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

If you're heading out to the West Country have a plan in case things go wrong, says Clearwater Regional Fire Rescue Services fire chief Steve Debienne.
(Photo from CRFRS Facebook)
West Country visitors should have an emergency plan: regional fire chief

Cellphones can’t be relied on in many back country areas

Rode
Sarcevic leads an impressive list of additions to RDC Kings soccer

In 2019 the RDC Kings soccer program took a major step forward… Continue reading

The Red Deer PCN Women's Fun Run will take on a different look this weekend with rising COVID-19 numbers.
Women’s Fun Run goes ahead this weekend in Red Deer

With new public health measures in place because of rising COVID-19 case… Continue reading

Alberta’s chief medical officer of health Dr. Deena Hinshaw asked Albertans to limit travel throughout the province as COVID-19 cases continue to rise. (Photo by Chris Schwarz/Government of Alberta)
Red Deer nears 900 active COVID-19 cases

Province reports additional 2,211 COVID-19 cases

David Eggen, the NDP’s advanced education critic, said the UCP government has been focused on cutting funding to post-secondary institutions across Alberta. (Contributed photo)
NDP worry new status for Red Deer College doesn’t mean more funding

This week the province announced that RDC will become a polytechnic institute

Alberta Health Services locked the Whistle Stop Cafe in Mirror on Wednesday morning after owner Christopher Scott refused to comply with health orders. (Photo by Paul Cowley/Advocate staff)
UPDATED: AHS shuts down Whistle Stop Cafe for defying health orders

Justice minister promises to get tough with those ignoring public health orders

Wizards beat Raptors in OT, Toronto playoff bid nearly over

Wizards beat Raptors in OT, Toronto playoff bid nearly over

Toronto Blue Jays' Teoscar Hernandez (37) hits a single to drive in two runs against the Oakland Athletics during the sixth inning of a baseball game in Oakland, Calif., on Thursday, May 6, 2021. (AP Photo/Tony Avelar)
Grichuk drives in 5, Jays beat A’s 10-4 for series split

Grichuk drives in 5, Jays beat A’s 10-4 for series split

Canada's Sports Hall of Fame 2019 inductee Jayna Hefford speaks in Toronto on Wednesday, October 23, 2019. THE CANADIAN PRESS/Frank Gunn
Three Canadian teams to play in women’s hockey Dream Gap Tour in Calgary

Three Canadian teams to play in women’s hockey Dream Gap Tour in Calgary

Rugby Canada says some members of women’s sevens team have tested positive for COVID

Rugby Canada says some members of women’s sevens team have tested positive for COVID

Team Canada skip Kerri Einarson, centre, makes a shot as lead Briane Meilleur, left, and second Shannon Birchard sweep against Denmark at the Women's World Curling Championship in Calgary, Alta., Thursday, May 6, 2021.THE CANADIAN PRESS/Jeff McIntosh
Einarson’s five-game win streak ends with loss to Japan at world curling playdowns

Einarson’s five-game win streak ends with loss to Japan at world curling playdowns

FILE - In this Feb. 24, 2020, photo, the Olympics rings are reflected on the window of a hotel restaurant as a server with a mask sets up a table, in the Odaiba section of Tokyo. The vaccine rollout in Japan has been very slow with less than 1% vaccinated. This of course is spilling over to concerns about the postponed Tokyo Olympics that open in just over three months.(AP Photo/Jae C. Hong, File)
Canadian athletes, coaches applaud news of vaccine doses ahead of Tokyo

Canadian athletes, coaches applaud news of vaccine doses ahead of Tokyo

Minister of Employment, Workforce Development and Disability Inclusion Carla Qualtrough holds a press conference on Parliament Hill in Ottawa on Thursday, Sept. 24, 2020. THE CANADIAN PRESS/Sean Kilpatrick
Liberals pressed to ease access to EI parental leave to help unemployed moms

Liberals pressed to ease access to EI parental leave to help unemployed moms

Katie Telford, Chief of Staff to the Prime Minister, appears as a witness via videoconference during a House of Commons finance committee in Ottawa, Thursday, July 30, 2020. The Canadian Press has learned that Katie Telford has written members of the defence committee inquiry into allegations of sexual misconduct against Canada's former top military commander, offering to testify at their meeting Friday. THE CANADIAN PRESS/Sean Kilpatrick
PM’s chief of staff offers to testify on Vance sexual misconduct allegations

PM’s chief of staff offers to testify on Vance sexual misconduct allegations

Most Read