Top for­mer Nor­tel ex­ecs charged with fraud

Ac­count­ing mess blocks firm’s progress

Ottawa Citizen - - News - BY BERT HILL

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.

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