Nortel today said it will pay and $35 million to settle civil fraud charges stemming from a 31/2 year investigation by the Securities and Exchange Commission.
It’s financial activities and the subsequent investigation has put Nortel through the wringer and with the settlement Nortel does not admit to or deny the allegations.
According to the SEC, from late 2000 through January 2001, Nortel made changes to its revenue recognition policies that were not in conformity with U.S. Generally Accepted Accounting Principles (GAAP). The changes were made to fraudulently accelerate revenue into 2000 to meet its publicly-announced revenue targets for the fourth quarter of 2000 and for that year, the SEC said. The complaint alleges that Nortel also 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. Such actions inflated Nortel’s fourth quarter and fiscal year 2000 revenues by approximately $1.4 billion, the SEC stated.Further, the SEC said, Nortel had improperly established, and was improperly maintaining, over $400 million in excess reserves by the time it announced its fiscal year 2002 financial results. According to the SEC, these reserve manipulations erased Nortel’s fourth quarter 2002 pro forma profit and allowed it to report a loss instead so that Nortel would not show a profit earlier than it had previously forecast to the market.
The complaint alleges that in the first and second quarters of 2003, Nortel improperly released approximately $500 million in excess reserves to boost its earnings and fabricate a return to profitability. These efforts turned Nortel’s first quarter 2003 loss into a reported profit under US GAAP, and largely erased its second quarter loss while generating a pro forma profit. According to the complaint, in both quarters Nortel’s inflated earnings allowed it to pay tens of millions of dollars in so-called “return to profitability” bonuses, largely to a select group of senior managers.
In settling the matter, the SEC acknowledged Nortel’s substantial remedial efforts and cooperation. The vendor has also agreed to provide the SEC with quarterly written reports detailing its progress in implementing a remediation plan and actions to address weaknesses in its internal controls.
“The settlement recognizes the extensive and proactive efforts made by Nortel’s Board and senior management to identify and address the accounting and internal control issues and conduct that led to the investigation.” Nortel President Mike Zafirovski said in a statement.
The settlement did little to placate SEC commissioner Paul Atkins who told Bloomberg. Com that the settlement amounts to a “public relations gesture.” The settlement “does nothing to further the SEC’s objectives” of “protecting investors” and “maintaining fair, orderly and efficient markets,” Atkins continued. The money “will be paid by Nortel shareholders, many of whom were victims of the financial fraud.”
Still in a Network World story earlier this year customers, partners and analysts agreed that Nortel can improve – and is working to improve – business relations with users and resellers. The company also has to further rationalize its product line, which observers contend is still confusing and redundant after acquisitions that took place almost 10 years ago.
