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Former Nortel Execs Acquitted of Fraud

Craig Matsumoto
News Analysis
Craig Matsumoto
1/14/2013
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Frank Dunn, one of the multiple ill-fated Nortel CEOs of the 2000s, was acquitted of fraud in Ontario Superior Court Monday. The same is true of former CFO Douglas Beatty and former Controller Michael Gollogly. All three were charged by the Canadian government in June 2008. Six months later, Nortel filed for bankruptcy protection -- and Monday happens to be the four-year anniversary of that filing. Coincidentally, Monday is also the scheduled start day for mediation talks about distributing Nortel's $9 billion in remaining assets. Among those fighting for the money will be pensioners, bondholders and suppliers. According to reports, Justice Frank Marrocco did note some manipulating of the books. For example, executives manipulated accruals -- money set aside for future liabilities -- to make Nortel turn a profit in its first quarter of 2003. But Marrocco noted that this is not out of the ordinary. More generally, he didn't see any damning evidence that the executives "deliberately misrepresented" Nortel's finances. A key accusation in the case was that Dunn and the others cooked the books in order to unlock profitability bonuses for all employees including themselves -- $12.8 million in all. (Although, some of that was in stock, which is now valued at a whole lot less.) See the Ottawa Citizen article from Friday for a hefty summary of the arguments presented at trial. For more

Other coverage of the verdict: — Craig Matsumoto, Managing Editor, Light Reading
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brookseven
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brookseven,
User Rank: Light Sabre
1/16/2013 | 6:29:34 PM
re: Former Nortel Execs Acquitted of Fraud
Duh,

I believe that employees are the single biggest problem. -Companies should be operated for the benefits of their shareholders. -Employees often are at complete odds with that and want companies to be operated solely for the benefit of their employees. -Now one would think that these are in alignment. -But they are often not. -Of course, how you would do this in right to work states or how multi-national companies (like when I was a Siemens employee in the US) have any way of complying is beyond me.

Now, to me Management - including the CEO - are just employees. -For example, bonuses are often calculated based on results....but if the results are manipulated (see Nortel) then the bonuses to all levels are often bad. -

seven
lrmobile_Stevery
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lrmobile_Stevery,
User Rank: Lightning
1/16/2013 | 4:56:51 PM
re: Former Nortel Execs Acquitted of Fraud
> -I'd adapt the German practice of giving non-executive employee-shareholders

I'm not familiar with the German system, but how do they prevent that appointee from becoming as corrupt as the others?

The fundamental issue is that a board appt of a well-known company is a nice perk, which is why the mutual fund guys don't raise anywhere near the stink that they should when a company is underperforming.
Duh!
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Duh!,
User Rank: Light Sabre
1/16/2013 | 4:01:54 PM
re: Former Nortel Execs Acquitted of Fraud
-Corporate governance is a huge issue.- Of the great telecom equipment companies that came into the 1998 bubble, how many are not troubled, dissolved or broken up?-- Cisco and (arguably) Ericsson are the only exceptions I can think of.- And how much of the blame for these failures can be placed on narcissistic, greedy, disengaged, short-sighted senior managements, enabled by complacent boards?- I differ with you (or maybe not?) on one part of the solution.- I'd adapt the German practice of giving non-executive employee-shareholders (usually through their union) a seat on the board.- It would take a lot of work for legislators and regulators to get the details exactly right. But whose interests are better aligned with buy-and-hold outside investors than employees?

Shortly before the late election, I made a half-baked attempt to reach out to now-Sen. Warren to ask her to start thinking about corporate governance and what federal legislation might start to address those issues.- Now that she's in office, it seems like time to reach out again.
brookseven
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brookseven,
User Rank: Light Sabre
1/16/2013 | 6:24:00 AM
re: Former Nortel Execs Acquitted of Fraud
mmqos,

I doubt we both worked together on FiOS. -I was with AFC and about the only 3rd party that I spent time with was Harmonic - who did our original video overlay.

The corporate governance thing is a big issue. -You want an independent BoD, but in reality they are appointed by management. -Yes, theoretically they are openly voted on but the management slate gets elected about 99 times out of 100. -That means that both the BoD and the management have vested interests in scratching each other's back. -If a BoD cans management then the BoD is likely to have several members replaced. -And management wants a BoD that rubber stamps what it says (especially around compensation and bonuses). -I do not have a great set of fixes but the first one should be that no employee (and that means senior management) should be a BoD member.

seven
MMQoS
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MMQoS,
User Rank: Light Sabre
1/15/2013 | 10:56:58 PM
re: Former Nortel Execs Acquitted of Fraud
Craig:
I worked at Nortel 8 years until bankruptcy in R&D and later after R&D was shuttered at my location, in new product development.- My gut reaction is to say "hang'em high" for destroying, as ANON writes, a great company.- But while these 3 were an integral part of the huge financial mess that ultimately sank the Company, they are just the fall guys.- In my experience, the real ones who should have been indicted and gone on trial are the Nortel BoD members that approved the shady financials including all of the bonuses presented to them by Dunn.- These were executives from other industries and finance and all carried a fiduciary responsibility to examine in detail CEO and CFO decisions, especially as the financial problems became obvious.-
However by allowing precious funds to be channeled into employee bonuses, and the bonuses were exceptionally large, those funds were wasted, which would have gone a long way to push the development of new products we were proposing to management.- They could have even saved the company given some needed product management changes.- But even with the financial and publicity problems Nortel was experiencing at the time some of our key customers were still pushing us for new innovative products but by then the funding had gone to bonuses.- I for one was working closely with Verizon on FiOS and FiOS TV product designs which were ultimately picked up by Alcatel and/or Ericsson and are now deployed in the Vz network.- Similar situation with SBC LightSpeed.
I had hoped the Canadian government would have had the courage to go after the real culprits at Nortel the way my government (US) went after the dirty execs here especially as the result was to lose one of their major technological jobs providers.

And Brook you and I may have worked together on FiOS and hopefully you for a company with a dutiful BoD.-
MMQoS
Net Worthy
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Net Worthy,
User Rank: Light Beer
1/15/2013 | 7:10:38 PM
re: Former Nortel Execs Acquitted of Fraud
I left Nortel some time before the wheels fell off so I didn't suffer financially the way many people did. That said, I have followed the trial proceedings with considerable interest and I have a strong sense that the case was very weak and they should never have been charged.

The reasons for Nortel's collapse are many but this ill-advised prosecution was a huge disruption and distraction at a critical time.
ANON1238695912491
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ANON1238695912491,
User Rank: Light Beer
1/15/2013 | 3:36:23 PM
re: Former Nortel Execs Acquitted of Fraud
Too little too late. Even then this is not the reason why NT went down. It started with their acquisitions of BroadBand NEtworks, Clarity, Bay Networks etc., and then their cluelessness in not being able to absorb them to their potential.. Wasted money, and people's lives. Shred ppl took destiny into their own hands while others got left behind until they were laid off.

A company which gave life to even people with no degree in Computer Science or Engineering...

I went to Ottawa recently and visited the Carling campus. It looks like a ghost town now.. It was Very disturbing to me after having seen- the best during hay days.

Great company and good bunch of people to work with. I treasure my experience.
Craig Matsumoto
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Craig Matsumoto,
User Rank: Light Sabre
1/14/2013 | 11:50:07 PM
re: Former Nortel Execs Acquitted of Fraud
Any reaction from ex-Nortelers?- There's a difference between "fraud" and "not having the best of intentions," so I can believe that they were acquitted, but I'd guess that the verdict doesn't sit right with a lot of people.
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