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Nortel Silent on Baffling Bonuses

Light Reading
News Analysis
Light Reading
4/28/2004

Following the ousting of Nortel Networks Ltd. (NYSE/Toronto: NT) CEO Frank Dunn in a financial scandal, the equipment vendor's executives are mum on Dunn's "return to profitability" bonus plan (see Nortel Dismisses Dunn and Nortel Fires CEO).

Since early 2003, millions of dollars have been paid to Nortel's executives and employees under the premise that the company had become profitable. But, thanks to revelations made by Nortel today, the premise under which those bonuses were paid may have been false.

And, unfortunately, Nortel hasn't disclosed how much has been paid under the program.

"The independent [financial] review is still underway, and we will complete it as soon as possible… So it would be wrong for me to comment on our actions regarding the bonuses paid until that review is completed," said Lynton (Red) Wilson, Nortel's chairman, in a conference call today.

The company's upcoming restatements will wipe out some $250 million in profits reported for 2003. The company reported $499 million in net earnings for that year and now says it is off by half. The net profit Nortel reported for the first half of 2003 should have been a net loss. Nortel wouldn't say much about its current financials, either. But the company did say its cash balance had dropped from $4 billion in December to $3.6 billion in March "primarily due to payments made in the first quarter of 2004 under the Nortel Networks employee incentive compensation plans as well as cash outlays for restructuring and a real estate transaction."

Nortel's "Return to Profitability" bonuses for employees were payable in full when Nortel reached profitability for a single fiscal quarter in 2003, according to the company's SEC filings.

For senior executives, the bonus payout came in three chunks and was quite lucrative. Each bonus was based on an undisclosed multiple of an executive's base salary. Execs got 20 percent of the aggregate potential amount after one profitable quarter, 40 percent after two straight profitable quarters, and 40 percent after four straight profitable quarters, the SEC filings state.

It's noteworthy how "profitability" is defined in Nortel's bonus plan description: The plan counts "positive pro forma earnings from continuing operations" as a profit, so it doesn't acknowledge GAAP earnings.

Nortel's shares ended Wednesday down $1.59 (28.19%) to $4.05 (see Nortel Stock Dives on Dunn Downfall).

— Phil Harvey, News Editor, Light Reading

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dljvjbsl
dljvjbsl
12/5/2012 | 1:54:44 AM
re: Nortel Silent on Baffling Bonuses
The executive profitability bonues are going to be a factor in class action suits by Nortel investors. Since investors relied on misleading financial results then a class action suit against Nortel is inevitable.
dljvjbsl
dljvjbsl
12/5/2012 | 1:54:44 AM
re: Nortel Silent on Baffling Bonuses
The executive profitability bonues are going to be a factor in class action suits by Nortel investors. Since investors relied on misleading financial results then a class action suit against Nortel is inevitable.
truelight
truelight
12/5/2012 | 1:54:38 AM
re: Nortel Silent on Baffling Bonuses
I will be happy in joinng this class action lawsuit as a former nortel stock holder.
change_is_good
change_is_good
12/5/2012 | 1:54:37 AM
re: Nortel Silent on Baffling Bonuses
>> I will be happy in joinng this class action lawsuit as a former nortel stock holder.



is that something that you want to admit to?

Indy_lite
Indy_lite
12/5/2012 | 1:54:36 AM
re: Nortel Silent on Baffling Bonuses
Ciena, Cisco, Juniper ...
Machavelli
Machavelli
12/5/2012 | 1:54:29 AM
re: Nortel Silent on Baffling Bonuses
Lucent recently settled relatively frivious lawsuits in March 2004 for 500 million for mismanagement during the tech boom. They paid even though there was little foundation for these lawsuits. Every company in the industry suffered the same fate (implosion of share value) like Lucent did.

I'll bet Nortel's liability will run into the billions (as much as 5 billion) given the following facts:

1) High ranking executives accepted "return to profitability" bonues that they did not deserve based on erronous financial reporting. While ten of thousands of employeess were fired and many shareholders invested based on these erronous reports and lost plenty of money. There is a direct correlation here (no ambuigities like in the Lucent case) in legal terms.

2) The company publically admitted yesterday the incompetent management of the company during 2001-2004 when they fired Dunn, Beatty and the other guy for "just cause"

"M"
hitekeng
hitekeng
12/5/2012 | 1:54:28 AM
re: Nortel Silent on Baffling Bonuses
So you have to run an article per day about Nortel?? I thought your "raison d'etre" was to enlighten people about technologies rather than sensationalism!!!
Machavelli
Machavelli
12/5/2012 | 1:54:23 AM
re: Nortel Silent on Baffling Bonuses
I certainly hope LR is covering the Nortel story with plenty of articles. This story is being well covered several times a day by every other news organization.

My beef with Nortel is seeing many older folks (I know personally)who invested a good chunk of their retirements savings into Nortel stock in the 1999-2001 timeframe being reduced from living in comfort to living just above the poverty line.

At the same time incompetent upper management at Nortel who fired 10000's of good, loyal and hardworking people and who plummneted the stock down through stupid acquistions and questionable acconting practices walk off with millions in stock options and severance packages.

"M"
whyiswhy
whyiswhy
12/5/2012 | 1:54:23 AM
re: Nortel Silent on Baffling Bonuses
Let's see: WorldCom, Tyco, LU and NT to name only a few. Oh, not to forget "Frankie da Q". The industry is rife with blatant criminality. And to my knowledge, nobody has done a day in jail, and not one former executive (or investment banker) has ended up "on the streets" having had to dipose of his/her home to pay fines and or settle law suits.

Although I can name several friends who declared bankruptcy as a result of their investments and or options.

And you think LR is senstationalistic?

JMHO: Get your lips surgically removed from the ass of the NT exec you report to.

-Why
stevenvasil
stevenvasil
12/5/2012 | 1:54:17 AM
re: Nortel Silent on Baffling Bonuses
To all those 'Posters' with a beef against Nortel or who know shareholders, family and friends of shareholders, I am currently writing a book, "Optical Delusions", documenting the rise and fall of the John Roth Empire and the cruel ride on which the average shareholder has been taken not only by the company but its Bay Street sponsors: not once, but twice. I want to hear THEIR story. Contact me at [email protected] and I'll be in touch.
Steve
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