Nortel settles SEC fraud case for $35M

The same day that the U.S. Securities and Exchange Commission filed a lawsuit alleging accounting fraud at Nortel Networks, the equipment vendor agreed to settle the case for $35 million, the SEC said today.

The SEC claimed in court today that Nortel used fraudulent accounting between 2000 and 2003 to close the gap between its financial results and Wall Street’s expectations. In settling the case, Nortel neither confirmed nor denied the SEC’s accusations.

"Since [2003], under new leadership, Nortel has undertaken significant efforts to address the wrongdoing, remedy the harm and implement a remediation plan to prevent recurrence of the misconduct," Linda Thomsen, director of the SEC’s Enforcement Division, said in a prepared statement.

According to the SEC, Nortel inflated its fiscal year 2000 revenue by $1.4 billion in order to meet publicly announced revenue targets and artificially deflated the numbers when they overshot targets. By the time the company announced its 2002 annual financial results, Nortel had culled over $400 million in excess reserves. And in the first half of 2003, it improperly released $500 million in reserves to “fabricate a return to profitability.” Those actions triggered the payment of tens of millions of dollars in executive bonuses, the SEC said.

The SEC intends to distribute the $35 million to affected Nortel shareholders, it said.

This spring, the SEC also filed civil fraud against former CEO Frank Dunn, former Chief Financial Officer Douglas Beatty, former controller Michael Gollogly and former assistant controller MaryAnne Pahapill. All four were terminated in April 2004.