Three former Nortel Networks Corp. executives will learn their fate in a Toronto courtroom Monday when a judge will deliver his verdict in their long-running fraud trial.
Former chief executive officer Frank Dunn, former chief financial officer Douglas Beatty and former controller Michael Gollogly are accused of fraudulently manipulating Nortel’s financial results in 2002 and 2003 to push the money-losing company to profitability and trigger special “return to profitability” bonuses for themselves.
The decision by Mr. Justice Frank Marrocco of the Ontario Superior Court comes a year after the fraud trial began, and coincidentally falls four years to the day since Nortel filed for bankruptcy protection and began the process of liquidating its assets.
The judge must decide if problems with the use of Nortel’s stockpile of accounting reserves in 2002 and 2003 were legitimate errors by top executives or were fraudulent manipulation. The difficulty he faces is deciding where the line is between criminal fraud and aggressive “earnings management” where executives adjust discretionary accounting items to bolster income.
The Crown relied heavily on internal reports dubbed “outlooks” and “road maps” that were prepared for executives and illustrated how the company could meet its profit targets by using millions of dollars of accounting reserves. Some of the road maps also included an analysis of what levels of profit would be needed to trigger bonus payments. The defence says the reports were standard planning tools, while the Crown alleges they are road maps to a fraud.
There is no evidence that clearly implicates the accused, and no testimony that anyone ever discussed fraud outright. The Crown argues no such blatant evidence would be likely to exist in a sophisticated accounting fraud case, but it forces Judge Marrocco to draw his own conclusions about the motives of the accused.
Key defence argument
The accused have presented reams of evidence to show that key decisions about the use of accounting reserves were approved by Nortel’s auditors at Deloitte & Touche, saying it shows the top executives believed their accounting decisions were appropriate at the time. However, evidence from Deloitte witnesses also showed auditors had a growing sense of unease about use of reserves in 2003.
Garth Drabinsky and Myron Gottlieb, the co-founders of live theatre company Livent Inc., were found guilty of fraud in 2009 for manipulating the financial statements of Livent in the 1990s, suggesting it is not impossible for the Crown to win accounting fraud cases. But the Livent trial was far different in key respects, including the fact the former vice-president of finance at Livent pleaded guilty to fraud and testified against his former bosses at the trial. He admitted he participated in a fraud and even prepared separate financial statements showing the company’s “real” financial position in each quarter.
The Nortel verdict will be closely watched for the signals it sends about how the courts view accounting fraud and where the line lies between aggressive earnings management and criminal fraud. During closing arguments, Judge Marrocco repeatedly asked both sides to comment on the difference between poor accounting that might lead to admonitions by accounting regulators, and criminally fraudulent accounting, remarking that he must apply a criminal burden of proof. And, perhaps most tellingly, he asked how he should view accounting decisions that may have been made for manipulative purposes, but which could be justified using permissible discretionary accounting methods.