The Neverending Nortel Saga

Nortel Networks is back in the news, but no one at the Canadian telecommunications equipment maker is crowing. Four more former company officers were added as participants in a fraudulent accounting scheme that also, it just happens, netted the top executive ranks some nice additional bonuses to boot.

The company's former chief executive Frank A. Dunn, and two other top officers—former chief financial officer Douglas C. Beatty and former controller Michael J. Gollogly—were charged last March by the Securities and Exchange Commission with orchestrating a scheme to use millions in the Toronto-based company's excess reserves to shore up company earnings forecasts.

The commission broadened its caseon Wednesday to include four former vice presidents of finance for Nortel business units. They are Douglas A. Hamilton, Craig A. Johnson, James B. Kinney and Kenneth R.W. Taylor, formerly of Nortel's Optical, Wireline, Wireless and Enterprise business units, respectively. There was no immediate comment from their lawyers.

The four new defendants were charged with aiding in the scheme to manipulate earnings and fabricate Nortel's return to profitability in the first quarter of 2003. The widespread downturn that began in 2000 caused orders at the company to fall, and the company had been struggling to right itself and return to profitability.

According to the amended complaint filed in federal court in Manhattan, the defendants realized that their business units had tens of millions in excess reserves from the second half of 2002, but did not release that money as required under normal accounting principles.

Instead, the four improperly established $44 million in reserves to lower Nortel's consolidated earnings, to conform the company's bottom line to market expectations.

Then in 2003, the foursome released about $154 million in reserves in the first quarter, turning its loss into a reported profit. They repeated their action—releasing an additional $191 million in reserves for the second quarter—which made the company's results almost break even for that three-month period.

The first-quarter 2003 profitability, which Dunn claimed was due to his business model and which was as a quarter earlier than the public had expected, also meant the defendants and others got "substantial bonuses," securities regulators pointed out.

And the second quarter was counted as counted as profitable anyway by the company management, the complaint noted, "which triggered the payment of another round of bonuses."

by Elizabeth Olson