Nortel Networks Pays $35 Million To Settle Financial Fraud Charges

by Mike Godfrey, Tax-News.com, Washington

18 October 2007

The Securities and Exchange Commission (SEC) has this week filed civil fraud charges against Nortel Networks Corporation (a Canadian manufacturer of telecommunications equipment) and its principal operating subsidiary Nortel Networks Limited (Nortel), alleging that Nortel engaged in accounting fraud from 2000 through 2003 to close gaps between its true performance, its internal targets and Wall Street expectations.

Without admitting or denying the Commission's charges, filed in the US District Court for the Southern District of New York, Nortel has agreed to settle the Commission's action by consenting to be permanently enjoined from violating the antifraud, reporting, books and records and internal control provisions of the federal securities laws, and by paying a $35 million civil penalty, which the Commission will seek to place in a Fair Fund for distribution to affected shareholders. Nortel has also agreed to report periodically to the Commission's staff on its progress in implementing remedial measures and resolving an outstanding material weakness over its revenue recognition procedures.

"This is an important fraud case involving conduct from 2000 through 2003," explained Linda Thomsen, Director of the Commission's Division of Enforcement. "Since that time, under new leadership, Nortel has undertaken significant efforts to address the wrongdoing, remedy the harm and implement a remediation plan to prevent recurrence of the misconduct."

Christopher Conte, an Associate Director of the Commission's Division of Enforcement, added: "The settlement reached today reflects the seriousness of the company's past activity. Nortel's fraud was long-running, intentional and pervasive."

According to the Commission's complaint, from late 2000 through January 2001, Nortel made changes to its revenue recognition policies that were not in conformity with US Generally Accepted Accounting Principles (GAAP). The changes were made to fraudulently accelerate revenue into 2000 to meet its publicly announced revenue targets for the fourth quarter of 2000 and for that year. The complaint alleges that Nortel also selectively reversed certain revenue entries during the 2000 year-end closing process, when its acceleration efforts pulled in more revenue than necessary to meet its targets. These actions, the complaint alleges, inflated Nortel's fourth quarter and fiscal year 2000 revenues by approximately $1.4 billion.

In settling the matter, the Commission acknowledged Nortel's substantial remedial efforts and cooperation.

As part of the settlement, Nortel agreed to report to the Commission staff every quarter until it fully implements its remediation program, and the company and its outside auditor agree that the existing material weakness has been resolved.

Recommended