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CANADA: Four Former Nortel Executives Charged With Accounting Fraud

Associated Press
September 13th, 2007

The U.S. Securities and Exchange Commission has charged four more former Nortel Networks Corp. executives with accounting fraud, alleging they manipulated reserves to change Nortel's earnings statements on the orders of more senior officers of the Canadian networking equipment maker.

The U.S. stocks regulator said Wednesday it had filed civil fraud charges against Douglas Hamilton, Craig Johnson, James Kinney and Kenneth Taylor, the former vice presidents of finance for Toronto-based Nortel's optical, wireline, wireless and enterprise business units.

In March, the SEC filed civil fraud charges against ex-CEO Frank Dunn and other executives -- including former Chief Financial Officer Douglas Beatty and former controller Michael Gollogly -- alleging they directed a so-called earnings management fraud to manipulate the company's financial reports.

In the latest charges, the commission alleges that from the second half of 2002 through January 2003, Messrs. Hamilton, Johnson, Kinney and Taylor "all determined that their business units held tens of millions of dollars in excess reserves."

"The four finance vice presidents did not immediately release those excess reserves as required under U.S. Generally Accepted Accounting Principles, but instead maintained them for earnings management purposes," the SEC said in its complaint Wednesday.

The regulator said the former executives set aside $44 million in additional excess reserves to lower Nortel's consolidated earnings and bring them in line with internal and market expectations.

The changes helped erase Nortel's profit for the fourth quarter of 2002 and helped produce a loss instead.

The SEC alleges that Messrs. Dunn, Beatty and Gollogly directed the improper companywide release of about $500 million of excess reserves in the first and second quarters of 2003 to inflate earnings and pay bonuses.

U.S. regulators allege the executives aimed to "create the false appearance" that the company had returned to profitability after three years of red ink so they could pay themselves and others bonuses, which were based on the company hitting certain financial targets.

The commission is seeking unspecified fines, a permanent injunction, repayment of money with interest and an order barring the executives from being officers and directors of any public company.

Nortel, which once accounted for one-third of the total valuation on the Toronto Stock Exchange, ran into financial headwinds around 2000 and lost billions of dollars of value.

Mr. Dunn was fired along with Messrs. Beatty and Gollogly in 2004 after allegations of accounting irregularities at the company.

The Ontario Securities Commission also plans a hearing into allegations of financial misconduct and negligence against Mr. Dunn and others named in the SEC filing.

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