Former Nortel CEO Frank Dunn leaves the University Ave. courthouse in Toronto.
After years of stony silence in the face of allegations of fraud and financial manipulations, top executives of Nortel Networks Corp. finally unveiled their version of events at the failed telecommunications company.
Lawyer David Porter, speaking in a Toronto courtroom on behalf of three executives charged with fraud at Nortel, said the allegation is "preposterous" and would have required the co-operation of "dozens if not hundreds" of people at both Nortel and the company's audit firm.
"In this prosecution, the Crown makes the preposterous accusation that there existed both within Nortel, and within its reputable auditor Deloitte & Touche, a criminal conspiracy involving dozens if not hundreds of people," Mr. Porter told Mr. Justice Frank Marrocco of the Ontario Superior Court.
"The criminal conspiracy in this case would be unprecedented in its scope and involved dozens and dozens of reputable chartered accountants in both Nortel and Deloitte & Touche somehow ultimately being co-ordinated in this alleged illegality by three senior executives."
Mr. Porter's opening statement comes about four years after the executives' arrests and eight years after the scandal accelerated the demise of what was once Canada's most important tech company.
Mr. Dunn, former Nortel chief financial officer Douglas Beatty and former controller Michael Gollogly are accused of fraudulently manipulating Nortel's financial statements in 2002 and 2003 to trigger executive bonus payments for returning the company to profitability. The men have denied the allegations, which have not been proven in court.
The Crown alleged that the men released money from Nortel's accounting reserves to manufacture a profit in the first two quarters of 2003 to trigger their bonuses.
During his opening remarks Thursday, Mr. Porter said the Crown misunderstood Nortel's special return to profitability bonus, and said the men would have earned the bonus even after Nortel's financial statements for 2003 were restated.
He said the return to profitability bonus would have been payable by the third quarter of 2003 under the corrected financial results.
"Even after the second restatement, it remains true that Nortel returned to profitability in 2003," Mr. Porter said.
During his opening remarks, Mr. Porter displayed an array of internal audit documents prepared by accountants at Deloitte & Touche, saying they showed that the audit firm was fully aware of the way Nortel was using and releasing accounting reserves.
He said many of the allegedly fraudulent uses of reserves identified by the Crown for 2002 and 2003 had been closely reviewed and approved by Deloitte officials.
Earlier in the week, Crown attorney Robert Hubbard told Judge Marrocco that there may be evidence that some of the disputed transactions in the case were approved by Deloitte, but that did not prove they were appropriate, and it did not release the accused executives from responsibility for misusing reserves.
However, Mr. Porter, who is representing Mr. Dunn and is from the firm McCarthy Tétrault, said the fact that the use of reserves was an open and transparent process "is completely inconsistent" with allegations of fraud.
In the contentious second quarter of 2003, when Nortel released $372-million of reserves to transform an operating loss into a profit – and trigger executive bonuses – Mr. Porter said the release of reserves was a key focus of Deloitte & Touche's audit, and the issue was flagged by Mr. Gollogly for discussion with the board's audit committee.
"This openness and candour between Nortel management, the auditors and the audit committee speaks to honesty in dealings, not fraud," Mr. Porter said.
He said Deloitte also knew there were not specific business "triggers" to justify releasing some of the reserves in the first quarter of 2003 and the issue was discussed with the auditors and ultimately allowed.
Mr. Porter said documentation to support some of the use of reserves was poor because Nortel had massively downsized its staff from 90,000 people in 2000 to just 36,000 by the end of 2002. Many people had left the company who knew about earlier transactions involving the creation of accounting reserves, Mr. Porter said.
As well, senior executives were facing huge losses – $19-billion in the second quarter of 2001 alone – and had many other business challenges to focus on at the time.
"Management was preoccupied with saving the company from going bankrupt," he said.
The first witness in the trial, a former member of Nortel's accounting staff, is expected to begin testifying Friday. The judge is first expected to rule on the admissibility of some contested documents.
Janet McFarland