TORONTO The acquittal of three former executives of bankrupt telecommunications company Nortel Networks in a high-profile fraud case is an embarrassing loss for Canadian prosecutors that could have a chilling effect on future efforts to pursue white-collar crime.
The telecom equipment manufacturer fired Chief Executive Frank Dunn and top lieutenants Douglas Beatty and Michael Gollogly in 2004 amid an accounting scandal, and they were charged four years later with altering corporate results to trigger lucrative bonuses.
On Monday, almost a decade after the accounting scandal broke, an Ontario judge ruled that prosecutors had failed to meet the burden of proof that a crime had been committed, leaving the entire prosecution in tatters.
The delays brought back memories of snails-pace investigations in high profile fraud cases like theatre company Livent, whose founders went to jail in 2011 after a scandal-plagued bankruptcy dating from 1998. Bre-X, a C$6 billion gold-salting fraud in the 1990s, has yet to produce a single conviction.
In the United States, in contrast, prosecutors have won several dozen guilty pleas and convictions on insider trading and other white collar crime since the 2008 financial crisis.
"For people who think that fraudsters are allowed to get away with securities fraud in Canada, these acquittals just confirm that view," Cristie Ford, a law professor at University of British Columbia, said of the Nortel case.
TECH BUBBLE STAR
Nortel was one of the stars of the 1990s tech bubble - a business that at its peak was worth about C$400 billion, making up one-third of the Toronto Stock Exchange and employing almost 100,000 people.
But it was already a shell of its former self when Dunn took over as CEO in November 2001. Nortel shares were down 90 percent from their peak, and the forecasts of massive profits that had driven the stock in the late 1990s instead materialized as multibillion-dollar losses. Dunn was brought in to stem the bleeding.
In their case, prosecutors accused the executives of improperly manufacturing quarterly losses and then engineering a profit in subsequent three-month periods to trigger lucrative cash and stock bonuses.
"What the verdict here tells people is the difficultly of trying to prove these kind of cases. Financial fraud cases are notoriously complex to prove," said Tom Gorman, a partner at Washington law firm Dorsey & Whitney LLP.
It raises "a question as to whether or not it should have been brought at all," he said.
Critics say Canada's pursuit of white-collar criminals is beset by structural weaknesses that deter foreign investment and compare badly to aggressive U.S. prosecutions, where recent offenders like hedge fund managers Bernie Madoff and financier Allen Stanford are serving 100-plus year sentences.
Unlike the single-regulator system of the U.S. Securities and Exchange Commission, the Canadian securities regime is a patchwork of 10 provincial regulators that can lead to jurisdictional issues that hamper criminal enforcement.
The Royal Canadian Mounted Police's Integrated Market Enforcement Teams, established in 2003 to beef up the country's approach to prosecuting corporate crime, carry out major investigations but have faced criticism over the past decade.
"The RCMP is a great police organization, but it's not really a securities regulator," said Ramy Elitzur, a professor at the University of Toronto's Rotman School of Management.
Spending years and millions of dollars to pursue an ultimately unsuccessful criminal case not only looks bad but could serve to make authorities gun-shy going after other similar cases, said.
"This probably would make them think twice because nobody wants to lose a case."
Jacob Frenkel, a former SEC lawyer and partner with Shulman Rogers in Maryland, allowed that a loss in such a high-profile case could cause prosecutors to be more picky in pursuing future cases.
"For (a prosecutor) to lose a case in which it is so invested, for so many years, the outcome is devastating," he said. "If (they) decide to bring fewer cases or become more reluctant to bring certain cases, because of this verdict, that would only become an invitation to fraudulent activity."
(Reporting By Cameron French; additional reporting by Allison Martell and Susan Taylor in Toronto and Tom Hals in Wilmington, Delaware; Editing by Janet Guttsman and Steve Orlofsky)