Almost exactly one year ago, three former Nortel Networks executives stood in a Toronto courtroom and pleaded not guilty to charges they defrauded the struggling company between 2002 and 2004.
Today, four years to the day after Nortel filed for bankruptcy protection, Ontario Superior Court Judge Frank Marrocco found former CEO Frank Dunn, chief financial officer Douglas Beatty and corporate controller Michael Gollogly not guilty of fraud by making allegedly false and misleading statements in Nortel’s books, financial statements, press releases and related documents.
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Immediately after the decision, the three accused joyously embraced their lawyers, families and friends in the courtroom.
Dunn refused to speak to reporters, but his lawyer, David Porter, said the decision was a complete vindication. Sharon Lavine, one of Gollogly legal team, said he is delighted with the verdict. “It is a demonstration that he acted properly with honesty and integrity as controller of Nortel.”
The judge’s decision was 141 pages long, but he read a condensed version that took just under a half hour to read. In it, he concentrated on whether Nortel had a pro forma profit in the fourth quarter of 2002, which was allegedly manupulated into a loss by the accused through the release of accrued liabilities. The prosecution alleged this was done because Nortel had returned to profitability faster than executives had predicted to investors.
But the judge concluded after reviewing the evidence there was no profit in that quarter. Therefore, the results were not misrepresented. There was an allegation that the accused improperly released $80 million in liabilities in the next quarter, the first quarter of 2003. But, the judge noted, Nortel’s outside accounting firm, Deloitte & Touche, wrote in a memo at the time that the release of that money was not considered material to the financial results because Nortel would have had a profit anyway in that quarter.
The judge said he found the memo “persuasive,” and therefore, that the $80 million had been properly released.
Although the judge found entirely in favour of the defence, he did say that because there were disputes in the facts, it was entirely appropriate that the matter come to trial.
Crown prosecutor Robert Hubbard couldn’t say if he will appeal, explaining he first has to read the full decision.
During the trial he alleged the motive of the accused was to manipulate quarterly financial results by playing with hundreds of millions of dollars in reserves so they and other Nortel officials would qualify for performance bonuses for bringing the company back to profitability.
Hubbard said the three accused between them got $12.8 million in bonuses. As a result, Hubbard alleged, they defrauded the public shareholders, and Nortel.
When the positive quarterly results were issued, Nortel stock rose. Ultimately, however, the company had to restate its financial results several times, undermining investor and customer confidence.
In April, 2004 Dunn, Beatty and Gollogly were fired. Shares dropped 30 per cent.
At the outset of the trial Hubbard said he would prove they controlled a “cookie jar” of accrued funds Nortel had set up years before that could be dipped in to, to tailor the network equipment maker’s profits and losses so they could qualify for lucrative cash and stock bonuses.
Hubbard used the same phrase in his closing argument after months of testimony.
The funds were accrued liabilities, certain items (such as possible costs in a lawsuit) that have to be allocated to a corporate balance sheet under Generally Accepted Accounting Principles (GAAP). Eventually the provisions are released to the profit and loss statement, which can increase or decrease a company’s revenue.
But the three accused, who didn’t testify, insisted through their lawyers that all financial statements were approved by Nortel’s accounting firm, Deloitte and Touche.
“The fundamental fact which the Crown’s case cannot overcome is that the evidence clearly established that, when accounting entries were made at Nortel, and the financial statements were prepared, they were done so honestly, with support, and in accordance with the accounting principles considered to be applicable,” the defence lawyers said in a combined statement to the judge. “There was no dishonesty in the preparation of the financial statements by anyone, and in particular, by none of the accused. There were no dishonest acts.”
Dunn’s lawyer, David Porter, told the judge that “there is no evidence from any witness that Mr. Dunn ever asked anyone to do anything dishonest, or to create false financial statements.
“There is no evidence from anyone that Mr. Dunn ever asked anyone to hide relevant documentation from the auditors, or to engage in any dishonesty in relation to the auditors. There is no evidence that Mr. Dunn ever asked or instructed anyone to create false or misleading documentation.”
Dunn disagreed sometimes with staff, Porter said, but “there was not a single instance in which Mr. Dunn was shown to have interfered with the accounting judgment of Nortel finance personnel, overruled the accounting judgment of Nortel finance personnel, or ignored the advice of D&T on any issue.”
One sensitive period involved the report of fourth quarter 2002 financials. Dunn, the prosecution pointed out, had promised investors Nortel would return to profitability in 2003.
But the initial financial results for the quarter were good – too good, the prosecution alleged, for it would have shown Nortel shifting into the black faster than expected. So, Hubbard alleged, reserves were added so the profit for that quarter turned into a loss.
Not so, Porter argued in his final summation. In late January, 2003 Dunn had reported to the chairman of Nortel’s board that over $100 million in accrued reserves had to be included in the Q4 2002 results, changing “a small profit into a small loss. That disclosure “is completely inconsistent with the allegation that he dishonestly and deliberately created a false loss for Q4 2002 by the manipulation of accruals,” Porter told the judge.
