Washington, D.C., Sept. 12, 2007 – LAWFUEL – The Legal Newswire – The Securities and Exchange Commission today charged four more former officers of Nortel Networks Corporation with engaging in accounting fraud by manipulating reserves to manage Nortel’s earnings. The Commission filed an amended complaint in SEC v. Dunn, a case pending in the U.S. District Court for the Southern District of New York, to add as defendants Douglas A. Hamilton, Craig A. Johnson, James B. Kinney and Kenneth R.W. Taylor, who were the former vice presidents of finance for Nortel’s Optical, Wireline, Wireless and Enterprise business units, respectively. The Commission’s original complaint, among other things, charged three former corporate officers of Nortel – CEO Frank Dunn, CFO Douglas Beatty and Controller Michael Gollogly – with directing the earnings management fraud.
“Today’s action shows that the Commission will hold accountable not only wrongdoers in the corporate suite, but others whose actions make a company-wide financial fraud possible,” said Linda Thomsen, Director of the Commission’s Division of Enforcement.
Christopher Conte, an Associate Director of the Commission’s Division of Enforcement, stated, “The defendants charged today participated with Nortel’s former top executives to improperly maintain, establish and release reserves in order to manipulate earnings and fabricate Nortel’s return to profitability in the first quarter of 2003. Nortel’s earnings management fraud could not have happened without their efforts. These defendants all received significant compensation while they were falsifying Nortel’s financial results.”
Among other allegations, the amended complaint alleges that Hamilton, Johnson, Kinney and Taylor engaged in the following misconduct:
From the second half of 2002 through January 2003, Hamilton, Johnson, Kinney and Taylor all determined that their business units held tens of millions of dollars in excess reserves. The four finance vice presidents did not immediately release those excess reserves as required under U.S. Generally Accepted Accounting Principles (GAAP), but instead maintained them for earnings management purposes.
In early January 2003, during the 2002 year-end closing process, Hamilton, Johnson, Kinney and Taylor acted on orders received from former executives Dunn, Beatty and Gollogly and improperly established over $44 million in additional excess reserves in order to lower Nortel’s consolidated earnings and bring it in line with internal and market expectations. Their efforts helped erase Nortel’s pro forma profit for the fourth quarter of 2002 and caused it to report a loss instead.
In the first and second quarters of 2003, Dunn, Beatty and Gollogly directed the improper company-wide release of approximately $500 million of excess reserves specifically to inflate earnings and pay bonuses. These efforts turned Nortel’s first quarter 2003 loss into a reported profit under U.S. GAAP, largely erased Nortel’s second quarter loss and generated a pro forma profit in the second quarter. The efforts of Hamilton, Johnson, Kinney and Taylor were essential to creating these false results because the four vice presidents improperly released approximately $154 million in reserves in the first quarter of 2003, and approximately $191 million in reserves in the second quarter.
The amended complaint charges Hamilton, Johnson, Kinney and Taylor with violating and/or aiding and abetting violations of the antifraud, reporting, books and records and internal controls provisions of the federal securities laws. The Commission seeks a permanent injunction, a civil monetary penalty, an officer and director bar, and disgorgement with prejudgment interest against each of these defendants.
In its original complaint, filed on March 12, 2007, the Commission alleged that (1) Dunn, Beatty and Gollogly learned that the company was carrying massive amounts of excess reserves and then directed the alleged reserve manipulations to meet earnings targets, fabricate profits and pay performance-related bonuses, and also (2) that Dunn, Beatty and former Assistant Controller MaryAnne Pahapill altered Nortel’s revenue recognition policies from late 2000 through January 2001 to accelerate revenue to meet publicly announced revenue targets. See LR-20036 (March 12, 2007) / Accounting and Auditing Enforcement Release No. 2576 (March 12, 2007).
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For more information, contact:
Christopher R. Conte
Associate Director, Division of Enforcement
U.S. Securities and Exchange Commission
Timothy N. England
Assistant Director, Division of Enforcement
U.S. Securities and Exchange Commission