The three former Nortel Networks Corp. executives at the centre of one of Canada’s biggest corporate fraud cases manipulated even small transactions to ensure they would meet financial targets to receive bonuses, a Toronto court heard on the first day of the long-awaited trial.
Nearly a decade after an accounting scandal accelerated the long death-spiral of what was once Canada’s most important tech company, Ontario’s Crown outlined its evidence against the executives, which will involve some of the country’s most prominent corporate directors, former employees and a slew of internal documents.
Included in the Crown’s case, attorney Robert Hubbard said on Monday, will be an internal e-mail in which former chief financial officer Douglas Beatty allegedly explained to chief executive officer Frank Dunn the amounts of money the company would have to add to its expected income in 2003 to meet the executives’ payout triggers for their restricted share units.
“You will hear evidence that the accused are acutely aware for the next quarter and the quarter after that what their bonus milestones are for their [restricted share units],” Mr. Hubbard told Mr. Justice Frank Marrocco of the Ontario Superior Court.
Mr. Dunn, Mr. Beatty and former controller Michael Gollogly are accused of manipulating Nortel’s financial statements in 2002 and the first half of 2003 to meet targets for their restricted share units and to trigger “return to profitability” bonuses set up by the company’s board for senior management.
Mr. Hubbard said the Crown will show the accused arbitrarily used accounting reserves, known as accruals, to meet earnings targets, a practice he called “cookie jar” accounting because a large amount of reserves was kept on hand and dipped into whenever desired.
“The ‘cookie jar’ approach allowed the accused to trigger lucrative cash and stock bonuses to themselves,” he said.
The trial began with the three men standing to listen to the detailed charges levelled against them. Flanked by their lawyers, they in turn each said “not guilty” in clear and deliberate voices when asked how they pleaded to the counts.
Mr. Hubbard said the Crown has a list of 28 possible witnesses, including two of Canada’s most prominent corporate directors – former Nortel chairman Lynton (Red) Wilson and former audit committee chairman John Cleghorn.
The Crown says Mr. Cleghorn is expected to testify about how unwilling Mr. Beatty was to do a restatement of Nortel’s books in 2003.
The first witnesses at the trial, however, will be former financial employees who will explain how the company used its reserves and handled a 2003 restatement of its financial results that the Crown alleges was itself manipulated.
Mr. Hubbard said the trial will examine Nortel’s later restatements of its financial records from 2001 to 2003 to identify the inaccuracies in the company’s books. He said the main issue at the trial will be proving the men knew the financial statements were inaccurate at the time they were created.
The defence alleges any amounts later restated were due to errors previously and not to deliberate misrepresentations.
“When you weigh the question of errors or deliberate [manipulations], bear in mind they were manipulating amounts as small as $4-million to meet the threshold for the bonuses,” Mr. Hubbard said to Judge Marrocco.
He also said the Crown will introduce internal reports called “outlooks” and “road maps” prepared for the executive team that suggested the company was far from meeting its earnings targets in 2003, which meant the only solution was to manipulate the books.
Mr. Hubbard said the gloomy outlook documents were never given to the board nor shown to Nortel’s auditors.
“They knew that profitability in 2003 could be achieved only through the improper release of hundreds of millions of dollars of excess [accounting] accruals from the balance sheet to the [income statement],” Mr. Hubbard alleged.
The Crown also will introduce information about changes made to the financial statements for the second quarter of 2003, done during several days in July that year when Mr. Gollogly was out of the office.
When he returned from his trip and learned of the plan, he objected and said the changes were improper, Mr. Hubbard said, and they were scrapped and never done.
Mr. Hubbard said the details of the plan will demonstrate Mr. Dunn’s willingness to “set the target and then go about doing whatever you have to do to meet the target.”
The trial began Monday after Judge Marrocco first denied a defence motion to require the Crown to provide more detail about its allegations in the case.
The judge said he was satisfied the accused have a clear understanding of what they are accused of, having done years of pre-trial disclosure and after facing other legal matters – including charges by securities regulators in Canada and the United States – related to the same allegations.
