January 14, 2013 / 3:46 PM / 5 years ago

UPDATE 3-Court dismisses fraud charges against 3 Nortel execs

* Former CEO and two others were accused of misrepresenting results

* One-time tech heavyweight crashed after dot-com bubble burst

* Judge says prosecutors failed to meet burden of proof (Adds comments from academic, reference to bankruptcy hearing)

By Susan Taylor and Allison Martell

TORONTO, Jan 14 (Reuters) - An Ontario Court on Monday dismissed fraud charges against three former top executives at bankrupt Nortel Networks Corp after a year-long trial involving one of the most spectacular casualties of the 1990’s dot-com bubble.

Former Chief Executive Frank Dunn, former Chief Financial Officer Douglas Beatty and former Controller Michael Gollogly were found not guilty of fraudulently misrepresenting Nortel results in a tumultuous time for the one-time tech superstar between 2000 and 2004.

Prosecutors had charged that the accused manufactured a loss in one quarter at the end of 2002 and a profit in a subsequent three-month period, defrauding investors and triggering more than $12 million in cash and stock bonuses.

But Ontario Superior Court Justice Frank Marrocco said he was not satisfied that the three accused had improperly accounted for accrued liability balances to misrepresent the 2002 results, nor that they had fudged income statements in the first quarter of 2003 in order to earn a bonus.

“The accused are presumed innocent. The burden is on the prosecution. It was entirely appropriate that we go through this process to find out what happened. The burden, in my view, is not met. The charges are dismissed,” he told a crowded courtroom.

The verdict - which comes more than four years after the executives were first charged - is bound to focus attention on complaints that Canada is soft on corporate crime.

“White collar crime pays in Canada,” said Ramy Elitzur, a financial analysis professor at the University of Toronto’s Rotman School of Management. “I must say, I‘m very discouraged by this court decision.”

He said Canada needs a national securities regulator to pursue market and accounting crimes more effectively, along with a more aggressive attitude.


Lawyers for the accused described the result as a vindication for their argument that the three executives had done nothing wrong.

“We’re ecstatic with the result,” Beatty’s lawyer, Gregory Lafontaine, said after the ruling, his client smiling behind him outside the downtown Toronto court building. “It’s a great judgment, and a complete vindication of Mr. Beatty. There was no fraud at Nortel. No fraud at Nortel at all.”

The decision has no bearing on Nortel’s complex bankruptcy proceeding, where suppliers, bondholders, governments and former employees hold $20 billion in claims. Nortel, which filed for bankruptcy in 2009, has just $9 billion in cash. Mediation in that matter begins this week in Toronto.

Once the equipment manufacturing arm of Canada’s biggest phone company, Nortel became a market darling in the late 1990s as the Internet revolution picked up steam and investors bet the company would make billions selling fiber optics networks.

In 2000, speculators drove the company’s shares up to the point where its market capitalization topped out around C$400 billion, a full third of the entire Toronto Stock Exchange.

But the shares plunged as tech stocks fell out of favor and Nortel’s sales missed analysts’ stratospheric expectations by miles. The stock dropped more than 99 percent by 2002, decimating investment funds.

Nortel returned to profit in 2003 after several years of losses, but the company then restated its results several times, shaking investor faith and triggering numerous investigations.

The scandal led to the firing of the three defendants in 2004.

Dunn had been Nortel’s chief financial officer before his promotion to CEO in 2001, succeeding the affable John Roth at a time when no one else wanted the job.

With the company taking heavy losses, Dunn eliminated tens of thousands of jobs, sold plants, shut business lines and slashed costs.


Critics have long argued that Canada is soft on white-collar crime. Some high-profile cases have dragged on for years, in contrast with cases in the United States that brought long prison sentences for corporate criminals.

In 1997, shares of Bre-X collapsed after it emerged that samples from its Busang gold deposit in Indonesia had been salted to create the impression of a massive gold strike. Despite a prosecution that dragged on until 2007, no one was convicted.

Elitzur said the Nortel trial would have produced a different outcome had it been heard in the United States.

“They understand that market failures could be deadly to the operation of a capital market and that’s why they pursue more aggressively securities violations,” he said. (Additional reporting Andrea Hopkins, writing by Cameron French; Editing by Nick Zieminski, Janet Guttsman and Dan Grebler)

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