Nortel head office sought extra reserves, court told

Share

A former employee in the Hong Kong office of Nortel Networks Corp. was asked to find new accounting reserves the company could book for the fourth quarter of 2002, even though his office had already submitted its final numbers for the quarter.

Glenn Morita, Nortel's former director of finance for the Asia region, testified Wednesday at the fraud trial of three former Nortel executives, saying he was contacted in early January, 2003, by a member of the team working for Nortel controller Michael Gollogly and asked whether he could find any new accounting reserves to book for the 2002 financial statements.

After contacting other employees in Asian countries, he e-mailed back on Jan. 8 to Mr. Gollogly and others in the head office with a list of three possible reserves totalling $4.8-million (U.S.). They were all booked.

"If you had not been contacted by corporate [head office]would you have submitted these late journal entries," Crown attorney David Friesen asked.

"No," Mr. Morita replied.

Mr. Morita is testifying at the trial of Mr. Gollogly, former Nortel chief executive officer Frank Dunn and former chief financial officer Douglas Beatty, who are accused of manipulating the company's accounting reserves to trigger special "return to profitability" bonuses for themselves.

Mr. Morita is the second former Nortel employee to testify at the trial that he received an unusual request in early 2003 to find new accounting reserves to book for the quarter. Former U.S. controller Karen Sledge testified last week she received a similar request at that time. The reserves transformed the company's profit to a loss for the quarter.

The Crown has alleged Nortel's top executives arbitrarily turned a profit into a loss because they felt the gains that quarter were a "blip" that could not be sustained in the next quarter. The company's return to profitability bonus plan was structured to only pay the maximum amount if the company were profitable for four consecutive quarters.

The Crown alleges new reserves created in the fourth quarter of 2002 were instead used to help push the company to profitability in the first and second quarters of 2003 to help trigger the bonus payouts at that time.

The accused have denied all of the allegations and pleaded not guilty before Mr. Justice Frank Marrocco of the Ontario Superior Court.

In cross-examination Wednesday, Mr. Morita told defence lawyer Sarit Batner, who is part of Mr. Dunn's legal team, that he believed the $4.8-million of new reserves were valid and represented real risks that required provisions.

Ms. Batner suggested to Mr. Morita that he had been given an opportunity to take more time to get the numbers more correct, and the new reserves made Nortel's books more accurate. He agreed.

"You would not have done this if you felt it was wrong," Ms. Batner asked. "Or if you felt it was incorrect? You would have just said 'no'?"

Mr. Morita, who is a Canadian chartered accountant, said that was correct.

In earlier testimony, Mr. Morita confirmed one of the new reserves, worth $1.5-million, was reversed in a later restatement of Nortel's books.

He also testified he could not remember specifically who asked him to find the new accruals, but said it "came from Mike [Gollogly]and his group."

Mr. Friesen showed him a phone record for Brian Harrison, a former employee in the head office who testified earlier in the trial that he was told by Mr. Gollogly to phone around to various regions globally to look for new reserves to book after the company posted an unexpected profit in the fourth quarter of 2002.

The phone record showed Mr. Harrison phoned Mr. Morita on the morning of Jan. 8, 2003. Mr. Morita e-mailed his list of possible new reserves later that evening.

Mr. Friesen also introduced phone records showing Mr. Gollogly phoned the Hong Kong office twice on Jan. 8, but Mr. Morita said he could not identify who Mr. Gollogly had called based on the record.

Mr. Morita was also questioned about an e-mail he wrote in January, 2004, after Nortel had already completed its first restatement of its books. In it, he asks the controller for the Asian region why there were excess reserves being unexpectedly unwound at that time.

In the e-mail, he said it was "like squirrels … secretly storing your nuts for a rainy day. Just when you think they're all gone, more mysteriously appear."

Mr. Morita testified he wrote the e-mail because he was frustrated that more reserves were being used unexpectedly to offset expenses, even after the company had done a lengthy review of its balance sheet in 2003 to identify and eliminate all unsupported reserves.

"We thought we were fairly clean in that area," he said.