TORONTO – Three former Nortel executives accused of orchestrating a widespread multimillion-dollar fraud will learn their fate Monday, nearly a year after one of the largest criminal trials in Canada’s corporate history began.
Ontario Superior Court Justice Frank Marrocco is set to rule on whether ex-CEO Frank Dunn, ex-CFO Douglas Beatty and ex-controller Michael Gollogly manipulated financial statements at Nortel Networks Corp., between 2002 to 2003.
The men, who each face two counts of fraud, are accused of participating in a book-cooking scheme designed to trigger $12.8 million in bonuses and stocks for themselves at the once powerful Canadian technology giant.
The accused, who were fired in 2004, have all pleaded not guilty to the charges.
If convicted, each could face up to 10 years in prison.
Justice Marrocco was the lead prosecutor in the Bre-X Securities case — the largest corporate fraud case in Canadian history — and his verdict will send a message through both legal and financial circles, says one expert observer.
Darren Henderson, an assistant professor of managerial accounting and control at Richard Ivey School of Business at Western University, says that since the fall of Nortel, securities regulations have been tightened — particularly to ensure that top-ranking executives at major corporations are held more accountable when signing off on financial statements.
Despite this, Canada is still seen as soft on white-collar crimes, especially when compared to the stiff sentences handed out in the U.S. during the Enron scandal.
“When you look at white collar crime, there is always going to be incentives for manipulating financial statements,” he said.
“There is a direct financial incentive of increasing the value of your sales, getting a bigger bonus or keeping your job. And what has to counteract that is a disincentive or deterrent from the perspective of potential litigation and potential to go to prison.”
At its height, the Ottawa-based firm employed more than 90,000 workers worldwide and was worth nearly $300 billion. During the technology boom in 1999-2000, Nortel was one of Canada’s most valuable companies, with its shares peaking at $124.50.
In the years that followed the accounting scandal, the company’s shares nosedived to penny-stock status amid falling sales, large debts, and a gamut of legal issues.
In 2009, Nortel filed for bankruptcy in North America and Europe, shedding thousands of jobs.
Since then, it has sold its remaining businesses piecemeal to various buyers for more than to US$7.8 billion, one of largest asset sales in Canadian history.
At trial, crown prosecutors alleged that Dunn, Beatty and Gollogly were complicit in releasing accruals — money set aside to cover future liabilities — onto Nortel’s balance sheets during quarters that needed to show the beleaguered telecom company was turning a profit when it wasn’t.
The Crown argued that these decisions by the accused, which were kept from the board of directors and the firm’s investors, generated return-to-profitability bonuses for themselves even though the company was in the red.
The defence says there is no evidence that the accused were involved in a conspiracy with countless accredited accountants from Nortel and outside auditors Deloitte & Touche.
Dunn’s lawyer also told the court that as CEO, his client approved the accounting at the telecom equipment maker but should not be held responsible if the figures given to him were inaccurate.
At the time, Dunn was preoccupied with trying to save the company and trusted that the balance sheets were correct when he approved them, argued the defence.
But the Crown charged there were instances of blatant falsification of financial records while the accused were in charge.
In one instance, the company had $189 million in excess accruals, but only released $80 million so it could boost numbers during the first quarter of that year, while holding onto the rest for use in future quarters.
It’s also alleged that a year earlier, Nortel’s own accountants were aware of $303 million in cash reserves that were held without a legitimate reason.
The verdict will come on the same day that mediation talks on the distribution of nearly $9-billion in assets from the now-bankrupt Nortel begin in Toronto.
The week-long proceedings, headed by Ontario Chief Justice Warren Winkler, are part of an effort to settle the company’s creditor claims in Canada, the U.S. and around the world.
About 100 lawyers were expected to attend the talks, including those representing Nortel pensioners, disabled former employees, bond holders, trade creditors and governments.
Last April, Winkler says one of the challenges he will be facing in analyzing the proposals will be that the claims are greater than the company’s residual assets.
Two other efforts to mediate settlements have previously failed.