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Nortel Complaint Hits Soundlessly

Light Reading
News Analysis
Light Reading
7/18/2002

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
http://www.lightreading.com
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LightSwitch
LightSwitch
12/4/2012 | 10:04:15 PM
re: Nortel Complaint Hits Soundlessly
You must be freakin kiddin me. And this thing is really going to court?

I suppose I should file suit for $13k for every dollar that I invested in companies that have had their stock plummit. Hello? Earth to human, Earth to human, investing comes at a risk.
bitdropper
bitdropper
12/4/2012 | 10:04:13 PM
re: Nortel Complaint Hits Soundlessly
I'd like to know where the teacher and the farmer got that kind of money to invest in NT in the first place.

I think it's time to buy a tractor and get out of telecom. :)
Mrtekinvestr
Mrtekinvestr
12/4/2012 | 10:04:13 PM
re: Nortel Complaint Hits Soundlessly
Let me get this straight. Three people lost a total of $380,000 and they are suing for
$5 Billion. What is that for Pain and suffering?

And I thought the American legal system was crazy.
Long live the Canadian Barristers in wigs.
BobbyMax
BobbyMax
12/4/2012 | 10:04:12 PM
re: Nortel Complaint Hits Soundlessly
Nortel.s management lied to the shareholders. They made very bad decisions in acquiring Alteon, Bay Networks,Shasta Networks, and a DSL company (All in California). Similarly they acquired an optical switch company without analyzing the technology and product viability. The company cheated big time by these acquisitions. Its wireless division was run very poorly in Richardson, Texas.

The company granted a large number options to its retiring employees. All this internal corruption lead to the fall of Nortel. Its partnership with Motorola was a big joke and should not have been undertaken.

A lot of locations that should have beeb closed are still open causing a dremendous drain on money.
Arrow
Arrow
12/4/2012 | 10:04:10 PM
re: Nortel Complaint Hits Soundlessly
"I think it's time to buy a tractor and get out of telecom. :)"

=> first you'll have to find a few 100k$ to buy the tractor and the farm!
Mary Jander
Mary Jander
12/4/2012 | 10:04:08 PM
re: Nortel Complaint Hits Soundlessly
Keep in mind that this is supposed to be a class action suit, so the requested damages apply to "all Canadian residents who purchased securities of Nortel... during the Class Periods... and suffered a realized or unrealized loss as of February 15,2001...."
Mary Jander
Mary Jander
12/4/2012 | 10:04:07 PM
re: Nortel Complaint Hits Soundlessly
Keep in mind that this is supposed to be a class action suit, so the requested damages apply to "all Canadian residents who purchased securities of Nortel... during the Class Periods... and suffered a realized or unrealized loss as of February 15,2001...." [Quoted from the claim text]
WhiteKnight
WhiteKnight
12/4/2012 | 10:04:07 PM
re: Nortel Complaint Hits Soundlessly
bitdropper wrote:
I'd like to know where the teacher and the farmer got that kind of money to invest in NT in the first place.

I think it's time to buy a tractor and get out of telecom. :)

----------------------------

I think you should ask the questions:
What kind of crops?
There are those illegal ones that can be very lucrative.
What sort of teaching?
rosebudd
rosebudd
12/4/2012 | 10:04:07 PM
re: Nortel Complaint Hits Soundlessly
At US$1.25 share price, NT market cap is US$4 billion. The complaint is asking for around US$3.5 billion. Interesting
USA
USA
12/4/2012 | 10:04:06 PM
re: Nortel Complaint Hits Soundlessly
I heard today that more downsizing was taking place in Ottawa. Don't have specifics on the number of people who were terminated.
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