SEC Press press_release 8 KB 4,922 chars

Press Release: SEC Charges 4 Additional Former Officers of Nortel Networks Corporation in Financial Fraud Scheme

Release: 2007-182
Caption: Securities and Exchange Commission v. Dunn, et al.

summary

The SEC charged four former Nortel finance vice presidents—Hamilton, Johnson, Kinney, and Taylor—with aiding a $500 million accounting fraud by manipulating reserves to create false losses in Q4 2002 and artificial profits in Q1–Q2 2003, enabling bonus payments, and faces injunctions, penalties, and bars.

paragraph

The SEC charged Douglas Hamilton, Craig Johnson, James Kinney, and Kenneth Taylor with aiding and abetting a $500 million accounting fraud at Nortel Networks by improperly managing reserves to manipulate earnings. In Q4 2002, they established $44 million in excess reserves at the direction of top executives to convert a profit into a reported loss, then released $345 million in reserves in Q1 and Q2 2003 to fabricate profitability and fund performance bonuses. They are accused of violating antifraud, reporting, books and records, and internal controls provisions of federal securities laws, with the SEC seeking permanent injunctions, civil penalties, officer/director bars, and disgorgement with interest.

narrative

The SEC charged four former Nortel Networks finance vice presidents—Douglas Hamilton, Craig Johnson, James Kinney, and Kenneth Taylor—with participating in a coordinated $500 million accounting fraud to manipulate earnings and enable bonus payments. From late 2002 through early 2003, they maintained tens of millions in excess reserves in their respective business units, then, under orders from CEO Frank Dunn, CFO Douglas Beatty, and Controller Michael Gollogly, established an additional $44 million in excess reserves during the Q4 2002 year-end close to artificially report a loss instead of a profit. In Q1 and Q2 2003, they released approximately $154 million and $191 million in reserves respectively, turning Q1 into a reported profit and erasing Q2’s loss, thereby fabricating a return to profitability that misled investors. These reserve manipulations were essential to Nortel’s earnings management scheme, which also involved improper revenue recognition policies from 2000–2001. The SEC alleges the four defendants knowingly violated antifraud, reporting, books and records, and internal controls provisions of federal securities laws. The agency seeks permanent injunctions, civil monetary penalties, officer and director bars, and disgorgement of ill-gotten gains with prejudgment interest against each defendant. This action expanded an earlier March 2007 complaint that had already targeted Nortel’s top executives for orchestrating the fraud.

Enriched metadata

Scheme: accounting-fraud (100%)
Court: Southern District of New York
Victim loss: $500,000,000

Classified accounting-fraud(confidence 100%). EDGAR detection: forms 10-K/10-Q/8-K/NT 10-K· recall 80% / precision 48%. detection rule →

Extracted insights

Dollar amounts 4

$500.00M $500 million $100M–$1B
$191.00M $191 million $100M–$1B
$154.00M $154 million $100M–$1B
$44.00M $44 million $10M–$100M

Entities 8

person accounting fraud
person amended complaint
person earnings management fraud
person excess reserves
company four former officers of nortel networks corporation
person original complaint
agency Securities and Exchange Commission
person significant compensation

Triples 14

SEC Charged Four Former Officers of Nortel Networks Corporation
Four Former Officers Engaged in Accounting Fraud
The Commission Filed Amended Complaint
The Commission Added Douglas A. Hamilton, Craig A. Johnson, James B. Kinney and Kenneth R.W. Taylor as Defendants
Original Complaint Charged Frank Dunn, Douglas Beatty and Michael Gollogly
Frank Dunn, Douglas Beatty and Michael Gollogly Directed Earnings Management Fraud
Defendants Participated with Nortel's Former Top Executives
Defendants Maintained Excess Reserves
Defendants Received Significant Compensation
Hamilton, Johnson, Kinney and Taylor Determined Business Units Held Tens of Millions of Dollars in Excess Reserves
Hamilton, Johnson, Kinney and Taylor Established Over $44 Million in Additional Excess Reserves
Dunn, Beatty and Gollogly Directed Improper Release of $500 Million of Excess Reserves
Hamilton, Johnson, Kinney and Taylor Released $154 Million in Reserves in Q1 2003
Amended Complaint Charges Hamilton, Johnson, Kinney and Taylor with Violating Federal Securities Laws

