Crown says letters show Nortel execs knew they were getting bonuses fraudulently

TORONTO — The three former Nortel Networks Corp. executives on trial for fraud knowingly manipulated the now insolvent company’s books to reap nearly $13 million in cash and stock bonuses, the Crown alleged Wednesday.

TORONTO — The three former Nortel Networks Corp. executives on trial for fraud knowingly manipulated the now insolvent company’s books to reap nearly $13 million in cash and stock bonuses, the Crown alleged Wednesday.

Lead prosecutor Robert Hubbard has said that former Nortel chief executive Frank Dunn, finance chief Douglas Beatty and controller Michael Gollogly falsified Nortel’s financial statements to show a return to profitability in 2003, even though the company was still in the red.

The three men have pleaded not guilty to the charges and none of the Crown’s allegations has been proved in court. The defence opening arguments begin on Thursday, the fourth day of what’s expected to be a six-month trial.

The crux of the Crown argument is that under Dunn’s direction, Nortel had a culture of “cookie-jar accounting” in which hundreds of millions of dollars worth of reserves weren’t released when they should have been and later used fraudulently to shore up quarterly results.

Hubbard said he plans to prove that those in control of the company knew what they were doing was wrong. He plans to show that many misleading transactions were not simply a result of bad accounting or improper record keeping, but part of a plan to give the illusion the company had returned to profit, when it had not.

He said the senior executives should have known that the company shouldn’t bolster results in a lacklustre period by releasing excessive amounts of cash from reserves, which Hubbard repeatedly referred to as the “cookie jar.”

“It’s accounting 101,” Hubbard said. “That’s a pretty good indication that the results drive the accounting, rather than the accounting driving results.”

Dunn’s defence lawyer is set to deliver opening arguments for all three defendants Thursday morning in what is expected to be a lengthy trial that could be one of the biggest cases of corporate fraud in Canadian history.

Hubbard showed the court Wednesday a draft letter allegedly written by Gollogly to the company’s board of directors in which he voices concerns about how Nortel reported a profit in the second quarter of 2003.

Dunn had originally said he was “embarrassed and ashamed” that the company would not be able to turn a profit in that quarter, but then had employees look for any possible reserves they could find, and the company reported a profit, triggering the bonuses, Hubbard said.

Concerned about “spotty” documentation, Gollogly offered to resign and give up alleged fraudulently earned bonuses in a letter penned to the fallen telecom equipment maker’s board, the Crown argued.

But it appears that letter was never sent, and Gollogly accepted his $571,000 bonus, Hubbard said.

“In my opinion, the company has not returned to profitability, at least not in the spirit the (return to profitability) program was intended,” Gollogly allegedly said in the letter.

Gollogly’s letter also allegedly drew attention to how a forecasted loss for the company’s third quarter, when it planned to clean up its books again, could call into question how the second quarter profit was achieved, Hubbard argued.

“The obvious question is how the company can lose $75 million in Q3 off revenue of $2.3 billion but essentially broke even in Q2 with the same revenue base,” Hubbard said.

A note, allegedly in Gollogly’s handwriting, was also shown to the court, in which he calls the effort to clean up the balance sheets in the third quarter “a joke,” because, as his assistant controller allegedly put it, the company’s finances were already “polluted,” Hubbard said.

His assistant controller, Karen Sledge, is also expected to testify.

Hubbard argued that the alleged scheme delivered each of the senior executives millions of dollars in cash and stock bonuses, as the return to profitability also had the effect of raising Nortel’s stock price.

However, the results were later restarted several times to reflect the misleading accounting, which sent Nortel shares into a tailspin and wiped out the value of its stock.

“It’s only when the truth leaks out … that the shares dip, and that’s the effect of telling the truth,” Hubbard said.

Under the return to profitability plan, Dunn received $4.8 million, Beatty received $1.75 million and Gollogly received $471,000. They also received millions more through a stock option program tied to a return to profitability, Hubbard argued.

When the three executives were fired over the allegations in 2004, the board demanded the repayment of bonuses totalling about $12.9 million, including payments from a restricted share scheme in 2001.

The company demanded $7.8 million from Dunn, $3 million from Beatty and $2 million from Gollogly.

The Crown has a list of 28 witnesses it plans to call, including former employees expected to testify about how they helped move money, and has warned the judge that some of them may have been accomplices.

The first three witnesses will be Brian Harrison, Karen Sledge and Sue Shaw — three mid-level employees Nortel’s once 1,500 member finance group.

