Press Release: SEC Charges Four Former Senior Executives of Nortel Networks Corporation in Wide-Ranging Financial Fraud Scheme
summary
The SEC charged four former Nortel executives—Frank Dunn, Douglas Beatty, Michael Gollogly, and MaryAnne Pahapill—with orchestrating a years-long accounting fraud from 2000 to 2004 by manipulating revenue recognition and reserves to meet earnings targets, fabricating profits, securing millions in bonuses, and causing a $948 million restatement and billions in shareholder losses.
paragraph
From 2000 to 2004, former Nortel executives Frank Dunn, Douglas Beatty, Michael Gollogly, and MaryAnne Pahapill engaged in systematic accounting fraud by altering revenue recognition policies to inflate 2000 revenue by over $1 billion and later creating, concealing, and releasing $490 million in excess reserves to manipulate quarterly earnings. These actions falsely portrayed profitability, enabled tens of millions in performance bonuses, and led to a $948 million restatement in November 2003 after years of concealed reserve manipulation. The SEC charged them with violating antifraud, reporting, books and records, internal controls, and Sarbanes-Oxley certification provisions, seeking civil penalties, disgorgement, officer/director bars, and permanent injunctions.
narrative
From late 2000 through January 2004, four former senior Nortel Networks executives—Frank Dunn, Douglas Beatty, Michael Gollogly, and MaryAnne Pahapill—orchestrated a widespread accounting fraud to meet Wall Street earnings targets and secure performance bonuses. In late 2000, Beatty and Pahapill changed revenue recognition policies to pull forward revenue, artificially boosting 2000 fourth-quarter and fiscal-year revenue by over $1 billion, then selectively reversed entries to avoid exceeding targets. From 2002 to 2003, Dunn, Beatty, and Gollogly concealed over $300 million in excess reserves, then created an additional $151 million in unnecessary reserves during the 2002 year-end close to avoid reporting a profit and delay bonus payments. In early 2003, they released $490 million of those reserves to turn losses into reported profits, enabling Nortel to claim it had returned to profitability ahead of schedule and pay tens of millions in bonuses to senior managers. The fraud was concealed through false public statements about a 'comprehensive review' of liabilities, when in reality the November 2003 $948 million restatement was caused by intentional reserve manipulation. The SEC charged all four with violating antifraud, reporting, books and records, internal controls, and Sarbanes-Oxley certification provisions, seeking civil penalties, disgorgement with interest, officer and director bars, and permanent injunctions.
Classified accounting-fraud(confidence 100%). EDGAR detection: forms 10-K/10-Q/8-K/NT 10-K· recall 80% / precision 48%. detection rule →
Parties
controller and chief financial officer of nortel networks corporationcontroller of nortel networks corporationdouglas c. beattyfour former senior executives of nortel networks corporationmaryanne e. pahapillmichael j. golloglySecurities and Exchange Commission
Keywords
dunn beattydunnbeattynortel'snortelexecutives nortelbeatty golloglyfinancialgolloglyformer seniorsenior executivesnortel networksnetworks corporationrevenuecommission
Extracted insights
Dollar amounts 5
- $1.00B $1 billion ≥$1B
- $948.00M $948 million $100M–$1B
- $490.00M $490 million $100M–$1B
- $300.00M $300 million $100M–$1B
- $151.00M $151 million $100M–$1B
Entities 7
- company controller and chief financial officer of nortel networks corporation
- company controller of nortel networks corporation
- person douglas c. beatty
- company four former senior executives of nortel networks corporation
- person maryanne e. pahapill
- person michael j. gollogly
- agency Securities and Exchange Commission
Triples 14
- SEC filed civil fraud charges against Frank A. Dunn, Douglas C. Beatty, Michael J. Gollogly, MaryAnne E. Pahapill
- Frank A. Dunn served as Chief Financial Officer and Chief Executive Officer of Nortel Networks Corporation
- Douglas C. Beatty served as Controller and Chief Financial Officer of Nortel Networks Corporation
- Michael J. Gollogly served as Controller of Nortel Networks Corporation
- MaryAnne E. Pahapill served as Assistant Controller and Vice President of Corporate Reporting at Nortel Networks Corporation
- Four Former Senior Executives of Nortel Networks Corporation engaged in accounting fraud between September 2000 and January 2004