View original SEC press releasesec.gov

Extracted body text (4,922c)

SEC Charges 4 Additional Former Officers of Nortel Networks Corporation in Financial Fraud Scheme FOR IMMEDIATE RELEASE 2007-182 Washington, D.C., Sept. 12, 2007 - The Securities and Exchange Commission today charged four more former officers of Nortel Networks Corporation with engaging in accounting fraud by manipulating reserves to manage Nortel's earnings. The Commission filed an amended complaint in SEC v. Dunn, a case pending in the U.S. District Court for the Southern District of New York, to add as defendants Douglas A. Hamilton, Craig A. Johnson, James B. Kinney and Kenneth R.W. Taylor, who were the former vice presidents of finance for Nortel's Optical, Wireline, Wireless and Enterprise business units, respectively. The Commission's original complaint, among other things, charged three former corporate officers of Nortel — CEO Frank Dunn, CFO Douglas Beatty and Controller Michael Gollogly — with directing the earnings management fraud. "Today's action shows that the Commission will hold accountable not only wrongdoers in the corporate suite, but others whose actions make a company-wide financial fraud possible," said Linda Thomsen, Director of the Commission's Division of Enforcement. Christopher Conte, an Associate Director of the Commission's Division of Enforcement, stated, "The defendants charged today participated with Nortel's former top executives to improperly maintain, establish and release reserves in order to manipulate earnings and fabricate Nortel's return to profitability in the first quarter of 2003. Nortel's earnings management fraud could not have happened without their efforts. These defendants all received significant compensation while they were falsifying Nortel's financial results." Among other allegations, the amended complaint alleges that Hamilton, Johnson, Kinney and Taylor engaged in the following misconduct: From the second half of 2002 through January 2003, Hamilton, Johnson, Kinney and Taylor all determined that their business units held tens of millions of dollars in excess reserves. The four finance vice presidents did not immediately release those excess reserves as required under U.S. Generally Accepted Accounting Principles (GAAP), but instead maintained them for earnings management purposes. In early January 2003, during the 2002 year-end closing process, Hamilton, Johnson, Kinney and Taylor acted on orders received from former executives Dunn, Beatty and Gollogly and improperly established over $44 million in additional excess reserves in order to lower Nortel's consolidated earnings and bring it in line with internal and market expectations. Their efforts helped erase Nortel's pro forma profit for the fourth quarter of 2002 and caused it to report a loss instead. In the first and second quarters of 2003, Dunn, Beatty and Gollogly directed the improper company-wide release of approximately $500 million of excess reserves specifically to inflate earnings and pay bonuses. These efforts turned Nortel's first quarter 2003 loss into a reported profit under U.S. GAAP, largely erased Nortel's second quarter loss and generated a pro forma profit in the second quarter. The efforts of Hamilton, Johnson, Kinney and Taylor were essential to creating these false results because the four vice presidents improperly released approximately $154 million in reserves in the first quarter of 2003, and approximately $191 million in reserves in the second quarter. The amended complaint charges Hamilton, Johnson, Kinney and Taylor with violating and/or aiding and abetting violations of the antifraud, reporting, books and records and internal controls provisions of the federal securities laws. The Commission seeks a permanent injunction, a civil monetary penalty, an officer and director bar, and disgorgement with prejudgment interest against each of these defendants. In its original complaint, filed on March 12, 2007, the Commission alleged that (1) Dunn, Beatty and Gollogly learned that the company was carrying massive amounts of excess reserves and then directed the alleged reserve manipulations to meet earnings targets, fabricate profits and pay performance-related bonuses, and also (2) that Dunn, Beatty and former Assistant Controller MaryAnne Pahapill altered Nortel's revenue recognition policies from late 2000 through January 2001 to accelerate revenue to meet publicly announced revenue targets. See LR-20036 (March 12, 2007) / Accounting and Auditing Enforcement Release No. 2576 (March 12, 2007). # # # For more information, contact: Christopher R. Conte Associate Director, Division of Enforcement U.S. Securities and Exchange Commission (202) 551-4834 Timothy N. England Assistant Director, Division of Enforcement U.S. Securities and Exchange Commission (202) 551-4959 Additional materials: Litigation Release No. 20275 http://www.sec.gov/news/press/2007/2007-182.htm Home | Previous Page Modified: 09/12/2007

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