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Crown alleges Nortel CEO also falsified results restatement

The Crown will drop one of the three remaining charges by the time the trial of the three former Nortel executives begins on Monday, leaving just two counts of fraud remaining.

Nathan Denette/The Canadian Press/Nathan Denette/The Canadian Press

Nortel Networks Corp. chief executive officer Frank Dunn not only manipulated his company's financial results in 2002 and 2003 but also falsified a $1-billion (U.S.) restatement of the results at the end of 2003, a Toronto court heard Thursday.

Crown attorney Robert Hubbard alleged that Mr. Dunn and two other former Nortel executives only partly corrected their own accounting manipulations when they restated Nortel's financial results at the end of the 2003, but the restatement still hid problems at the technology company.

Nortel later announced a more sweeping restatement in January, 2005, about nine months after Mr. Dunn and other executives were dismissed.

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Mr. Dunn, former Nortel chief financial officer Douglas Beatty and former controller Michael Gollogly are accused of manipulating Nortel's financial statements to trigger special bonuses in 2003 that would be paid to them if the company returned to profitability.

The trial of the three men is scheduled to start Monday. Mr. Hubbard made his remarks at a pretrial hearing on a motion tabled by the defence that is calling on the Crown to outline the detailed "particulars" of the case against the accused. The accused have denied all the allegations.

Lawyer David Porter, representing Mr. Dunn, said the defence needs to know exactly which of the millions of documents handed over by Nortel are alleged by the Crown to be fraudulent.

He said the risk is having "a trial in the air" where the Crown can pull out any document at the end of the trial and say it proves the fraud, even when the defence hasn't focused on the document or addressed it at the trial.

"Surely after eight years of investigation, they know and … should tell us what they allege was false," Mr. Porter said.

Mr. Hubbard told the court that the Crown has dropped four of the original seven charges against each of the men because they were "duplicative." The dropped charges had alleged publication of false financial statements and omission of a "material fact" from a financial document.

Later Thursday, Mr. Hubbard announced that the Crown would drop a further charge relating to falsifying financial statements.

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That leaves two counts of fraud remaining in the case against each of the accused. Mr. Hubbard said they are the key charges in the case and that all the other charges were based on the same facts.

Mr. Hubbard told Mr. Justice Frank Marrocco of the Ontario Superior Court that the extra disclosure sought by the defence is unnecessary because the Crown has already given the lawyers a lengthy and detailed rundown of its case.

He said the Crown alleges that the fraudulent financial entries were the same ones Nortel identified in its earnings restatements. The only dispute between the two sides, he said, is whether the incorrect financial entries were honest errors or intentional manipulations.

"It was a lie" each time Mr. Dunn certified the financial statements as fair and accurate, Mr. Hubbard said, because he knew they were not. Mr. Hubbard said the 2003 restatement did not correct innocent mistakes made in 2002 and the first half of 2003.

"When you say, 'Whoops, it was an error,' that's a lie," Mr. Hubbard said. "It wasn't an error. You knew it was wrong all along."

Judge Marrocco reserved his decision on the "particulars" motion, saying he will announce it Monday afternoon. Depending on his decision, the trial will begin immediately after with an opening statement from the Crown.

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Mr. Hubbard also revealed an unexpected twist Thursday, that previous lawyers for Mr. Dunn and Mr. Beatty, including Toronto lawyer Thomas Heintzman, will be Crown witnesses at the trial. They will be called to testify about a meeting their clients had in early 2004 – before they were fired from Nortel – with U.S. lawyers working for Nortel's board to investigate financial problems.

The Canadian lawyers attended the meeting with their clients, and Mr. Hubbard said they will testify about what the men were asked at the meeting and what information they provided in response.

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About the Author
Real Estate Reporter

Janet McFarland is the real estate reporter for The Globe and Mail’s Report on Business, with a focus on residential real estate trends. She joined Report on Business in 1995, and has specialized in reporting on corporate governance, executive compensation, pension policy, business law, securities regulation and enforcement of white-collar crime. More

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