Trial for 3 ex-Nortel execs begins

Former Nortel CEO Frank Dunn in a file photo. REUTERS/Jim Young

Former Nortel CEO Frank Dunn in a file photo. REUTERS/Jim Young

Alastair Sharp, REUTERS

, Last Updated: 5:43 PM ET

Three former executives at bankrupt Nortel Networks reached into the “cookie jar” a decade ago to enrich themselves, prosecutors said, opening a fraud trial that dredged up memories of one of the most spectacular casualties of the 1990’s dot-com bubble.

The trio - former Chief Executive Frank Dunn, former Chief Financial Officer Douglas Beatty and former Controller Michael Gollogly - misrepresented Nortel’s financial results between 2000 and 2004 in a plan that brought them bonus payments while defrauding investors, prosecutor Robert Hubbard said on Monday.

Their day in court came more than three years after the executives were charged and a dozen years after their alleged transgressions began. All three pleaded not guilty.

The long time lapse highlights the complexity of the case as well as what critics say is the slow pace and laxity of Canada’s justice system in cases involving alleged corporate wrongdoing.

The crown charges that the accused improperly manufactured a loss in one quarter and then engineered a profit in a subsequent three-month period.

“This cookie jar approach allowed the accused to trigger lucrative cash and stock bonuses to themselves,” Hubbard said as the crown laid out its case in a packed Toronto courtroom.

In preparing for the case, prosecutors have been sorting through millions of documents, some of them dating back to before the spectacular collapses of Enron and WorldCom, two of the biggest corporate scandals in U.S. history.

FORMER MARKET DARLING

Once the equipment manufacturing arm of Canada’s biggest phone company, Nortel became a market darling in the late 1990’s as the Internet revolution picked up steam and investors bet the company would make billions selling fibre optics network s .

In 2000, speculators pushed the company’s shares up to the point where its market capitalization topped out around $400 billion, accounting for a full third of the entire Toronto Stock Exchange.

As tech stocks crested and Nortel’s sales failed to meet analysts’ stratospheric expectations, the company’s shares went off a cliff, dropping more than 99% by 2002 and decimating investment funds.

While the company returned to profit in 2003 after several years of losses, the subsequent accounting scandal forced Nortel to restate its results several times, shaking investor faith in its prospects and triggering numerous investigations.

The scandal led to the firing of the three defendants in 2004.

Dunn had been Nortel’s chief financial officer before his promotion to CEO in 2001, succeeding the affable John Roth at a time when no one else wanted the job.

With the company taking heavy losses, Dunn eliminated tens of thousands of jobs, sold plants, shut business lines and slashed costs.

Nortel filed for bankruptcy protection three years ago. A sale of Nortel’s patents last year brought in $4.5 billion US for creditors and was a bitter reminder of the depths to which the company had sunk.

WHITE COLLAR CRIME

Critics have long argued that Canada is soft on white-collar crime, and some high-profile cases have dragged on for years, in contrast with cases in the United States that have led to long prison sentences for corporate criminals.

The three accused in the Nortel case could face up to 14 years in jail if they are found guilty.

WorldCom CEO Bernard Ebbers is currently serving a 25-year U.S. prison term for fraud and conspiracy, while Dennis Kozlowski, former CEO of Tyco International, is serving 8-1/3 to 25 years after being convicted of stealing millions from the company.

Livent Inc, a Canadian theater production company, went bankrupt in 1998 after fraud allegations came to light, but founders Garth Drabinsky and Myron Gottlieb were not convicted until 2009, and were not jailed until they lost an appeal last fall.

In 1997, shares of Bre-X collapsed after it emerged that samples from its Busang gold deposit in Indonesia had been salted to create the impression of a massive gold strike. Despite a prosecution that dragged on until 2007, no one was ever convicted.

These cases and others like them only raise the pressure on prosecutors to get a conviction, experts say.

“If this does not result in a conviction, in my opinion we’ve major problems in Canada,” said Al Rosen, a forensic accountant with Rosen & Associates.

Earlier on Monday, Justice Frank Marrocco ruled that crown prosecutors did not have to explicitly identify evidence of deliberate falsification of records before the trial began, turning down a defense motion.

The case is The Crown vs Frank Dunn, Douglas Beatty and Michael Gollogly; Ontario Superior Court of Justice; court file number 1000145.

(Additional reporting by Allison Martell; Writing by Cameron French; Editing by Frank McGurty)

 


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