SEC Charges Four Former Top Nortel Execs With Running Financial Scheme

The U.S. Securities and Exchange Commission has filed civil fraud charges against four former senior executives from Nortel Networks for allegedly running a four-year financial fraud scheme.

The SEC filed the suit in U.S. District Court in the Southern District of New York on Monday, charging that the executives repeatedly engaged in accounting fraud to bridge gaps between Nortel's true performance, its internal targets, and Wall Street expectations, according to a release from the SEC.

Nortel is a Canadian manufacturer of telecommunications equipment.

Facing the charges are Frank A. Dunn, who served as CEO and chief financial officer; Douglas C. Beatty, who was controller and chief financial officer; Michael J. Gollogly, who also served as controller; and MaryAnne E. Pahapill, who was assistant controller and VP of corporate reporting. The complaint alleges that the defendants engaged in misconduct between September 2000 and January 2004.

"The fraudulent conduct at issue here was egregious and long-running," said Linda Thomsen, director of the commission's Division of Enforcement, in a written statement. "Each of the defendants betrayed Nortel's investors, and their misconduct gave rise to billions of dollars in shareholder losses. The action we take today sends a strong message that officers of U.S.-filing foreign corporations will be held to the same standards of accountability that are required of all participants in the U.S. financial markets."

Nortel has been having a rough time. Last month, the company announced that it is laying off 2,900 employees and shifting 1,000 more to new overseas locations.

President and CEO Mike Zafirovski announced what was the latest in an ongoing series of layoffs and called them part of Nortel's "business transformation plan," which is designed to return the company to its former profitability and leadership role in the telecom and networking industry. Nortel once employed 95,000 during the heyday of the technology bubble that imploded in 2000. That number is down to about 34,000 today.

The SEC's complaint alleges that from late 2000 through January 2001, Dunn, Beatty, and Pahapill altered Nortel's revenue recognition policies to accelerate revenue as needed to meet forecasts. And from at least July 2002 through June 2003, Dunn, Beatty, and Gollogly improperly established, maintained, and released reserves to meet earnings targets, fabricate profits, and pay performance-related bonuses.

"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," said Christopher Conte, an associate director of the commission's Division of Enforcement, in a written statement. "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."

The complaint charges Dunn, Beatty, Gollogly, and Pahapill with violating and/or aiding and abetting violations of the antifraud, reporting, books and records, internal controls, and lying to auditors provisions of federal securities laws. Dunn and Beatty are separately charged with violations of the officer certification provisions instituted by the Sarbanes-Oxley Act. The commission seeks a permanent injunction, civil monetary penalties, officer and director bars, and disgorgement with prejudgment interest against all four defendants.