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Former Nortel CEO Frank Dunn (Fernando Morales/Fernando Morales/The Globe and M)
Former Nortel CEO Frank Dunn (Fernando Morales/Fernando Morales/The Globe and M)

Ex-Nortel CEO was concerned over use of accounting reserves Add to ...

Frank Dunn told Nortel Networks Corp. investigators that “a lot concerns me” about the company’s use of accounting reserves to meet profit targets in 2003, but he maintained that he was not involved in any improper use of provisions.

The former chief executive officer allegedly made the remarks in 2004 during an interview with company investigators. A written summary of the conversation was revealed Thursday at the Toronto fraud trial of Mr. Dunn and two other former Nortel executives.

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During the interview on March 21, 2004, Mr. Dunn said he was “surprised” by what he was learning from investigators about e-mails sent between Nortel staff members who were allegedly asked to identify accounting reserves that could be used to help meet profit targets in 2002 and 2003.

“Dunn noted that on reading all of the e-mails together, ‘a lot concerns me,’ ” the interview summary says. “He later remarked, ‘Do I think someone is going to be able to explain away all of this? No.’ ”

Crown attorney Robert Hubbard read portions of the interview summary – which was prepared by investigators from U.S. law firm Wilmer Cutler Pickering Hale and Dorr LLP – while questioning two lawyers for Mr. Dunn who were called as witnesses at the long-running fraud trial.

Lawyers Abbey Sirivar and Thomas Heintzman were subpoenaed to testify about the interview they attended with Mr. Dunn in 2004.

Both lawyers testified that they recalled little that was said at the meeting. Mr. Hubbard read portions of Wilmer Cutler’s meeting summary to ask if it helped “refresh” their memories, but both said the excerpts did not help.

Mr. Dunn has made no direct public comments about the alleged accounting fraud at Nortel, so the interview summary offers a rare glimpse into his views on what occurred at the company.

The interview occurred just days after Nortel suspended chief financial officer Douglas Beatty and controller Michael Gollogly over accounting problems. Mr. Dunn was still CEO at the time of the meeting, but all three men were fired the following month.

The meeting summary said Mr. Dunn reported that he was unaware of any wrongful behaviour by either Mr. Beatty or Mr. Gollogly and knew of no wrongdoing at Nortel. He insisted that the company had legitimately earned a profit in 2003 and it was not the result of manipulations.

But he also said he was unaware that Nortel had identified $189-million of “unsupported” reserves that it was continuing to carry on its balance sheet in 2003 even though they should not have been maintained.

“If these are right, I have a big problem with my CFO and controller,” the summary quoted him saying at the interview.

The interview summary also said Mr. Dunn “questioned how the CFO and controller could have certified the accuracy of the financial statements if they knew that unsupported corporate and [non-operating]provisions were maintained on the balance sheet.”

Mr. Dunn, Mr. Beatty and Mr. Gollogly are accused of fraudulently manipulating Nortel’s accounting reserves to push the company to profitability in 2003 and trigger “return to profitability” bonuses for executives.

Although Mr. Heintzman testified Thursday that he remembered little of the meeting, he said he did have a clear memory of one conversation about Nortel’s financial results for the fourth quarter of 2002.

At the interview, Wilmer Cutler staff suggested Mr. Dunn had told them previously that Nortel had created new provisions in the fourth quarter of 2002 to turn a profit into a loss for the period because he didn’t want to pay bonuses for a single quarter of profitability after losing so much in the first nine months of the year.

But Mr. Dunn replied that he had never previously made those remarks.

“He said, ‘I never said that. The provisions used were properly used,’ ” Mr. Heintzman recalled Thursday.

“That’s the only thing I could remember about the meeting.”

In a ruling last week, Mr. Justice Frank Marrocco of the Ontario Superior Court said Mr. Hubbard was not allowed to use notes made by lawyers at the interview or enter them as evidence at the trial.

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