SEC Goes After More Former Nortel Execs

The Securities and Exchange Commission has charged four more former Nortel Networks executives in its widening investigation into past accounting practices of the telecom firm. The amended complaint in SEC v. Dunn charges 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.

The SEC’s original complaint, filed in March, charged three former corporate officers of Nortel — CEO Frank Dunn, CFO Douglas Beatty and Controller Michael Gollogly — with directing the earnings management fraud.

The case is pending in the U.S. District Court for the Southern District of New York.

The amended complaint alleges that Hamilton, Johnson, Kinney and Taylor, acting on orders from Dunn, Beatty and Gollogly, improperly established over $44 million in additional excess reserves from the second half of 2002 through January 2003 in order to lower Nortel’s consolidated earnings and bring it in line with internal and market expectations.

The complaint also charges Hamilton, Johnson, Kinney and Taylor with violating and/or aiding and abetting violations of the antifraud, reporting, books and records and internal controls provisions of the federal securities laws. The SEC seeks a permanent injunction, a civil monetary penalty, an officer and director bar, and disgorgement with prejudgment interest against each of these defendants.

In the first and second quarters of 2003, Dunn, Beatty and Gollogly directed the improper company-wide release of approximately $500 million of excess reserves specifically to inflate earnings and pay bonuses.

These efforts turned Nortel’s first-quarter 2003 loss into a reported profit under U.S. GAAP. The SEC called the efforts of Hamilton, Johnson, Kinney and Taylor “essential to creating these false results because the four vice presidents improperly released approximately $154 million in reserves in the first quarter of 2003, and approximately $191 million in reserves in the second quarter.”

In its original complaint, the SEC alleged that Dunn, Beatty and Gollogly learned the company was carrying massive amounts of excess reserves and then directed the alleged reserve manipulations to meet earnings targets, fabricate profits and pay performance-related bonuses. The complaint also alleges Dunn, Beatty and former Assistant Controller MaryAnne Pahapill altered Nortel’s revenue recognition policies from late 2000 through January 2001 to accelerate revenue to meet publicly announced revenue targets.

Current CEO Mike Zafirovski has been pushing his vision of “hyperconnectivity” and alliances with companies such as Microsoft to get Nortel back closer to its glory days of high growth.

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