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Nortel accounting reserves used as ‘cookie jar,’ Crown tells court

Nortel reserves used as ‘cookie jar,’ Crown tells trial


Internal "road map" documents prepared for senior executives at Nortel Networks Corp. lay out how an accounting fraud was conducted at the telecommunications company in 2003, a Toronto courtroom heard Thursday.

In closing arguments at the fraud trial of three former Nortel executives, Crown attorney Robert Hubbard said the executives – including former chief executive officer Frank Dunn – told staff to prepare confidential documents for them in 2003 tracking how much of the company's accounting reserves would have to be released each quarter to boost income and meet profit targets.

Mr. Hubbard dismissed defence suggestions the road maps were just "hypothetical scenarios" created as an internal planning exercise, arguing they are far more significant because the scenarios they outlined ended up becoming the final numbers in the company's financial statements in the first and second quarters of 2003.

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Various scenarios in the road maps, suggesting different amounts of accounting reserves could be released to reach different profit targets, prove the company wasn't releasing reserves properly with appropriate triggers, he said. Instead, Nortel was using reserves as a "cookie jar" that could be dipped into as needed to reach profit targets, he said.

The accused "distorted the financial reality" of Nortel through the manipulations, and are guilty of fraud, Mr. Hubbard told Mr. Justice Frank Marrocco of the Ontario Superior Court.

Mr. Dunn, former chief financial officer Douglas Beatty and former controller Michael Gollogly are each charged with two counts of fraud for allegedly manipulating Nortel's accounting reserves to reach profit targets needed to trigger bonus payouts for themselves.

The men have denied all the allegations, saying any incorrect use of accounting reserves was an honest error and not deliberate manipulation.

Their trial began in January and heard witness testimony until June. The Crown team is expected to complete its closing remarks Friday and defence lawyers are scheduled to give their closing arguments next Tuesday and Wednesday.

Mr. Hubbard told the court Thursday it is not necessary for the Crown to have evidence that the three men verbally instructed employees to make false accounting entries.

The defence has cited the absence of such smoking-gun evidence as a key flaw in the fraud case, but Mr. Hubbard said such evidence would be unlikely to exist in a sophisticated corporate fraud case.

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"The Crown doesn't expect in a case of this nature to call people who say, 'Mr. Dunn told me to do this or that,' " Mr. Hubbard argued.

Instead, he said there was a long-standing culture at Nortel stretching back to the 1980s in which employees knew they were expected to reach their financial targets by using accounting reserves to fill in profit gaps.

It was a "context where everybody knew what needed to be done," he said. "You don't need instructions when everybody has been doing it for years – but that doesn't make it right."

The defence has argued throughout the trial that all of Nortel's decisions about its use of reserves were reviewed and approved by auditors at Deloitte & Touche.

In his remarks Thursday, however, Mr. Hubbard said the auditors never saw the key internal "road map" documents prepared for senior management.

Mr. Hubbard said auditors were given thousands of documents, but weren't shown the true picture of what was being done with the reserves.

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He said it was like giving them thousands of jigsaw puzzle pieces without the box cover picture, so the pieces alone didn't let them understand what was happening.

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