BUSINESS

Defence says former Nortel executives accused of fraud did nothing wrong

10/02/2012 11:14 EDT | Updated 12/02/2012 05:12 EST
TORONTO - Three former Nortel executives accused of fraud were doing all they could to keep the struggling technology giant from going under a decade ago, but it is "unreasonable" to suggest they resorted to illegal activity, lawyers told a Toronto court Tuesday.

"All of the senior management at Nortel were committed to the survival of the company," lead defence lawyer David Porter told Ontario Superior Justice Frank Marrocco in closing submissions in the high-profile trial.

"In the circumstances, it is unreasonable to suggest anyone would intentionally place the company's future at risk."

Porter, who represents Nortel's ex-CEO Frank Dunn, says his client, along with ex-CFO Douglas Beatty and ex-controller Michael Gollogly, are not guilty of any "dishonest acts" as the Crown has suggested.

The three men are accused of manipulating the balance sheets at what was once Canada's biggest company to deceive investors and the board of directors into thinking that internal company financial targets were being met. All three have pleaded not guilty to two counts of fraud each.

It's alleged these top players at the insolvent telecom firm orchestrated a widespread book-cooking scheme in 2002 and 2003. The Crown says excess accruals — or cash reserves set aside to cover future liabilities — were being improperly released between quarterly reports to show a return to profitability when in fact the company was struggling financially.

Nortel, which had been losing millions for years, was in flux during this period with attempts to restructure by shedding a third of its 90,000-strong workforce and return to profitability.

In a nearly 100-page long oral submission, Porter argued that the allegations of improper accounting practices at Nortel during the time the accused were in charge were errors made in good faith.

“There was no dishonesty in the preparation of the financial statements by anyone, and in particular, by none of the accused,” he said.

In fact, nothing in the Crown's case points to any criminal wrongdoing by Dunn, Beatty or Gollogly, argued the defence.

"What the evidence does show are clear badges of innocence inconsistent with the allegation of fraud," said Porter.

There is no evidence that the former executives falsified or asked anyone to falsify Nortel's accounting, conceal information from auditors or had any knowledge that what they were doing was wrong, he told the court.

Porter told the long-running fraud trial, which began in January, that the accounting decisions at Nortel were made with the information available at the time.

The court has been shown volumes of documents from this time that suggest questionable accounting practices that the Crown says point to a fraud.

An internal report from the company’s own accountants in September 2002 listed $303 million in so-called accruals on the company’s balance sheet that was not known to the board of directors or auditors.

Another entry in question dates to February 2003, when the company had $189 million in accounting reserves but decided to only release $80 million during the first quarter of that year.

The inaccurate entries helped boost the bottom-line to meet internal targets that resulted in $12.8-million in cash and stock bonus payments for the accused.

Porter said neither the executives nor heads of Nortel’s accounting division saw these types of practices as deceitful.

“In cases where an accrual or release was restated, it was not restated for reasons of dishonesty or any wrongdoing whatsoever,” he said.

He argued that the accused were "transparent,” with Dunn repeatedly telling the accountants that "integrity was the underpinning of everything we do."

Even the external auditors at Deloitte & Touche were well aware of the company's accrual policies, according to the defence.

"In short, there is not a single instance of evidence to show fraud in this case," said Porter.

The Crown has argued that information about the company's financial targets contained in internal road maps and forecasts were purposefully kept from the auditors.

Lead Crown lawyer Robert Hubbard said last week that these targets left Nortel’s accountants no choice but to bend accounting rules to meet the unrealistic expectations of the executives.

Dunn, Beatty and Gollogly were fired from the company in 2004 amid the allegations.

It filed for bankruptcy protection in 2009 in the United States, Canada and Europe amid mounting losses, falling sales, big debts and a legacy of legal issues.

Thousands of Canadians lost their jobs when Nortel folded, though thousands of positions were also rescued when other tech giants bought up Nortel's assets.

The closing arguments were expected to wrap up Wednesday.

If convicted, the men could face up to 10 years in prison.