- Beatty and Pahapill altered Nortel's revenue recognition policies in late 2000
- Dunn, Beatty, and Pahapill reversed certain revenue entries during 2000 year-end closing process
- Dunn, Beatty, and Pahapill improperly boosted Nortel's fourth quarter and fiscal 2000 revenue by over $1 billion
- Dunn, Beatty, and Gollogly improperly established, maintained, and released reserves from July 2002 through June 2003
- Dunn, Beatty, and Gollogly concealed over $300 million in excess reserves in November 2002
- Beatty, Dunn, and Gollogly directed establishment of $151 million in unnecessary reserves in early January 2003
- Defendants received significant compensation in millions of dollars while manipulating Nortel's financial results
- Misconduct gave rise to billions of dollars in shareholder losses
Extracted body text (6,502c)
SEC Charges Four Former Senior Executives of Nortel Networks Corporation in Wide-Ranging Financial Fraud Scheme FOR IMMEDIATE RELEASE 2007-39 Washington, D.C., March 12, 2007 - The Securities and Exchange Commission today filed civil fraud charges in the U.S. District Court for the Southern District of New York against four former senior executives of Nortel Networks Corporation for repeatedly engaging in accounting fraud to bridge gaps between Nortel's true performance, its internal targets and Wall Street expectations. Nortel is a Canadian manufacturer of telecommunications equipment. Named in the Commission's complaint are Frank A. Dunn, Douglas C. Beatty, Michael J. Gollogly and MaryAnne E. Pahapill. The complaint alleges that these individuals engaged in this misconduct while serving as top corporate executives of Nortel between September 2000 and January 2004. During that time, Dunn served as Chief Financial Officer and Chief Executive Officer; Beatty as Controller and Chief Financial Officer; Gollogly as Controller; and Pahapill as Assistant Controller and Vice President of Corporate Reporting. "The fraudulent conduct at issue here was egregious and long-running. Each of the defendants betrayed Nortel's investors and their misconduct gave rise to billions of dollars in shareholder losses," said Linda Thomsen, Director of the Commission's Division of Enforcement. "The action we take today sends a strong message that officers of U.S.-filing foreign corporations will be held to the same standards of accountability that are required of all participants in the U.S. financial markets." Christopher Conte, an Associate Director of the Commission's Division of Enforcement, stated, "The defendants charged today all disregarded accounting principles and disclosure requirements designed to provide investors with a clear and accurate picture of a company's performance. Investors were misled for extended periods of time about the health and stability of Nortel's operations. Further, these defendants all received significant compensation, in some cases in the millions of dollars, while they were manipulating Nortel's financial results. In some cases, these individuals received such compensation only because they manipulated Nortel's financial results." According to the Commission's complaint, from late 2000 through January 2001, Dunn, Beatty and Pahapill altered Nortel's revenue recognition policies to accelerate revenue as needed to meet forecasts and, from at least July 2002 through June 2003, Dunn, Beatty and Gollogly improperly established, maintained and released reserves to meet earnings targets, fabricate profits and pay performance-related bonuses. The complaint specifically alleges the following. In late 2000, Beatty and Pahapill implemented changes to Nortel's revenue recognition policies that violated US GAAP, specifically to pull forward revenue to meet publicly announced revenue targets. However, because their efforts pulled in more revenue than needed to meet those targets, Dunn, Beatty and Pahapill selectively reversed certain revenue entries during the 2000 year-end closing process. These actions improperly boosted Nortel's fourth quarter and fiscal 2000 revenue by over $1 billion, while at the same time allowing the Company to meet, but not exceed, market expectations. In November 2002, Dunn, Beatty and Gollogly learned that Nortel was carrying over $300 million in excess reserves. Dunn, Beatty and Gollogly did not release these excess reserves into income as required under US GAAP. Instead, they concealed their existence and maintained them for later use. Further, in early January 2003, Beatty, Dunn and Gollogly directed the