"No Tell" Nortel Settles Up With the S.E.C.

Talk about a wrong number. Nortel Networks put out a load of them in its earnings statements starting in 2000, and today settled on another—$35 million—to try to put the whole mess behind it.

The Canadian telecommunications company and its principal subsidiary agreed to pay a $35 million civil penalty to settle Securities and Exchange Commission charges that the company engaged in two fraudulent accounting schemes, the S.E.C. announced Monday.

The Toronto-based telecommunications equipment maker, which settled without admitting or denying the allegations against it, has been embroiled in a series of problems over its previous accounting practices.

The latest centered on two separate schemes in which earnings were altered to enable Nortel and its subsidiary, Nortel Networks Limited, to meet revenue and earnings guidance it had provided Wall Street in 2000, and again in 2002 and 2003, according to the complaint filed in federal court in Manhattan.

"We are pleased that we have reached final resolution in this matter," said Mike Zafirovski, Nortel's president and chief executive, in a statement on Nortel's web site.

"The settlement recognizes the extensive and proactive efforts made by Nortel's board and senior management to identify and address the accounting and internal control issues and conduct that led to the investigation."

The commission said the $35 million would be placed in a Fair Fund for distribution to affected shareholders. In addition, the company has pledged not to repeat previous financial machinations and to provide regulators with quarterly written reports detailing its progress in straightening up its revenue recognition procedures.

In the accounting scheme that began in October 2000, Nortel allegedly accelerated its revenue recognition policies to make it appear that, despite a falloff in the telecommunications industry orders, Nortel still was meeting its revenue targets for the quarter and for the year. The company is alleged to have inflated the 2000 revenues by about $1.4 billion.

The complaint also alleged that Nortel had improperly withheld millions of dollars in reserves in 2002 to lower Nortel's earnings to make its bottom line conform with market expectations. Then in 2003, some $500 million in reserves were released to boost Nortel's earnings and push it into profitability.

As a result of this manufactured success, senior executives were paid tens of millions of dollars in "return-to-profitability" bonuses.

A half-dozen former company officers—including former chief executive Frank A. Dunn, former finance chief Douglas Beatty, former controller Michael Gollogly, and former assistant controller MaryAnne Pahapill—have been charged for participating in the same 2003 scheme that netted them handsome bonuses.

by Elizabeth Olson