Accounting & Tax

SEC Rings Up Nortel Execs for Fraud

Commission charges former senior members of the company's finance team; alleges that in some cases they received significant compensation ''only be...
Stephen TaubMarch 12, 2007

The Securities and Exchange Commission has filed civil fraud charges against four former executives of Nortel Networks for a widespread accounting fraud designed to bridge the gap between internal targets and Wall Street expectations on the one hand, and the company’s true performance on the other.

The commission charges, filed in U.S. District Court for the Southern District of New York, names four Canadian citizens who once worked for the Toronto-based telecom: chief executive officer Frank A. Dunn (who also previously served as chief financial officer), CFO Douglas C. Beatty, controller Michael J. Gollogly, and assistant controller and vice president of corporate reporting MaryAnne E. Pahapill.

According to the SEC, between September 2000 and January 2004, the four individuals violated or aided and abetted violations of the antifraud, reporting, books and records, internal controls, and lying to auditors provisions of the federal securities laws. Dunn and Beatty also allegedly violated the Sarbanes-Oxley officer certification provisions.

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The commission is seeking a permanent injunction, civil monetary penalties, officer and director bars, and disgorgement with prejudgment interest against all four defendants.

“The fraudulent conduct at issue here was egregious and long-running. Each of the defendants betrayed Nortel’s investors and their misconduct gave rise to billions of dollars in shareholder losses,” said Linda Thomsen, director of the SEC’s Division of Enforcement, in a statement. “The action we take today sends a strong message that officers of U.S.-filing foreign corporations will be held to the same standards of accountability that are required of all participants in the U.S. financial markets.”

In a statement, associate director Christopher Conte added that the four individuals disregarded accounting principles and disclosure requirements and that “investors were misled for extended periods of time about the health and stability of Nortel’s operations.” All four individuals received significant compensation while they were “manipulating” Nortel’s financial results — in some cases, “only because they manipulated Nortel’s financial results,” he added.

Specifically, alleged the SEC, from late 2000 through January 2001, Dunn, Beatty, and Pahapill altered Nortel’s revenue recognition policies in violation of U.S. generally accepted accounting principles and accelerated revenue to meet forecasts. From at least July 2002 through June 2003, Dunn, Beatty, and Gollogly improperly established, maintained, and released reserves to meet earnings targets, fabricate profits, and pay performance-related bonuses, the commission also charged.

These actions improperly boosted Nortel’s fourth-quarter and fiscal 2000 revenue by more than $1 billion, according to the SEC.

In November 2002, when Dunn, Beatty, and Gollogly learned that Nortel was carrying over $300 million in excess reserves, they did not release these excess reserves into income as required under U.S. GAAP, according to the commission; allegedly, the existence of the reserves was concealed so they could be maintained for later use.