establishment of yet another $151 million in unnecessary reserves during the 2002 year-end closing process to avoid posting a profit and paying bonuses earlier than Dunn had predicted publicly. These reserve manipulations erased 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 release of at least $490 million of excess reserves specifically to boost earnings, fabricate profits and pay bonuses. These efforts turned Nortel's first quarter 2003 loss into a reported profit under US GAAP, which allowed Dunn to claim that he had brought Nortel to profitability a quarter ahead of schedule. In the second quarter of 2003, their efforts largely erased Nortel's quarterly loss and generated a pro forma profit. In both quarters, Nortel posted sufficient earnings to pay tens of millions of dollars in so-called "return to profitability" bonuses, largely to a select group of senior managers. During the second half of 2003, Dunn and Beatty repeatedly misled investors as to why Nortel was conducting a purportedly "comprehensive review" of its assets and liabilities, which resulted in Nortel's restatement of approximately $948 million in liabilities in November 2003. Dunn and Beatty falsely represented to the public that the restatement was caused solely by internal control mistakes. In reality, Nortel's first restatement was necessitated by the intentional improper handling of reserves which occurred throughout Nortel for several years, and the first restatement effort was sharply limited to avoid uncovering Dunn, Beatty and Gollogly's earnings management activities. The complaint charges Dunn, Beatty, Gollogly and Pahapill with violating and/or aiding and abetting violations of the antifraud, reporting, books and records, internal controls and lying to auditors provisions of the federal securities laws. Dunn and Beatty are separately charged with violations of the officer certification provisions instituted by the Sarbanes-Oxley Act. The Commission seeks a permanent injunction, civil monetary penalties, officer and director bars, and disgorgement with prejudgment interest against all four defendants. The Commission acknowledges the assistance of the Ontario Securities Commission, which conducted its own separate, parallel investigation. The Commission's investigation is continuing. # # # For more information, contact: Christopher R. Conte Associate Director (202) 551-4834 U.S. Securities and Exchange Commission Timothy N. England Assistant Director (202) 551-4959 U.S. Securities and Exchange Commission Additional materials: Litigation Release No. 20036 http://www.sec.gov/news/press/2007/2007-39.htm Home | Previous Page Modified: 03/12/2007
OCR text (6,502c · plain-text · 99% conf)
SEC Charges Four Former Senior Executives of Nortel Networks Corporation in Wide-Ranging Financial Fraud Scheme FOR IMMEDIATE RELEASE 2007-39 Washington, D.C., March 12, 2007 - The Securities and Exchange Commission today filed civil fraud charges in the U.S. District Court for the Southern District of New York against four former senior executives of Nortel Networks Corporation for repeatedly engaging in accounting fraud to bridge gaps between Nortel's true performance, its internal targets and Wall Street expectations. Nortel is a Canadian manufacturer of telecommunications equipment. Named in the Commission's complaint are Frank A. Dunn, Douglas C. Beatty, Michael J. Gollogly and MaryAnne E. Pahapill. The complaint alleges that these individuals engaged in this misconduct while serving as top corporate executives of Nortel between September 2000 and January 2004. During that time, Dunn served as Chief Financial Officer and Chief Executive Officer; Beatty as Controller and Chief Financial Officer; Gollogly as Controller; and Pahapill as Assistant Controller and Vice President of Corporate Reporting. "The fraudulent conduct at issue here was egregious and long-running. Each of the defendants betrayed Nortel's investors and their misconduct gave rise to billions of dollars in shareholder losses," said Linda Thomsen, Director of the Commission's Division of Enforcement. "The action we take today sends a strong message that officers of U.S.