Crown zeros in on former Nortel CEO
Former financial director testifies Dunn discussed bonus payments despite company losses
Drawing on a conversation between Frank Dunn and a senior finance employee in the spring of 2003, Crown prosecutors attempted Monday to place the former Nortel Networks Corp. chief at the centre of an alleged fraud.
The gist of the discussion, between Dunn and former director of financial planning and analysis Brian Harrison, was about the unseemly “optics” of bonus payments being granted to top executives while the company was about to report a net loss, Harrison said.
“Having a public loss and paying bonuses would be an awkward thing,” the Crown’s first witness told the Ontario Superior Court of Justice trial, which resumed after a week’s hiatus. The bonuses were triggered when Nortel hit internal “pro forma” income targets, yet the company was about to post a loss based on generally accepted accounting practices (GAAP).
What followed the encounter with Dunn was the application or “release” of tens of millions of dollars in unused liabilities from Nortel’s balance sheet onto the income statement, swinging the company from a GAAP loss to a $54-million profit in the period.
The release of the accruals constituted illegal manipulation of Nortel’s books, the Crown alleges. Dunn, former CFO Douglas Beatty and former corporate controller Michael Gollogly each face two counts of fraud.
On TV screens in the courtroom, a series of forecasts drafted by Harrison, some hand-written, were brought up by lead prosecutor Robert Hubbard to illustrate how the former finance worker — at the behest of senior management — shifted accruals between quarters to hit earnings targets.
Hubbard said many of these “road map” documents were kept from the board of directors and external auditors for Nortel, once Canada’s largest company by market cap and world leader in the design and manufacturing of phone and Internet systems.
The Crown alleges the three accused collected more than $12 million combined in “return to profitability” bonuses at a time when revenues and operating losses continued to deteriorate.
In total, more than $300 million in accrued reserves was used to offset operating losses in the second quarter of 2003.
Most of the reserves flowed from Nortel’s four main operating units of wireless, wireline, optical and enterprise.
The divisions had been forced to book hundreds of millions in such provisions in earlier periods as each slashed head count and prepared to cover a gamut of liabilities such as lawsuits related to the significant restructuring.
Yet some $80 million came out of Nortel’s corporate head office at the time, the Crown said, a division in any firm that generally doesn’t contribute to revenues or earnings — another example of malfeasance Hubbard alleged to Justice Frank Marrocco.
In a brief reproach in defence of the use of these “non-op” provisions, Harrison said, “there’s some flexibility there about how you can treat these (items).”
Cross examination is to take place later this week. Dunn’s lawyers may look to argue that the practice of applying accruals to earnings doesn’t constitute fraud — and in some circumstances is a common accounting method. The defence team also argued in its opening that Nortel’s auditors, Deloitte & Touche LLC, signed off on Nortel’s financial statements.
Nortel’s board fired the company’s three most senior executives in April 2004.
Each has plead not guilty to all charges.