Securities Commissions Charge Former Nortel Execs With Fraud

Four former Nortel Networks senior executives face charges from both the United States and Canadian governments for fraudulently and repeatedly restating the company’s financials and misleading investors.

On Monday, the Securities and Exchange Commission (SEC) filed civil charges against Frank Dunn, Douglas Beatty, Michael Gollogly and MaryAnne Pahapill. Meanwhile, Canada’s Ontario Securities Commission also filed a complaint against the four and scheduled a May 1 hearing to decide, among other issues, whether the group will pay fines and be allowed to continue trading securities.

The SEC has formally probed Nortel’s accounting practices since early 2004. Former president and CEO Dunn, who also did a stint as CFO, CFO Beatty, controller Gollogly and assistant controller Pahapill all were fired in April 2004.

Dunn issued a statement Monday calling for proceedings to take place in Canada. He also said he welcomes the chance to clear his name and those of Nortel employees.

“I am looking forward to the opportunity that this open and transparent process will give for the truth to finally come out about the events of 2000 and 2003,” he said.

The SEC said its investigation is continuing.

"The fraudulent conduct at issue here was egregious and long-running,” the SEC’s Linda Thomsen, director of the enforcement division, said in a news release. “Each of the defendants betrayed Nortel's investors and their misconduct gave rise to billions of dollars in shareholder losses.”

The SEC has charged Dunn, Beatty, Gollogly and Pahapill with violating a number of securities rules. Dunn and Beatty are separately charged with violating the officer certification provisions instituted by the Sarbanes-Oxley Act.

The commission wants to impose several penalties, including permanently barring the four from working as company officers or directors and making them pay fines.

“Investors were misled for extended periods of time about the health and stability of Nortel's operations,” said Christopher Conte, an associate director of the SEC’s enforcement division. “Further, these defendants all received significant compensation, in some cases in the millions of dollars, while they were manipulating Nortel's financial results. In some cases, these individuals received such compensation only because they manipulated Nortel's financial results.”

The commissions’ announcements came just days after Nortel said it was holding off on publishing its annual report for 2006, and planned to restate financial results for the quarters between 2004 and 2006. The company cited “certain errors” related to numbers already released for 2004, 2005 and the first nine months of 2006. Executives were quick to point out that the restatements would not impact Nortel’s fourth-quarter 2006 numbers.

Nortel last year “implemented significant remedial measures and other actions to address our internal control weaknesses,” said Peter Currie, Nortel’s executive vice president and CFO. “This has resulted in a substantial reduction of control weaknesses at year end and represents a major milestone in our journey toward consistent, reliable and timely financial reporting.”

The Canada-based equipment maker has suffered years of accounting troubles and leadership disruptions. Even before the SEC started investigating Nortel, the company was reorganizing operations, getting rid of veteran leaders and bringing in new blood. The turmoil continued after Dunn, Beatty, Gollogly and Pahapill were fired, but things started smoothing out when Nortel hired Bill Owens, a former vice chairman of the U.S. Joint Chiefs of Staff, as CEO. Owens held his post for just more than a year. He left Nortel in November 2005, replaced by former Motorola president and COO Mike Zafirovski.

Since then, Nortel has announced steadily increasing revenue, although it still is recording losses in the millions of dollars. Despite its ongoing financial struggles, Nortel has worked to make a name for itself beyond the equipment space. The company last year partnered with Microsoft Corp. to develop unified communications products; teamed with IBM on IMS projects; and joined with Chinese equipment maker Huawei to form a new company.

Still, these ventures have not been enough to ward off job cuts. Nortel announced in early 2007 it will slash 2,900 jobs – except for certain sales positions – over the next two years as it works to regain its footing as a behemoth in the telecom equipment industry. Nortel also planned to reduce funding for research and development. The company’s stock prices have risen to highs not seen for months, however, reaching $28.25 per share on Monday, up from $2.91 a year ago.

Nortel Networks www.nortel.com  

Ontario Securities Commission www.osc.gov.on/ca  

SEC www.sec.gov

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