If a judge has ever had a tough verdict to render, it would be Mr. Justice Frank Marrocco.
This week, the spotlight at the long-running trial of three former Nortel Networks Corp. executives will shift to Judge Marrocco, a seven-year veteran of the Ontario Superior Court, as the Crown wraps up five months of evidence in the marathon fraud case.
Defence lawyers have not said whether they intend to call any witnesses of their own, but are not expected to do so. If they do not, the legal battle will move to closing arguments, likely to be scheduled for September.
The volume of evidence alone makes Judge Marrocco’s work daunting.
Since it began in January, the Nortel trial has seen more than 2,500 documents tendered as part of almost 600 exhibits. Dozens of thick black binders of exhibits line bookshelves in a spacious courtroom on Toronto’s University Avenue, representing a mere fraction of the 30 million pages of material disclosed to the RCMP in its investigation.
While the evidence is voluminous, the allegations in the case are relatively straightforward. The Crown alleges Nortel’s executives manipulated the company’s huge stockpile of accounting reserves on its books – amounts previously booked to cover anticipated future expenses – to push the company to profitability when most advantageous in the first and second quarters of 2003.
The alleged motive is that the executives wanted to trigger special “return to profitability” bonuses for themselves, ultimately earning payouts totalling a combined $12.8-million for former chief executive officer Frank Dunn, chief financial officer Douglas Beatty and controller Michael Gollogly.
The allegations may be the only straightforward thing about the case.
One of Judge Marrocco’s biggest tasks will come as he weighs the often ambiguous evidence presented at the trial from 20 Crown witnesses, much of it coming from cautious accountants who at times sounded more like they were called by the defence than the Crown.
Judge Marrocco is left to piece through hundreds of hours of testimony to decide which evidence remains clear and uncontested, and which was shaken under examination.
The Crown’s case, however, has several strengths.
Strength No. 1: The trial hinges on the clear fact that Nortel’s accounting was wrong during 2002 and 2003, a fact supported by two successive restatements of the company’s books.
The restatements have freed the Crown from having to demonstrate as a starting point that the accounting treatment was erroneous, which can be surprisingly difficult to do in the absence of a clear admission by the company. It means the starting point for the trial was whether the errors were intentional or not.
Strength No. 2: Internal reports dubbed “outlooks” and “road maps” for executives were introduced at Nortel in 2003 – and, according to testimony, not shown to auditors or the board of directors – illustrating how the company could move from losses to profitability by using millions of dollars of accounting reserves to meet the targets.
Some of the outlooks included pages analyzing the profit levels needed to trigger payouts under Nortel’s complex bonus and share unit plans. The defence argues the documents were innocuous efforts at forecasting and planning, but the Crown alleges they are road maps to a fraud.
Strength No. 3: Testimony about closing the books for the fourth quarter of 2002 was possibly the best employee evidence at the trial. At least four non-head office employees testified about receiving unusual phone calls early in 2003 asking if their operating divisions had any more accounting reserves they could create for the fourth quarter of 2002.
All had submitted their year-end numbers by this time, and said they had never received such a phone call before asking them to look for more reserves they could book after the fact. While witnesses shifted their evidence under cross-examination to varying degrees, it will be hard for the defence to fully counter the sheer volume of people telling similar versions of events.
There are also weaknesses in the Crown’s case that offer strength to the defence:
Weakness No. 1: There is no single smoking gun that clearly implicates the accused – no e-mail, memo or conversation where the accused openly discussed fraudulent manipulations. The Crown can only suggest the accused must logically have known about and directed the fraud, arguing no one else had the authority to make such key decisions.
Weakness No. 2: The three accused have stuck together and are presenting a combined defence with no one striking a deal to testify against the others. As a result Judge Marrocco is left with a challenge of separately weighing the guilt of each accused when there is little evidence which of the men made which key decisions at issue.
Weakness No. 3: There is plenty of evidence that many of the accounting decisions in question were reviewed and approved by Nortel’s external auditors at Deloitte & Touche, helping the defence build its argument that the accused believed their decisions were appropriate at the time. Similarly, there are many reports, memos and e-mails showing that accounting treatment of reserves was being carefully studied internally by Nortel staff beginning in 2002.
It means the defence has grounds to suggest the executives were releasing reserves as part of a well-intentioned effort to get the accounting fixed. Lawyers for the accused have stressed Nortel was facing huge chaos in 2001 and 2002, allowing errors with accounting reserves to fester unnoticed. When problems with overstated accounting reserves finally came to light, the defence argues executives tried to fix them in the most expedient way possible by reversing the reserves – and booking the income – to try to get the mistaken entries off the books.