A man walks past a company sign at a Nortel Networks office tower in Toronto on Feb. 25, 2009.
Nortel Networks Corp. executive Michael Gollogly wrote a letter to the company's board in 2003 expressing concerns about accounting decisions at the telecommunications giant and saying it would be wrong to pay special bonuses to executives when Nortel was not truly profitable.
But the letter from the former controller was never received by the board and appears to have never been sent, Crown attorney Robert Hubbard said in his opening statements at the trial of Mr. Gollogly and two other former executives.
And in the end, Mr. Gollogly accepted his share of the company's "return to profitability bonus" for the first half of 2003, despite the worries he expressed in his July letter that year, Mr. Hubbard told Mr. Justice Frank Marrocco of the Ontario Superior Court on Wednesday.
Mr. Gollogly, former chief executive officer Frank Dunn and former chief financial officer Douglas Beatty are charged with fraud for misrepresenting Nortel's financial statements in 2002 and 2003 to trigger bonuses under the company's return-to-profitability bonus scheme.
The three men have denied all the charges and none of the allegations have been proven in court.
In an excerpt of his letter to the board, displayed on screens in a Toronto courtroom, Mr. Gollogly wrote that the company's return-to-profitability bonus – referred to internally as the "RTP program" – was only payable in the second quarter of 2003 because management planned to include $101-million of special items in its financial statements.
"In my opinion the company has not 'returned to profitability,' at least not in the spirit under which I understand the RTP program was intended," Mr. Gollogly wrote.
"I further believe that as a result, no RTP bonus should be paid to the senior team. … In any event, I will not accept my own payment of the RTP, based on my concerns related to the results as outlined above for Q2."
Mr. Gollogly also told the board he was away for several days in July and returned to find that Mr. Beatty had told his staff to post three changes to the financial results that would transform the second-quarter results from a loss to a profit. Mr. Gollogly said there was no justification for the changes and they should be reversed.
Mr. Hubbard told Judge Marrocco that those changes were indeed reversed after Mr. Gollogly complained about it to Mr. Beatty.
Mr. Gollogly concluded his letter to the board by noting that he might be fired for his remarks, saying the board might find his position as controller "untenable."
"While I would certainly regret that conclusion, I would welcome any discussion you may feel you need to have with me on the subject," he wrote.
Mr. Hubbard told the court that Nortel board members will testify that they did not receive the letter, which was dated July 14, 2003.
The Crown's calculations show Nortel's three senior executives were paid more than $7-million under the bonus program in 2003, and also received $4.5-million in payouts in 2003 from a restricted share unit program that was based on meeting return on sales targets.
Including other payments from a 2001 restricted share scheme, the Crown alleged the men improperly received bonuses totalling $12.8-million: $7.8-million for Mr. Dunn, $3-million for Mr. Beatty and $2-million for Mr. Gollogly.
"The accused were paid these amounts on the basis of the fraudulent financial results they presented to the board of directors in the first two quarters of 2003, which concealed the fact that Nortel's return to profitability was based on excess [accounting]accrual releases and not on improved performance," Mr. Hubbard said in his opening statement.
Mr. Hubbard also said the trial will hear that Mr. Beatty told Nortel's business units that the third-quarter financial statements in 2003 were "amnesty time" but that "from now on, people will be fired for not following proper accounting practices."
Mr. Hubbard said the words meant staffers were allowed to "take their last kick at the can" in the third quarter that year to use excess accruals to meet earnings targets, but were told the practice would have to stop after that. At the time, Nortel had launched an accounting review to prepare a restatement of its books.
Mr. Hubbard said the company's auditors at Deloitte & Touche pressed for a restatement, which was resisted by senior executives.
Mr. Hubbard concluded his opening remarks Wednesday. The trial is to resume Thursday with opening comments from defence lawyer David Porter, who is representing Mr. Dunn.
Janet McFarland