Top former Nortel execs charged with fraud
Accounting mess blocks firm’s progress
Nortel Networks chief executive Mike Zafirovski likes to say that Nortel is now a normal company and that he looks forward to the day when he will be answering reporters’ questions about how the turnaround was achieved.
“Every day, we are taking steps toward remaking Nortel into an industry powerhouse,” he told the annual general meeting last month.
But a legacy of alleged accounting irregularities keeps coming back to remind customers, investors and employees of the bad old days.
More significantly, it reminds everyone of the lasting damage of the three lost years between 2004 and 2006 as the accounting investigation dragged on and of the black cloud it still casts over the company.
Yesterday was another such day. Former chief executive Frank Dunn and two top financial associates were charged with criminal fraud for allegedly manipulating financial results in 2002 and 2003.
Nortel said in a statement that it “has not been charged and was not the target of this investigation. (The) announcement by the RCMP does not distract the company from the work ahead.”
But one of Mr. Zafirovski’s first tasks as the new chief executive in 2006 was to negotiate a $2.5-billion settlement of a huge shareholder lawsuit — the biggest in industry history.
The settlement, which is only now being paid to 88,280 successful claimants, brought its own miseries. Almost every quarter, Nortel had to adjust results to reflect the rapidly declining value of the stock in the settlement, adding to investor doubts. The total value of the deal is now just $1.3 billion.
Nortel paid $35 million last October to settle civil fraud charges by the U.S. Securities and Exchange Commission for its part in the accounting mess, and it paid $1 million to the Ontario Securities Commission.
Along the way, Nortel was regularly in the spotlight as U.S. and Canadian regulators charged Mr. Dunn and later other former financial executives with civil fraud.
Recently, three of the eight financial executives settled with the SEC, but they were relatively minor players. One junior executive responsible for the optical networking division, where most of the alleged fraud happened, did not settle.
Despite enormous and growing pressure to settle, Mr. Dunn and the other big players in the alleged fraud — former chief financial officer Douglas Beatty and former controller Michael Gollogly — are still fighting.
Adding to the uncertainty is a U.S. grand-jury probe in Dallas. It started a criminal investigation several months before the RCMP and could be considering separate criminal charges.
The best thing for Nortel would be settlements by the accused that would finally put the issue to bed.
But McCarthy Tetrault, the law firm representing Mr. Dunn, said in a statement: “We are confident that the evidence will demonstrate that Mr. Dunn acted honestly and diligently in the interests of Nortel’s shareholders and employees at all times, and that he will be acquitted of these charges.”
The refusal to settle could be a sign this case might still go to court, giving the defendants a chance to make their case that mistakes not malice were responsible.
Judged on the amount of the SEC settlement with the three junior executives, Nortel shareholders might wonder what it was all about. They paid a total of $450,000 without acknowledging guilt or innocence. Most of the amount is for interest and penalties.
They returned back-to-profitability bonuses of just $52,000 to $66,845 each — money which Nortel is suing to recover and distribute to other shareholders. In total, Nortel is seeking $13 million from Mr. Dunn and other top financial executives from their back-toprofitability bonuses — a drop in the bucket for a company that spent hundreds of millions in legal and accounting charges on the investigation.
There are other potential troubles out there. Nortel fired at least three former financial executives who have not been charged with civil or criminal fraud. They might have success suing for unfair dismissal.
Adding to the mystery is another financial executive who was charged by the SEC but not fired by Nortel. Indeed, she stuck around during the postscandal mess to help then-chief executive Bill Owens put things together again. The charges laid yesterday did not name her nor did they involve the 19992000 period when some of the most egregious financial chicanery allegedly happened.
The biggest legacy of the accounting mess is the loss of market share and a path to future growth. It left Nortel in a deep hole while competitors forged ahead, putting their operations in order after the industry bust, negotiating mergers to prepare for the future and winning a piece of a brief industry spending splurge.
They had the cash and stock resources to pick up promising startups, but Nortel did not. They bought back their stock to improve shareholder value while Nortel increased its stock float by about 15 per cent to settle the shareholder suit.
Mr. Zafirovski has made progress reducing operating costs and improving internal efficiency by airlifting former colleagues from General Electric and Motorola. With a small pop in sales, Nortel might yet string together some profitable quarters.
But the problem is the three lost years. In early 2004, when Mr. Dunn announced a “blowout” first quarter and a return to profitability, Nortel looked like the first big player to emerge from the industry crash.
Today, Nortel is stuck in a time warp. As hard as Mr. Zafirovski tries to turn the page, the past comes back to bite.
He tried to jump-start growth with big merger deals with Avaya last year and with Motorola this year. The weak value of Nortel stock and worries about regulatory and criminal actions helped kill those deals.
Though there is little evidence that layoffs lead to success, Mr. Zafirovski has been forced to continually cut operations. Like Mr. Dunn, who presided over 10 rounds of layoffs in the 2001-2004 period, he has ordered three big rounds, involving about 8,000 jobs, in 30 months on the job.
Mr. Zafirovski faces the same mantra of demands from analysts that Mr. Dunn also faced: Focus scarce resources on a handful of key growth technologies and stop trying to compete with Ericsson, Alcatel, Lucent, Nokia and Siemens across many markets.
The difference now is that most of the old competitors have combined, and Nortel is also getting squeezed by Huawei, the new giant of the industry in Asia as well as Europe, and by Cisco Systems in profitable North American markets.
CHARGED: Douglas Beatty, former chief financial officer of Nortel Networks.
CHARGED: Frank Dunn, former chief executive officer of Nortel Networks.
CHARGED: Michael Gollogly, former controller of Nortel Networks.