the damage to its financial records and its reputation. On March 1, Nortel said it would post yet another round of financial restatements and delay the filing of its 2006 annual report.
The defendants all disregarded accounting practices and disclosure requirements in their effort to manipulate the books at the Canadian telecommunications equipment maker, the SEC said in charges filed in the U.S. District Court for the Southern District of New York.
“The fraudulent conduct at issue here was egregious and long-running,” said Linda Thomsen, director of the SEC’s division of enforcement, in a statement. “Each of the defendants betrayed Nortel’s investors and their misconduct gave rise to billions of dollars in shareholder losses.”
According to the SEC, between late 2000 and January 2001, Dunn, Beatty and Pahapill changed Nortel’s revenue-recognition policies so they could appear to meet financial forecasts. And from July 2002 through June 2003, Dunn, Beatty and Gollogly created an illegal pool of reserve funds they used to fabricate profits, meet earnings targets and award bonuses.
Then, in the second half of 2003, Dunn and Beatty tried to cover their tracks by explaining the company’s US$948 million restatement as an accounting error caused by internal control mistakes, the SEC said. That restatement was actually caused by the secret fund.
Although he did not address the charges, one of the defendants quickly denounced the SEC for charging executives of a company outside U.S. borders.
“I am disappointed that, after three years, the [SEC] has brought charges on the same day in respect of the same matter as the Ontario Securities Commission,” said Dunn in a statement. “I think it would have been appropriate, under the circumstances, if the authorities in the United States had deferred to the Ontario Securities Commission in what is really a Canadian matter, and had acknowledged that the Canadian authorities are fully capable of addressing these important issues.”
However, the SEC insisted that it had jurisdiction since Nortel’s stock trades on U.S. exchanges.
“The action we take today sends a strong message that officers of U.S.-filing foreign corporations will be held to the same standards of accountability that are required of all participants in the U.S. financial markets,” Thomsen said.
