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Nortel CFO did not manipulate profit, trial told

Former Nortel Networks chief financial officer Douglas Beatty arrives at the University Avenue Courthouse in Toronto on Jan. 20, 2012.

Fernando Morales/FERNANDO MORALES/THE GLOBE AND MAIL

A lawyer for Douglas Beatty told investigators in 2004 that his client "did not do his job" in overseeing Nortel Network Corp.'s financial statements in 2002 and 2003, but had no role in manipulating profit at the telecommunications giant.

The fraud trial of Nortel's former chief financial officer and two other former executives heard testimony Monday about an interview Mr. Beatty had on April, 23, 2004, with investigators hired by Nortel's board to examine accounting problems at the company.

At the meeting, one of Mr. Beatty's U.S.-based lawyers, John Siffert, made what Crown attorney Robert Hubbard called an "unusual" statement to the investigators.

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According to a summary of the meeting read aloud in court Monday, Mr. Siffert volunteered that his client "did not do what he should have done and understands the consequences his lack of oversight could have for him."

"Siffert can also see how one could conclude from the documents that Beatty was active in the financial engineering effort," the summary states. "While Beatty acknowledges he did not do his job and that he relied on other people improperly, he was not involved in any 'affirmative conspiracy' to manage earnings."

Mr. Siffert also told investigators no one – including Nortel controller Michael Gollogly or external auditors from Deloitte & Touche – had told Mr. Beatty the company's use of accounting reserves in the first quarter of 2003 "was bad."

Mr. Hubbard read the interview summary Monday while questioning Mr. Beatty's Canadian lawyers, Kara Beitel and James Douglas, who also attended the same meeting.

Both Mr. Douglas and Ms. Beitel testified they remembered almost nothing of what was said at the meeting about Nortel's accounting issues, including Mr. Siffert's comments. Mr. Hubbard read both of them excerpts from the meeting summary prepared by Nortel's investigators from U.S. law firm Wilmer Cutler Pickering and Dorr LLP to see if it would refresh their memories.

Both said the summary read by Mr. Hubbard did not help them recall anything about the meeting.

Their testimony does little to help the Crown's fraud cases against Mr. Beatty, Mr. Gollogly and former chief financial officer Frank Dunn, who are accused of manipulating accounting reserves in 2002 and 2003 to push Nortel to profitability and trigger special "return to profitability" bonuses for themselves.

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That's because the summary of the meeting read in court was ruled to be not itself admissible as evidence at the trial. It could only be used in an attempt to refresh the lawyers' memories, and it appeared not to succeed.

The summary does, however, offer a public glimpse into Mr. Beatty's thoughts in April, 2004, shortly after he had been suspended by the company and just days before he and the other two executives were fired.

According to the summary of the meeting, Mr. Beatty conceded the company's use of accounting reserves had been handled incorrectly in various instances, and admitted he did not do enough "due diligence" before approving some decisions.

Mr. Beatty also told investigators he and Mr. Dunn had wanted to fire Mr. Gollogly as controller in the summer of 2003. He said it was because Mr. Gollogly had become "unglued" and was "not sharing his numbers."



The trial has previously heard testimony that Mr. Gollogly protested a decision made by Mr. Beatty in July, 2003, while Mr. Gollogly was out of town in Montreal one Friday afternoon. Mr. Beatty told Mr. Gollogly's staff to book three accounting changes that transformed Nortel's bottom line for the second quarter of 2003 from a loss to a profit.

The request was reversed the following week when Mr. Gollogly returned to the office and complained about the decision to Mr. Dunn and Mr. Beatty. His protest appeared to have upset his superiors.

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"Beatty noted that Gollogly and Dunn got along well in [the first quarter of 2003]but Dunn soured on Gollogly and wanted him replaced after this incident," according to the summary of Mr. Beatty's interview with investigators.

However, Mr. Gollogly was not fired until Nortel terminated all three men on April 27, 2004.

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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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