Nortel Tries On a New Suit

Shares of Nortel Networks Ltd. (NYSE/Toronto: NT) sank $0.11 (3.07%) to $3.47 in early afternoon trading today as investors digested yesterday's shareholder update and the news of a new Nortel lawsuit aimed at its current and former directors and executives (see Nortel Discloses Civil Lawsuit).

Nortel didn't announce layoffs yesterday, as one analyst had predicted (see Nortel Update May Include Layoffs). That announcement may instead come on August 19, when Nortel says it expects to announce "estimated limited preliminary unaudited results for the first and second quarters of 2004."

Nortel did confirm that it has received notice of yet another shareholder lawsuit, 1:04-cv-05954, filed in the U.S. District Court for the Southern District of New York on July 30. Nortel has been subject to 27 securities-related lawsuits since March 2004, but all of those suits have been consolidated into one massive shareholder action that's still pending trial.

This new lawsuit is something else entirely. Its plaintiffs include Locals 302 and 612 of the International Union of Operating Engineers, which owns 254,000 shares of Nortel; the Indiana Electrical Workers Pension Trust Fund IBEW, which owns 6,800 Nortel shares; and a New Jersey resident named Dong Wen, who owns 2,140 shares.

The plaintiffs accuse nine of eleven of Nortel’s current directors and its current chairman and CEO of profiting from a conspiracy to violate securities laws in Canada and the U.S. "Nortel’s top executives and its managers have pocketed hundreds of millions of dollars of bonuses based on faked profits," the complaint states.

According to the complaint, Nortel's financial nightmare began when, between 1998 and 2000, it acquired "18 companies for over $30 billion – virtually all of which were acquired in return for Nortel stock – in many instances, paying billions and billions of dollars more than the true worth as well as the actual value of the assets of these acquired companies."

The digestion of all those companies, at a time when the telecom business was entering a massive slowdown, resulted in sloppy financial reporting, mismanagement, and a coordinated coverup to hide Nortel's true financial condition while its executives enjoyed performance-based bonuses, the complaint alleges.

Elsewhere, the 115-page complaint states: "Nortel insiders John Roth[former CEO], Frank Dunn [former CEO], Clarence Chandran [former COO], Chahram Bolouri [current president of global operations], Pasal Debon [current president, wireless networks], Gary Donahee [former president of Nortel Americas], Frank Plastina [former president of Nortel's metro & enterprise networks] and Nicholas DeRoma [current chief legal officer] pocketed cash bonuses of $5,636,250; $1,014,515; $2,675,000; $807,836; $717,375; $1,059,840; $880,800; and $715,307, respectively, based on Nortel’s record 2000 revenues and 'operating' profits, while their Nortel stock options and other stock rights soared in value by millions and millions of dollars."

What are the plaintiffs seeking? In a word, payback. The shareholders want a jury trial to help determine whether shareholders deserve any compensation and whether Nortel's current and former brass should reimburse the company for any bonuses and incentive-based pay that resulted from financial misstatements.

In its press release about the financial update, Nortel states that "its Board of Directors would carefully consider the matters that had been raised."

— Phil "estimated limited preliminary unaudited" Harvey, News Editor, Light Reading

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