Nortel Networks Corp. chief financial officer Douglas Beatty ordered a staff member to make accounting changes in July, 2003, that would have transformed the company’s loss to a profit for the second quarter that year, a Toronto fraud trial heard Tuesday.
Nortel’s former assistant controller, Karen Sledge, testified she was out of the office on July 11, 2003 – and so was controller Michael Gollogly – when she received a phone call from one of her staff members.
The employee said he had been told to make three accounting entries reversing three reserves that together added $23-million (U.S.) to the company’s bottom line for the second quarter. He was concerned about the request, Ms. Sledge said.
She testified she telephoned Mr. Gollogly, who was in Montreal, and told him about the changes. They discussed their concerns and he said he would deal with it when he returned to the office the next Monday, July 14, she testified.
Ms. Sledge was not permitted to testify about who the employee said told him to make the changes after defence lawyers raised an objection, saying that it would be hearsay, or second-hand, evidence.
However, Crown attorney Robert Hubbard showed her a draft of a letter written by Mr. Gollogly the next week and addressed to Nortel’s board of directors. In the letter, Mr. Gollogly says one of his employees was told by Mr. Beatty to make three accounting changes the previous Friday, while Mr. Gollogly was absent from the office.
In the letter, Mr. Gollogly notes the changes are small, but would transform the loss for the quarter into a profit, and he says he believes they had no justification and should not be allowed to proceed. The trial has previously heard that it does not appear the letter was ever actually sent to the board.
Ms. Sledge is the third witness to testify in the Ontario Superior Court trial of Mr. Gollogly, Mr. Beatty and former Nortel chief executive officer Frank Dunn, who are charged with fraud for allegedly manipulating Nortel’s financial statements in 2003 to trigger special “return to profitability” bonuses paid to executives.
At the trial on Tuesday, Mr. Hubbard also showed Ms. Sledge a second letter written by Mr. Gollogly to Mr. Beatty, dated July 14, in which he says he was opposed to making the three changes Mr. Beatty had ordered. He also outlined how the information would have to be disclosed to the firm’s auditors and in the company’s public filings if the changes were made.
Ms. Sledge testified the content of the letters was similar to the issues she discussed with Mr. Gollogly when she contacted him on July 11.
She said the three changes were later reversed and were not recorded on the books. The company reported a small net loss for the fourth quarter as a result, but Nortel still booked an internal pro forma profit for the period, which was the basis for paying executive “return to profitability” bonuses.
The Crown has previously contended the July entries are important, even though they were reversed, because they demonstrate a pattern at Nortel of using accounting reserves to bolster profits.
Ms. Sledge also testified Tuesday that there appeared to be tension in 2003 between Mr. Gollogly and Mr. Beatty as the company began work on a planned restatement of its books. The work began in late July that year.
“In my observation it was a tense relationship,” Ms. Sledge told Mr. Hubbard during questioning. “At times there was conflict, and there was just at times not working well together.”
Ms. Sledge said Mr. Gollogly made comments to her about “his opinion of Doug.” She did not elaborate on the nature of the comments.
