SEC, Canada Charge Ex-Nortel Execs With Fraud

Nortel Networks  is taking a pretty severe beating on both sides of the U.S./Canada border.

The U.S. Securities and Exchange Commission charge the networking giant and several former executives with accounting fraud, and the Ontario Securities Commission announced a hearing into allegations of financial misconduct and negligence.

The SEC formally charged Frank Dunn, Nortel’s former CEO and CFO, Douglas Beatty, the former CFO and controller, Michael Gollogly, the former controller, and MaryAnne Pahapill, the former assistant controller, for their alleged roles in manipulating the company’s accounting policies.

According to the Commission’s complaint, from late 2000 through January 2001, Dunn, Beatty and Pahapill altered Nortel’s revenue recognition policies to accelerate revenue as needed to meet forecasts. This suit claims this resulted in over $1 billion in extra revenue.

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.

This case is entirely a civil one and does not carry criminal penalties. The exact dollar figure on these penalties is up to the court, according to Christopher R. Conte, associate director of the SEC. While the statute references about $100,000 per violation, there’s a lot more variables involved.

“In terms of civil monetary penalties, it’s hard to put a number on that,” Conte told internetnews.com. “Separate from the penalties, we’re seeking disgorgement from ill gotten gains, monies paid to [the defandants] as a result of misconduct they engaged in, and office and director bars to prohibit them from serving as officer or director for a company that files with us.”

Meanwhile, the Ontario Securities Commission said its own investigation into the former executives would begin on May 1.

The charges come as Nortel continues to struggle from the scandal, financially and image-wise. The four defendants were fired or resigned and a new CEO hired in 2005. The company settled a class action suit for a painful sum of $2.5 billion in February 2006, which caused it to post a loss for fiscal 2005.

It finally managed to get all of its books restated by mid-2006 but still saw losses.

Conte would not speak to any criminal investigations or penalties for Nortel. He said the company made disclosures to various accounting issues it had publicly identified, but would not say how the SEC learned of it.

The SEC is working with its Canadian counterparts.

“I would anticipate talking to them and they may be talking to us about how our matter is developing,” said Conte, but he added that he expected the cases to develop independently.