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Former Nortel chairman offers praise for Dunn

Former Nortel CEO Frank Dunn leaves the University Ave. Court House. Toronto, January 12, 2012. Photo by: Fernando Morales/The Globe and Mail

Fernando Morales/Fernando Morales/The Globe and M

Former Nortel Network s Corp. chairman Lynton (Red) Wilson paid tribute Tuesday to ousted chief executive officer Frank Dunn even as he described firing the long-time Nortel executive in 2004 over accounting concerns.

Mr. Wilson completed his testimony Tuesday at the fraud trial of Mr. Dunn and two other former top Nortel executives, saying he met with the former CEO in late April, 2004, to inform Mr. Dunn the board had decided to fire him for cause following the receipt of a report by outside investigators hired by the board.

Despite the accounting scandal and years of ensuing litigation between Mr. Dunn and Nortel, Mr. Wilson offered generous praise Tuesday for Mr. Dunn's work earlier in his career, saying he "saved" Nortel in 2001 and 2002 when it was reporting billions of dollars of losses and laying off the majority of its staff.

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He said he recalled telling Mr. Dunn at the dismissal meeting that he had done a lot for the company over his 28-year career at Nortel, and had returned it to profitability before his departure.

"His role in managing through the downsizing and returning the company to profitability had been very good.... The ship was listing pretty badly at that point in time and it was a credit to Mr. Dunn's leadership that he was able to keep the ship afloat," Mr. Wilson testified.

Asked by Crown attorney David Friesen when Mr. Dunn had generated a profit at Nortel, given that the restatements of the company's finances eliminated the profits reported in the first half of 2003, Mr. Wilson replied that the second half of 2003 was profitable even after the restatement.

"The company had returned to profitability during his time as chief executive," Mr. Wilson said.

Mr. Dunn, former chief financial officer Douglas Beatty and former controller Michael Gollogly are accused of fraudulently manipulating Nortel's accounting reserves to push the company to profitability in 2003 and trigger "return to profitability" bonuses for themselves.

Harry Underwood, a member of Mr. Dunn's legal team, suggested to Mr. Wilson during cross-examination that the board had been "constantly stressing" to management the need to return Nortel to profitability.

Mr. Wilson said he didn't think it was something that needed to be stressed explicitly.

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"I don't think it was necessary to stress it constantly – they were well aware of the challenge," he said.

Mr. Wilson said the "return to profitability" bonus plan was adopted by the board because it was considered essential to give employees of Nortel an incentive to stay with the company. He agreed with Mr. Underwood that employee morale was low at the time, and thousands of jobs had already been cut.

Mr. Underwood noted that the board's compensation committee had given long consideration to whether to pay out the "return to profitability" bonuses in December, 2003, after Nortel had already announced its first restatement two months earlier.

"The view was they had legitimately earned it – they had been through fire," Mr. Underwood suggested.

"Yes, it was earned," Mr. Wilson said.

Lawyer Greg Lafontaine, who is representing Mr. Beatty, asked Mr. Wilson if he was aware that his client and Mr. Dunn had opted to forego another "success" bonus at the end of 2003 and not to take payout of a large proportion of their share units until the board's investigators from a U.S. law firm had completed their work.

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He said they ultimately never got the money. Mr. Lafontaine added that Mr. Beatty also opted to take 20 per cent of his "return to profitability" bonus in 2003 in stock and took all of his restricted share unit payments in stock. He said Mr. Beatty had to pay tax on the payouts, but held onto those shares until recently, meaning they became worthless.

"He held onto them until the bitter end," Mr. Lafontaine said.

Mr. Wilson said he did not know Mr. Beatty had kept the shares.

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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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