Get local stories you won't find anywhere else right to your inbox.
Sign up here

Just Posted

Erika Fetterly, owner of EFP Studios, recently launched the Let Them Have A Voice campaign. (Contributed photo)
Central Alberta photographer’s campaign aims to give youths a voice

An Innisfail photographer is giving a platform to young central Albertans so… Continue reading

Chopped Canada-winning chef Pete Sok is trying to focus on the future as he reopens Boulevard Restaurant and Lounge in the Holiday Inn on Gasoline Alley during the pandemic. (Contributed photo)
Red Deer’s celebrity chef looks past the pandemic with new restaurant opportunity

Pete Sok is reopening Boulevard Restaurant — and betting on the future

The Red Deer Rebels hosted the Medicine Hat Tigers in the first game of the shortened 2020-21 season on Friday. The two teams faced off again in Medicine Hat Saturday (Photo by Rob Wallator/ Red Deer Rebels)
Red Deer Rebels fall to Medicine Hat Tigers on Saturday

Tigers 7 Rebels 2 The Red Deer Rebels have lost two straight… Continue reading

Alberta has 1,910 active cases of COVID-19 as of Wednesday. Red Deer is reporting five active cases, with 108 recovered. (File photo)
Red Deer reports 25th COVID-19 death

415 new cases identified provincially Saturday

Red Deer science-communicating dogs Bunsen and Beaker helped save a missing pet recently. The two dogs have more than 80,000 followers on Twitter. (Contributed photo)
WATCH: Red Deer science dogs help save lost pet

Red Deer science-communicating dogs Bunsen and Beaker helped rescue a missing pet… Continue reading

Alberta Premier Jason Kenney speaks during a news conference in Edmonton on Feb. 24, 2020. It’s budget day in the province, and Kenney’s United Conservative government is promising more help in the fight against COVID, but more red ink on the bottom line. THE CANADIAN PRESS/Jason Franson
Alberta Premier slams vandalism after slur painted on MLA’s office window

EDMONTON — Alberta Premier Jason Kenney is condemning alleged vandalism at the… Continue reading

Canada Pension Plan Investment Board President and Chief Executive Officer Mark Machin waits to appear at the Standing Committee on Finance on Parliament Hill, in Ottawa on Tuesday, November 1, 2016. Executives who engage in so-called "vaccine tourism" show both an ethical disregard for those less fortunate and a surprising lack of business acumen, experts argue. THE CANADIAN PRESS/Adrian Wyld
Vaccine tourism is both unethical and bad for business, experts say

Executives who engage in so-called “vaccine tourism” show both an ethical disregard… Continue reading

Edmonton Oilers' Jesse Puljujarvi (13) and Toronto Maple Leafs' Justin Holl (3) battle in front as goalie Jack Campbell (36) makes the save during second period NHL action in Edmonton on Saturday, February 27, 2021.THE CANADIAN PRESS/Jason Franson
No Matthews, no problem: Minus NHL goal leader, Maple Leafs blank Oilers 4-0

Leafs 4 Oilers 0 EDMONTON — The Maple Leafs knew even with… Continue reading

The Pornhub website is shown on a computer screen in Toronto on Wednesday, Dec. 16, 2020. THE CANADIAN PRESS
Pornhub policies reveal legal gaps and lack of enforcement around exploitive videos

OTTAWA — Serena Fleites was in seventh grade when a sexually explicit… Continue reading

Sean Hoskin stands on a neighbourhood street in Halifax on Thursday, Feb. 25, 2021. Hoskin was diagnosed with COVID-19 almost a year ago with symptoms that still persist. Some provinces have established programs to deal with long-term sufferers but Atlantic Canada, with relatively low numbers of patients, has yet to provide a resource to assist them. THE CANADIAN PRESS/Andrew Vaughan
On East Coast, exhausted COVID-19 ‘long haulers’ hope specialized clinics will emerge

HALIFAX — On evenings when Sean Hoskin collapses into bed, heart pounding… Continue reading

Ottawa Senators goaltender Matt Murray (30) stands in his crease as Calgary Flames left wing Andrew Mangiapane (88), left to right, defenceman Rasmus Andersson (4), Matthew Tkachuk (19), Mikael Backlund (11) and Mark Giordano (5) celebrate a goal during second period NHL action in Ottawa on Saturday, Feb. 27, 2021. THE CANADIAN PRESS/Sean Kilpatrick
Calgary Flames beat Ottawa 6-3 to end Senators’ three-game win streak

Flames 6 Senators 3 OTTAWA — The Calgary Flames used a balanced… Continue reading

Crosses are displayed in memory of the elderly who died from COVID-19 at the Camilla Care Community facility during the COVID-19 pandemic in Mississauga, Ont., on November 19, 2020. The number of people who would have died from a COVID-19 infection is likely to be much higher than recorded because of death certificates don't always list the virus as the cause of a fatality, experts say. THE CANADIAN PRESS/Nathan Denette
Death certificates don’t accurately reflect the toll of the pandemic, experts say

The number of people who would have died from a COVID-19 infection… Continue reading

A health-care worker prepares a dose of the Pfizer-BioNTech COVID-19 vaccine at a UHN COVID-19 vaccine clinic in Toronto, Thursday, Jan. 7, 2021. A single dose of Pfizer-BioNTech's COVID-19 vaccine is barely enough to cover the average pinky nail but is made up of more than 280 components and requires at least three manufacturing plants to produce. THE CANADIAN PRESS/Nathan Denette
From science to syringe: COVID-19 vaccines are miracles of science and supply chains

OTTAWA — A single dose of Pfizer-BioNTech’s COVID-19 vaccine is barely enough… Continue reading

Most Read