Nortel Networks faces the biggest challenge of its long history in a massive accounting scandal that triggered the firing of chief executive Frank Dunn, added fuel to scores of shareholder lawsuits and could create a debt-repayment crisis.
Nortel stock fell nearly 30 per cent yesterday after the company revealed it had overstated profits by $366 million U.S. last year, or 50 per cent.
It actually lost money in the first half of the year when it previously claimed $48 million in profits.
The revelation led the Nortel board to fire Mr. Dunn, 50, whose financial expertise helped Nortel escape a major crisis in 2001-2002 that could have pushed the company into bankruptcy protection.
Two other senior financial officers were fired and four others put on paid leave.
Nortel picked William Owens, 63, a retired U.S. admiral, top technology executive and Nortel director, to take over.
He is the first American to head Nortel since Paul Stern led the company in the early 1990s.
Mr. Owens tried yesterday to reassure investors and employees that Nortel has the products that are winning market share, insisting “this company is fundamentally strong.”
However, Nortel postponed results for the quarter ending in March that were due to be released today.
The profit shortfall revelation could threaten $120 million in cash and stock bonuses that Nortel has or was expected to pay to senior executives and most of its 35,300 employees. Mr. Dunn has, or was scheduled to get, about $7.5 million U.S. in restricted stock.
Rank-and-file employees got about $70 million in cash bonuses last spring, which could now be in jeopardy. “When we complete the review, we will rule on the profitability bonus,” Mr. Owens said.
He promised to restore the confidence of investors, employees and other stakeholders with a new era of financial accountability and transparency.
“Yesterday was a very long day for the board and its advisers,” Nortel chairman Lynton (Red) Wilson said in announcing the firings.
“The decision to terminate Frank Dunn was particularly difficult, but it is the right decision for the company.”
“He has worked extremely hard and has had some great successes.”
The revelation of the misstatement of financial results will provide fresh ammunition for scores of shareholder lawsuits that have been filed in the last month as well as for investigations by U.S. and Canadian regulators.
Speaking at a dinner hosted by the University of Western Ontario’s Richard Ivey School of Business, Nortel’s chief technology officer, Greg Mumford, wouldn’t provide specifics about today’s events. Speaking in front of a crowd of about 260 Ottawa technology workers, Mr. Mumford simply said the day had been a very tough one to get through.
“I do need to recognize today,” said Mr. Mumford before asking and answering a few questions on behalf of the crowd. “What kind of day did I have? Bad. What kind of shape is Nortel Networks in? Good, if not excellent. And, am I going to answer any questions on it or talk about this any further? No.”