SEC charges ex-Nortel execs with fraud

The U.S. Securities and Exchange Commission charged four former Nortel Networks executives with accounting fraud today.

Former Chief Executive Officer Frank Dunn, former Chief Financial Officer Doug Beatty, former controller Michael Gollogly and assistant controller MaryAnne Pahapill “repeatedly” engaged in accounting fraud between September 2000 and January 2004, the SEC alleged in civil charges filed in a federal district court in New York.

All four were terminated by Nortel in the spring of 2004. Two years later, Dunn sued Nortel for wrongful termination. Nortel sued Dunn, Beatty and Gollogly last year.

“From late 2000 through January 2001, Dunn, Beatty and Pahapill altered Nortel's revenue recognition policies to accelerate revenue as needed to meet forecasts,” the SEC said in a statement issued today. “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.”

"The fraudulent conduct at issue here was egregious and long-running," said Linda Thomsen, director of the SEC’s enforcement division. “Each of the defendants betrayed Nortel's investors, and their misconduct gave rise to billions of dollars in shareholder losses. The action we take today sends a strong message that officers of U.S.-filing foreign corporations will be held to the same standards of accountability that are required of all participants in the U.S. financial markets."

According to the SEC, the problems began in 2000, when Beatty and Pahapill began violating U.S. generally accepted accounting principles in order to shift revenue forward to meet publicly specified targets. After they shifted more revenue than was needed for that purpose, they reversed the process, ultimately boosting Nortel’s fiscal 2000 revenue by over $1 billion.

In 2002, the SEC said, Dunn, Beatty and Gollogly discovered $300 million in excess reserves in Nortel’s books. Instead of reporting it as required, they hid it, later forcing Nortel to report a loss rather than a profit in 2002, thereby avoiding the triggering of executive bonuses earlier than Dunn had predicted.

In early 2003, Dunn, Beatty and Gollogly released at least $490 million in hidden reserves to boost earnings, triggering the payment of executive bonuses and allowing Dunn to claim profitability a quarter ahead of schedule, the SEC said.

In the second half of 2003, the SEC alleged, Dunn and Beatty misled investors by claiming that a major financial restatement in 2003 (the first of four in as many years) was caused by internal control mistakes. “In reality, Nortel's first restatement was necessitated by the intentional improper handling of reserves which occurred throughout Nortel for several years,” the SEC said, “and the first restatement effort was sharply limited to avoid uncovering Dunn, Beatty and Gollogly's earnings management activities.”