Nortel Networks will pay a $35 million civil fine Oct. 15 to settle Securities and Exchange Commission charges that the Canadian network gear maker engaged in accounting fraud from 2000-2003 to close gaps between its true performance, its internal targets and Wall Street expectations.
Nortel also consented to injunctions against it from violations of certain provisions of federal securities laws. Further, Nortel will provide to the SEC quarterly written reports detailing its progress in implementing its remediation plan and actions to address its outstanding material weakness in internal controls.
"The settlement reached today reflects the seriousness of the companys past activity," said Christopher Conte, an associate director of the SECs Division of Enforcement, in a statement. "Nortels fraud was long-running, intentional and pervasive."
In settling the case, Nortel neither admitted nor denied the SEC charges.
"Since that time, under new leadership, Nortel has undertaken significant efforts to address the wrongdoing, remedy the harm and implement a remediation plan to prevent recurrence of the misconduct," said Linda Thomsen, director of the SECs Division of Enforcement, in a statement.
According to the SEC, Nortel made changes to its revenue recognition policies that were not in conformity with U.S. GAAP (Generally Accepted Accounting Principles) from late 2000 through January 2001. The SEC said 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 also claims 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. These actions, the complaint alleges, inflated Nortels fourth quarter and fiscal year 2000 revenues by approximately $1.4 billion.
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The accounting fraud allegedly continued through 2003. According to the SEC complaint, Nortel improperly established, and was improperly maintaining, over $400 million in excess reserves by the time it announced its fiscal year 2002 financial results. These reserve manipulations erased Nortels 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 SEC complaint further 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 Nortels first quarter 2003 loss into a reported profit under GAAP, and largely erased its second quarter loss while generating a pro forma profit.
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