Nortel Fraud Trial Punctuates a Decade of Decline

Frank Dunn joined Nortel in 1976 as a management trainee. He was appointed CFO in 1999 under John Roth and became CEO in 2001, when Roth retired.

Not so fast.

Those who assumed the sale of Nortel’s wireless patents to a group that included Apple, Microsoft, Sony Corp and Ericsson last summer was the last time the fallen star would take center stage were mistaken.

Pre-trial motions in the case of Her Majesty the Queen v. Frank A. Dunn, Douglas C. Beatty, and Michael J. Gollogly, opened today.

Former chief financial officer Douglas Beatty, former controller Michael Gollogly and former CEO Frank Dunn face seven charges, including two charges of Fraud over $5,000, three charges of falsifying public statements, and another charge of omitting key financial information from a financial record.

The trio were actually arrested in June 19, 2008 by the RCMP after the US Securities and Exchange Commission filed civil fraud charges against them and a fourth defendant, MaryAnne E. Pahapill.

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At that time, Christopher Conte, an Associate Director of the Securities and Exchange Commission’s Division of Enforcement, explained the arrests.

“The defendants charged today all disregarded accounting principles and disclosure requirements designed to provide investors with a clear and accurate picture of a company’s performance” he said. “Investors were misled for extended periods of time about the health and stability of Nortel’s operations. Further, these defendants all received significant compensation, in some cases in the millions of dollars, while they were manipulating Nortel’s financial results. In some cases, these individuals received such compensation only because they manipulated Nortel’s financial results.”

Today, Drew Hasselbeck, Editor of the Legal Post section of the Financial Post, pointed out the defendants could face stiffer sentences than in the past.

“It is worth noting that the Conservative government’s new sentencing rules are now on the books. If any or all of the three are convicted of a fraud exceeding $1-million, the new law requires a minimum jail sentence of two years. ”

At its peak, in 2000, Nortel had a market value of $350 billion. At one time, the stock represented 36% of the entire value of the Toronto Stock Exchange and employed 90,000 people.

The seemingly endless downward spiral of Nortel actually began on October 25, 2000, when CEO John Roth warned, for the first time, that the company would not meet its sales targets. The stock fell from $96 to $71 that day. By 2002, half of the company’s 90,000 workers had been laid off. And then it got worse. Debt downgrades, missed reporting deadlines and financial restatements killed a meager rally in the stock. Nortel declared bankruptcy on January 14, 2009.

The Financial Post has scanned and posted the court documents here.

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