Well, that was quickfor the RCMP’s financial fraud cops, that is. The Mounties’ Integrated Market Enforcement Team (IMET), laid criminal fraud chargestoday against former Nortel ( NT) CEO Frank Dunn and his two key financial executives, Douglas Beatty (a former CFO) and Michael Gollogly (a former controller), 466 days after the SEC filed civil fraud charges. Each former exec now faces two counts of Fraud Affecting Public Market, two counts of Falsification of books and documents, and three charges of False Prospectus, all related to the era from January 1, 2002 to June 30, 2003.
The time period is more defined than the SEC’s civil suit, which in addition to that 18-month span, also targets events in late 2000, and the second-half of 2003. Also, the IMET charges don’t include MaryAnne Pahapill, Nortel’s Assistant Controller and Vice-President of Reporting of that period, nor the four Nortel divisional vice-presidents of finance that the SEC charged late last summer(three of whom reached settlements of US$75,000 each and five-year bans on acting as a director or officer of a public company). Save for Pahapill, all the executives were fired for cause in 2004.
What’s the upshot of this? For Nortel, it looks like it has dodged any further legal slings and arrows, for now. It issued a statementtoday clarifying that it was not the target of the investigation, and that it cooperated with the RCMP. To date, it has paid: US$2.4 billion to settle class-action lawsuits; US$35 million in October to settle with the SEC over allegations of profit manipulation; and a measly $1 million last year to the Ontario Securities Commission just to cover investigation costs. But the office of the U.S. Attorney for the North District of Texas, which also contributed to the RCMP probe, is continuing its own criminal investigation, so maybe it’s not out of the woods yet.
But this is a good day for the RCMP’s fraud cops, simply for the optics of filing charges ahead of U.S. investigators (if they do at all). This case will be closely watched for IMET’s ability to bag big game, though. Canada is often regarded as having toothless market regulationthe OSC seems particularly ineptand it doesn’t get much more high-profile than former Nortel executives, and a lot is riding on these charges sticking. (The court granted defense lawyers’ requests for a publication ban on the evidence.) Investors should at least feel some vindication that these are, in fact, criminal fraud chargeseven if they really wish it was Dunn’s predecessor, John Roth, who was on trial for putting Nortel in its precarious position in the first place, eight long years ago.
Regardless, it’s a disgrace that such white-collar crime cases take so long to land in court at all. The wheels of justice certainly turn too slowly for the investors, and also the alleged perpetrators, who’ve had this investigation hanging over them for years now.
For the record, Dunn contends the accounting issues at the heart of these lawsuits were errors, not fraud. A statement from his lawyer read, “the evidence will demonstrate that Mr. Dunn acted honestly and diligently in the interests of Nortel’s shareholders and employees at all times, and that he will be acquitted of these charges.” Beatty and Gollogly also deny the allegations. Nortel is suing its three former executives to recover $12.85-million in bonuses; Beatty and Gollogly are suing Nortel for wrongful dismissal. All three face OSC hearings for alleged improper accounting practices. Lawyers are getting rich all over the place.
The former Nortel executives’ next court appearance for the criminal fraud charges is Aug. 18, in Newmarket, Ont., north of Toronto.
One final note: the National Post reported back in February that charges were “imminent”. Perhaps it is only a happy coincidence for Nortel that the positive vibes it set off last week with an upbeat analyst day had a few days to dissipate before this news surfaced. On the TSX, Nortel shares were off 3% today, a continuation of Wednesday’s 4% slide.