Accounting & Tax

SEC Takes Aim at Ex-Nortel Finance Execs

After charging the CEO, CFO, controller, and assistant controller with financial fraud at Nortel, the SEC now says they had help from four vice pre...
Tim ReasonSeptember 12, 2007

In a move that doubles the number of defendants facing charges of financial fraud at Nortel, the Securities and Exchange Commission Wednesday accused four vice presidents of finance at four different business units of helping the CEO, CFO, and controller use reserve accounts to fraudulently manage earnings.

The SEC added charges against Douglas A. Hamilton, Craig A. Johnson, James B. Kinney and Kenneth R.W. Taylor, the former vice presidents of finance for Nortel’s Optical, Wireline, Wireless and Enterprise business units, respectively, to SEC v. Dunn. Originally brought last March, that case first charged CEO Frank Dunn, CFO Douglas Beatty and controller Michael Gollogly with directing the earnings management fraud, and also charged Dunn and Beatty in colluding with assistant controller Maryanne E. Pahapill to accelerate revenue recognition.

“Today’s action shows that the Commission will hold accountable not only wrongdoers in the corporate suite, but others whose actions make a company-wide financial fraud possible,” said Linda Thomsen, Director of the Commission’s Division of Enforcement.

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Attorneys for Johnson, Kinney, and Taylor did not return phone calls from CFO.com requesting comment. In a voice mail left after hours at CFO.com, Hamilton’s attorney, Don Buchwald, of the New York firm Kelley Drye & Warren LLP, said “I haven’t read the complaint yet, but I can say that I think it was wholly inappropriate for the SEC to have included Mr. Hamilton as a defendant.”

The new charges allege that the finance vice presidents all knew that their business units held tens of millions in excess reserves, which they should have released in accordance with GAAP, but instead held in order to manage earnings. In addition, the SEC alleges that the four vice presidents, acting on orders from Dunn, Beatty, and Gollogly, established additional excess reserves of $44 million, lowering Nortel’s consolidated earnings. “Their efforts helped erase Nortel’s pro forma profit for the fourth quarter of 2002 and caused it to report a loss instead,” the SEC said in its complaint.

In the first and second quarter of 2003, the SEC alleges, the four vice presidents — acting on orders from Dunn, Beatty, and Gollogly — released a total of $345 million in reserves as part of a larger, company-wide release of $500 million in excess reserves intended to inflate earnings and pay bonuses. “These efforts turned Nortel’s first quarter 2003 loss into a reported profit under U.S. GAAP, largely erased Nortel’s second quarter loss and generated a pro forma profit in the second quarter. of finance to release approximately,” the SEC alleges.

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