Nortel Networks has agreed to pay $35 million to settle accounting fraud charges with the Securities and Exchange Commission.
The SEC charged the Canadian telecommunications equipment maker with engaging in accounting fraud from 2000 to 2003 to close gaps between its true performance, internal targets and Wall Street expectations. "Nortel's fraud was long-running, intentional and pervasive," said Christopher Conte, associate director of the SEC's Division of Enforcement, in a statement.
The SEC said in its complaint that from late 2000 through January 2001, Nortel made changes in its revenue recognition policies that fraudulently accelerated revenue into 2000 to meet publicly announced revenue targets for the fourth quarter of 2000 and for the year. The complaint also said that Nortel selectively reversed certain revenue entries during the 2000 year-end closing process when its acceleration efforts pulled in more revenue than necessary to meet its targets. Those actions allegedly inflated fourth quarter and fiscal year 2000 revenues by approximately $1.4 billion.
The complaint also charged Nortel with improperly establishing and maintaining over $400 million in excess reserves by the time it announced its fiscal year 2002 financial results. The reserve manipulations erased the company's fourth quarter 2002 pro forma profit and allowed it to report a loss so it would not show a profit earlier than it had forecast. Then in the first and second quarters of 2003, Nortel released $500 million in excess reserves to boost its earnings and show a return to profitability. That allowed it to pay bonuses to senior managers.
Nortel has since restated its financials four times in the past four years and replaced members of senior management. The SEC has previously filed civil fraud charges against former CEO Frank Dunn, former CFO Douglas Beatty, former controller Michael Gollogly and former assistant controller MaryAnne Pahapill for their roles. Nortel has consented to provide the SEC with quarterly written reports detailing its progress in implementing a remediation plan and to address any outstanding weaknesses in its internal controls. The company has also settled charges with the Ontario Securities Commission and resolved shareholder class-action lawsuits.
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