Nortel aimed for ‘integrity’

Profits due to cost-cutting, not release of some accruals, defence says

Frank Dunn, former chief of Nortel Networks Corp, was steadfast in his pursuit to get the telecom-equipment giant back to profitability as quickly as possible a decade ago, but solely through ethical means, defence lawyers told an Ontario Superior Court of Justice trial Wednesday.

“Nothing could be more urgent for the company and its employees than a return to profitability,” the executive said in an email to Nortel’s 36,000 workers in the fall of 2002.

The goal was for everyone in the organization to move past the turmoil of heavy job losses and restruc- turing in recent periods and redeem the century-old firm in the eyes of investors and its global network of customers.

Dunn, who stands accused by the Crown of two counts of fraud for earnings manipulation, stressed to all to, “model integrity in everything we do.”

The character-building exercise from lead defence lawyer David Porter portrayed Nortel’s former CEO as deeply devoted to turning around Nortel, which was in crisis after the dot-com crash.

Revenues were weakening as were operating profits. The dive in profit- ability was an “overhang” that had to be rid of, according to documents detailing conversations Dunn had at the time.

Through eight days here, the Crown has alleged Dunn, alongside former CFO Douglas Beatty and former controller Michael Gollogly, rigged Nortel’s income statements to artificially swing the company back into the black in 2003.

More than $70 million in bonuses for senior executives would be triggered, as a result, $12 million of which was collected by the accused combined.

The fraud is predicated on what the Crown believes to be the illegal release of unused credit reserves on Nortel’s books into quarterly earnings.

The provisions were drawn from a “cookie jar” totalling $5.2 billion amassed over the course of the firm’s downsizing.

During cross-examination of the Crown’s first witness Wednesday, Dunn’s defence suggested aggressive cost-cutting in the periods in question was by far the biggest contributor to Nortel reporting successive quarters of positive earnings in 2003, not the release of some accruals.

“Even though revenue had de- clined substantially … the earnings had become a (operating) profit of $48 million by June 30, 2003,” Porter said. This “continued reduction of costs” saw cumulative operating profit climb to $81 million through the third-quarter of 2003, the court was told.

“What these figures demonstrate” is that efforts to wind down excess expenses “flowed directly through to the bottom line.”

Porter suggested the evidence provided to Justice Frank Marrocco was a more fulsome picture of the “true financial performance of the company” than what the Crown put forth.

All three men deny the charges.