Three former Nortel Networks Corp. finance executives settled Securities and Exchange Commission fraud charges stemming from their alleged involvement in Nortel’s earnings management fraud during 2002 and 2003.
Craig A. Johnson, James B. Kinney, and Kenneth R.W. Taylor, who were the vice presidents of finance for the Wireline, Wireless, and Enterprise business units of Nortel, respectively, each consented to the commission’s allegations, without admitting to them or denying guilt. In a final judgment in the commission’s litigation, each was ordered to pay a $75,000 civil penalty.
As previously reported, the Royal Canadian Mounted Police have been actively pursuing the case, apparently targeting two finance executives with whom Johnson, Kinney, and Taylor once worked.
In addition to the terms set for Johnson this week, he was ordered to disgorge $66,845 and pay $21,186 in prejudgment interest. Kinney and Taylor each were ordered to disgorge $52,000 and each to pay prejudgment interest in the amount of $16,481.
The final judgments also bar each of the three from acting as an officer or director of any public company for five years.
As part of this settlement, Kinney also consented to the issuance of an administrative order suspending him from appearing or practicing before the commission as an accountant, with the right to apply for reinstatement after five years.
The commission’s complaint alleges that Johnson, Kinney and Taylor improperly maintained reserves during the fourth quarter of 2002, which they knew, or were reckless in not knowing, were no longer needed.
The complaint also alleges that Johnson, Kinney and Taylor, acting on the orders of former Nortel executives Frank Dunn, Douglas Beatty and Michael Gollogly, manipulated Nortel’s earnings by establishing about $37 million in unnecessary reserves during the fourth quarter of 2002 in order to suppress an unexpected profit and smooth Nortel’s consolidated financial results. They are then accused of releasing about $213 million in excess reserves into income in order to generate fictitious profits for the first and second quarters of 2003, which in turn triggered the payment of so-called “return to profitability” bonuses to Nortel’s employees and officers.
Dunn served as CFO and CEO, Beatty as CFO and controller, and Gollogly as Controller. As previously reported the Royal Canadian Mounted Police were said in February to be preparing to charge Beatty and Gollogly.
The SEC noted in the case this week that its accounting-fraud litigation is also ongoing against other former Nortel executives as well. The commission also previously announced settled enforcement proceedings against Nortel and its principal operating subsidiary, Nortel Networks Limited, in connection with an accounting fraud which ran from 2000 through 2003.