Saturday, January 19, 2013

Canadian Court Finds that Nortel Senior Officers Did Not Misrepresent Financial Results

A Canadian Superior Court judge was not satisfied beyond a reasonable doubt that a company’s CEO, CFO and Controller misrepresented the quarterly financial results of the company, a Canadian manufacturer of telecommunications equipment, by releasing to income $361 million and $372 million respectively in accrued liability balances. Thus, the court found the three senior officers not guilty of fraudulently misrepresenting the company’s financial results. R. v. Dunn, et al., 10-00145, Jan. 14, 2013.

While conceding that, in the abstract, the fact that accrued liability balances in Nortel’s balance sheet were restated is capable of supporting an inference that, in their original form, the financial statements misrepresented the company’s financial results, the court, based on the evidence , could not draw such an inference in this case..

Nortel reported its financial results in accordance with US GAAP and Canadian Generally Accepted Accounting Principles (“Canadian GAAP”). The primary financial statements were prepared in accordance with US GAAP.

In the opinion, the court applied the definition of  materiality such that misrepresented financial results are material if, in light of the surrounding circumstances, the magnitude of the item is such that it is probable that the judgment of a reasonable member of the investing public would have been changed or influenced by the correction of the item.  The omission of a financial result is material if, in light of the surrounding circumstances, the magnitude of the item is such that it is probable that the judgment of a reasonable member of the investing public would have been changed or influenced by the disclosure of the item. 

The court also found that Nortel was a significant Deloitte & Touche client and that Deloitte was embedded in one form or another in all aspects of Nortel’s operations. The evidence is replete with communications between Nortel staff and Deloitte staff. Many of the witnesses testified that, when Deloitte asked for information, it was provided. This assertion is amply borne out by the documentary record, said the court.

In 2007, the company settled an SEC enforcement action alleging that it had engaged in accounting fraud to close gaps between its true performance, its internal targets and Wall Street expectations. Without admitting or denying the Commission's charges, the company agreed to pay a $35 million civil penalty, which the Commission placed in a Fair Fund for distribution to affected shareholders. The company also agreed to report periodically to the SEC staff on its progress in implementing remedial measures and resolving an outstanding material weakness over its revenue recognition procedures. SEC v. Nortel Networks Corp., SD NY, Oct. 15, 2007, Civil Action No. 07-CV-8851 (S.D.N.Y.), Oct 15, 2007.

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