SEC charges ex-Nortel executives

The SEC brought fraud charges on Monday against four former executives of Nortel Networks
  • Ben Ames (IDG News Service)
  • 13 March, 2007 07:55

US and Canadian stock regulators have filed fraud charges against several former executives of Nortel Networks, accusing them of twisting accounting practices to make it seem that the company was meeting Wall Street expectations.

The US Securities and Exchange Commission charged Nortel's former CEO and CFO, Frank Dunn, the former CFO and controller, Douglas Beatty, the former controller, Michael Gollogly, and the former assistant controller, MaryAnne Pahapill.

Meanwhile, the Ontario Securities Commission announced it would hold a hearing on May 1 to consider sanctions against Dunn, Beatty and Gollogly.

The charges come as Nortel struggles to recover from the scandal. The company had fired or accepted resignations from all four managers by 2005, but is still repairing the damage to its financial records and its reputation. On March 1, Nortel said it would post yet another round of financial restatements and delay the filing of its 2006 annual report.

Nortel had no reaction to the new charges. "We have no comment on any proceedings against former officers or employees of the company. The company continues to cooperate fully with the regulatory authorities," spokesperson, Jamie Moody, said in an email.

The defendants all disregarded accounting practices and disclosure requirements in their effort to manipulate the books at the Canadian telecommunications equipment maker, the SEC said in charges filed in the US District Court for the Southern District of New York.

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

According to the SEC, between late 2000 and January 2001, Dunn, Beatty and Pahapill changed Nortel's revenue-recognition policies so they could appear to meet financial forecasts. And from July 2002 through June 2003, Dunn, Beatty and Gollogly created an illegal pool of reserve funds they used to fabricate profits, meet earnings targets and award bonuses.

Then, in the second half of 2003, Dunn and Beatty tried to cover their tracks by explaining the company's $US948 million restatement as an accounting error caused by internal control mistakes, the SEC said. That restatement was actually caused by the secret fund.

Although he did not address the charges, one of the defendants quickly denounced the SEC for charging executives of a company outside US borders.

"I am disappointed that, after three years, the [SEC] has brought charges on the same day in respect of the same matter as the Ontario Securities Commission," Dunn said in a statement. "I think it would have been appropriate, under the circumstances, if the authorities in the United States had deferred to the Ontario Securities Commission in what is really a Canadian matter, and had acknowledged that the Canadian authorities are fully capable of addressing these important issues."

However, the SEC insisted that it had jurisdiction since Nortel's stock trades on US exchanges.

"The action we take today sends a strong message that officers of US-filing foreign corporations will be held to the same standards of accountability that are required of all participants in the US financial markets," Thomsen said.