SEC Adds Four Ex-Nortel Officials to Fraud Complaint
The SEC added four former Nortel executives to a fraud complaint against colleagues, it said Wednesday. The SEC wants an injunction, a civil fine, a ban on the defendants working as officers or directors of public companies, and relinquishment by them of profits from the fraud, it said in an amended SEC v. Dunn complaint filed in the U.S. District Court for New York’s Southern District.
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The SEC added Douglas Hamilton, Craig Johnson, James Kinney and Kenneth Taylor, former finance vice presidents for Nortel’s optical, wireline, wireless and enterprise divisions. “Nortel’s earnings management fraud could not have happened without their efforts,” said Christopher Conte, associate director of the SEC enforcement division. Nortel declined to comment.
The men “participated with Nortel’s former top executives to improperly maintain, establish and release reserves in order to manipulate earnings and fabricate Nortel’s return to profitability in the first quarter of 2003,” Conte said. “These defendants all received significant compensation while they were falsifying Nortel’s financial results.” The original March 12 complaint charged former CEO Frank Dunn, former CFO Douglas Beatty and former Controller Michael Gollogly.
The SEC said that in 2002-2003, the four realized that their business units held “tens of millions of dollars in excess reserves,” but didn’t immediately release the reserves as required under generally accepted accounting principles, the commission said. They “instead maintained them for earnings management purposes,” the SEC said.
In early 2003, the men acted on orders from Dunn, Beatty and Gollogly to “improperly establish over $44 million in additional excess reserves in order to lower Nortel’s consolidated earnings and bring it in line with internal and market expectations,” the SEC said. The action helped erase Nortel’s pro forma profit for Q4 2002 and made it report a loss instead, it said.
The SEC said the quartet’s efforts in the first two quarters of 2003 were “essential” to companywide release by Dunn, Beatty and Gollogly of about $400 million in excess reserves, a move intended to inflate earnings and pay bonuses. The four helped by releasing about $154 million reserves in Q1 2003 and about $191 million in Q2, it said.