Nortel Complaint Hits Soundlessly

On earnings eve, a Canadian class-action lawsuit accuses Nortel of cooking its books. But reaction is muted

July 18, 2002

3 Min Read
Nortel Complaint Hits Soundlessly

When Nortel Networks Corp. (NYSE/Toronto: NT) reports its earnings tonight, its new CFO (see Nortel's New CFO: Beatty Who?) may face some tough questions. A class action lawsuit filed in Canada yesterday accuses Nortel of a range of "improper accounting practices" for which plaintiffs are seeking billions in compensation.

In a claim sent from Ontario Superior Court yesterday, three plaintiffs call Nortel's ex-CEO John Roth, present CEO Frank Dunn, and various other executives to defend themselves against allegations that Nortel "violated generally accepted accounting principles" by engaging in the following actions from October 2000 onward:

  • Manufacturing revenues by extending vendor financing to "uncreditworthy customers"

  • Pressuring customers into buying products they didn't need or want that were later returned

  • Recording revenues based on letters of intent rather than formal purchase orders

  • Deliberately delaying the writedown of goodwill on acquisitions in order to soften their impact on Nortel financials

  • Engaging in deals, such as the purchase of the Zurich component manufacturing facility from JDS Uniphase Corp. (Nasdaq: JDSU; Toronto: JDU) in February 2001 (see Nortel Buys JDSU Plant for $2.5B), which plaintiffs say were based on inflated share pricing that resulted in "unjust enrichment" of top execs.

The complaint also names Nortel auditor Deloitte & Touche LLP for failing in its duties to keep the company on the straight and narrow.

The plaintiffs -- a farmer, a family physician, and a teacher, all from Ontario -- spent a total of about CN$386,780 (about US$250,000) on Nortel common stock in February 2001. They're collectively seeking about CN$5 billion (US$3.25 billion) in damages.

Nortel says the suit is a rehash of one delivered last year and that it's "without merit." Ditto Deloitte, which calls the suit "frivolous."

Joel Rochon, founding partner of Toronto firm Rochon Genova, which is representing the plaintiffs along with Lerner & Associates, also of Toronto, acknowledges the latest complaint has been reconstituted from one issued in February 2001. But he says there's plenty of new material here, including the accusations against Deloitte, some new information on Roth's actions, and the naming of William R. Hawe, Nortel's ex-CTO, as a defendant. Hawe made about US$18.4 million by cashing in his stock options just prior to resigning in February 2001 (see Nortel CTO Quits as Woes Mount).

Rochon says the latest complaint is based on information gleaned from senior ex-Nortelers based in the U.S.

Despite the hairy allegations, which were splashed across the Canadian press last night and this morning, Nortel's stock actually climbed in early trading, rising $0.02 (1.48%) to $1.37 by midday.

What gives? Has the market grown so jaded that yet more accusations of book-cooking fall on deaf ears?

Not exactly, analysts say. But several say Nortel's stock price can't take much more bad news: "There's plenty of gloom and doom already written into $1.30 a share," says one.

Others say the allegations in the complaint don't signal lawbreaking. "Vendor financing can be irresponsible, but it's not illegal," says Steve Levy of Lehman Brothers. The same goes for moving revenues around.

Others don't seem to trust the investment complaints of a doctor, teacher, and farmer: "I don't see anything wrong and view the whole thing as idiotic," says a Canadian investment manager, who asked for anonymity. Still others see it as sensationalism: "Maybe, unlike the media, we're tired of groveling in the negatives -- and that's not for attribution," says the managing director of a major Wall Street firm.

— Mary Jander, Senior Editor, Light Reading

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