-filing foreign corporations will be held to the same standards of accountability that are required of all participants in the U.S. financial markets." Christopher Conte, an Associate Director of the Commission's Division of Enforcement, stated, "The defendants charged today all disregarded accounting principles and disclosure requirements designed to provide investors with a clear and accurate picture of a company's performance. Investors were misled for extended periods of time about the health and stability of Nortel's operations. Further, these defendants all received significant compensation, in some cases in the millions of dollars, while they were manipulating Nortel's financial results. In some cases, these individuals received such compensation only because they manipulated Nortel's financial results." According to the Commission's complaint, from late 2000 through January 2001, Dunn, Beatty and Pahapill altered Nortel's revenue recognition policies to accelerate revenue as needed to meet forecasts and, from at least July 2002 through June 2003, Dunn, Beatty and Gollogly improperly established, maintained and released reserves to meet earnings targets, fabricate profits and pay performance-related bonuses. The complaint specifically alleges the following. In late 2000, Beatty and Pahapill implemented changes to Nortel's revenue recognition policies that violated US GAAP, specifically to pull forward revenue to meet publicly announced revenue targets. However, because their efforts pulled in more revenue than needed to meet those targets, Dunn, Beatty and Pahapill selectively reversed certain revenue entries during the 2000 year-end closing process. These actions improperly boosted Nortel's fourth quarter and fiscal 2000 revenue by over $1 billion, while at the same time allowing the Company to meet, but not exceed, market expectations. In November 2002, Dunn, Beatty and Gollogly learned that Nortel was carrying over $300 million in excess reserves. Dunn, Beatty and Gollogly did not release these excess reserves into income as required under US GAAP. Instead, they concealed their existence and maintained them for later use. Further, in early January 2003, Beatty, Dunn and Gollogly directed the establishment of yet another $151 million in unnecessary reserves during the 2002 year-end closing process to avoid posting a profit and paying bonuses earlier than Dunn had predicted publicly. These reserve manipulations erased 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 release of at least $490 million of excess reserves specifically to boost earnings, fabricate profits and pay bonuses. These efforts turned Nortel's first quarter 2003 loss into a reported profit under US GAAP, which allowed Dunn to claim that he had brought Nortel to profitability a quarter ahead of schedule. In the second quarter of 2003, their efforts largely erased Nortel's quarterly loss and generated a pro forma profit. In both quarters, Nortel posted sufficient earnings to pay tens of millions of dollars in so-called "return to profitability" bonuses, largely to a select group of senior managers. During the second half of 2003, Dunn and Beatty repeatedly misled investors as to why Nortel was conducting a purportedly "comprehensive review" of its assets and liabilities, which resulted in Nortel's restatement of approximately $948 million in liabilities in November 2003. Dunn and Beatty falsely represented to the public that the restatement was caused solely by internal control mistakes. In reality, Nortel's first restatement was necessitated by the intentional improper handling of reserves which occurred throughout Nortel for several years, and the first restatement effort was sharply limited to avoid uncovering Dunn, Beatty and Gollogly's earnings management activities. The complaint charges Dunn, Beatty, Gollogly and Pahapill with violating and/or aiding and abetting violations of the antifraud, reporting, books and records, internal controls and lying to auditors provisions of the federal securities laws. Dunn and Beatty are separately charged with violations of the officer certification provisions instituted by the Sarbanes-Oxley Act. The Commission seeks a permanent injunction, civil monetary penalties, officer and director bars, and disgorgement with prejudgment interest against all four defendants. The Commission acknowledges the assistance of the Ontario Securities Commission, which conducted its own separate, parallel investigation. The Commission's investigation is continuing. # # # For more information, contact: Christopher R. Conte Associate Director (202) 551-4834 U.S. Securities and Exchange Commission Timothy N. England Assistant Director (202) 551-4959 U.S. Securities and Exchange Commission Additional materials: Litigation Release No. 20036 http://www.sec.gov/news/press/2007/2007-39.htm Home | Previous Page Modified: 03/12/2007