Ontario Superior Court Justice Frank Marrocco acquitted ex-CEO Frank Dunn, ex-CFO Douglas Beatty and ex-controller Michael Gollogly because he was "not satisfied" the evidence showed the men had "deliberately misrepresented" the finances at the now-defunct telecom company in 2002 and 2003.
"The criminal trial is based on evidence," he told a packed Toronto courtroom. "The decision I make is based on that evidence and nothing else."
Following the not guilty verdicts, the former executives jumped to their feet to hug family members and their lawyers.
Marrocco's 145-page ruling concludes one of the largest and most complex trials in Canadian corporate history.
Since beginning last January, court has heard from numerous witnesses, and saw more than 600 exhibits entered as evidence, including financial statements, internal emails and memos.
Dunn, Beatty and Gollogly each had faced two counts of fraud — one count of defrauding the public and one count of defrauding Nortel Networks Corp.
The Crown had alleged that the men participated in a book-cooking scheme designed to trigger $12.8 million in bonuses and stocks for themselves while they were at the helm of Nortel.
They were fired from the beleaguered firm in 2004.
All three had pleaded not guilty to the charges.
In a statement, Dunn, the former head of Nortel, said he was "grateful to have received vindication."
"For a very long time, integrity has been the foundation of Nortel Networks' corporate governance and business practices," he said in the statement after declining to speak to the media outside the courthouse.
"The documentary evidence and testimony re-affirmed this core value that I witnessed over my 28 years with the company."
The former head of finances at the company, Beatty, smiled and replied, "Yes, I am," when asked if he was happy to be moving on with his life.
His lawyer, Greg Lafontaine said the ruling reinforces that there was no wrongdoing at the troubled telecom company when his client and the co-defendants were in charge.
"It's a great judgment. It's a complete vindication of Mr. Beatty," he said.
"There was no fraud at Nortel. No fraud at Nortel at all."
Sharon Lavine, who represented Gollogly, said the Marrocco made a "clear decision," but added the turmoil of the trial has taken an "immeasurable emotional toll" on her client.
The Crown says it will not comment on the case, as it now has 30 days to decide whether it will appeal.
Greg Draper, who heads investigative and forensic services at chartered accountancy and business consulting firm MNP, says that the burden of proof was difficult to meet in this case.
"To prove that there was not just intention to do the conduct, moving the money and making the financial statements that were made, but to do it with a criminal purpose to defraud shareholders and the corporation is difficult to prove," he said.
"It certainly sounds like in this case, there wasn't evidence to support that."
Draper said Marrocco, who was the lead prosecutor in the Bre-X Securties case, was correct in ruling that accounting practices at major corporations can be interpretive and not based on steadfast rules.
"Accounting principles are just that, they're principles. They're not rules. There is room for management judgment and that is expected and necessary for the orderly overall operation for a corporation the size of what Nortel was at the time," he said.
"You can apply those judgments. Sometimes there is specific documentation in support of it, sometimes there isn't. Sometimes it is a discussion across the desk."
At its height, Nortel employed more than 90,000 workers worldwide and was worth nearly $300 billion. During the technology boom in 1999-2000, it was one of Canada's most valuable companies, with its shares peaking at $124.50.
In the years that followed the accounting scandal, the company’s shares nose dived to penny-stock status amid falling sales, large debts, and a gamut of legal issues.
In 2009, Nortel filed for bankruptcy in North America and Europe, shedding thousands of jobs. Since then, it has sold its remaining businesses piecemeal to various buyers for more than US$7.8 billion, one of largest asset sales in Canadian history.
At trial, Crown prosecutors tried to prove that Dunn, Beatty and Gollogly were complicit in releasing accruals — money set aside to cover future liabilities — onto Nortel's balance sheets during quarters that needed to show the company was turning a profit when it wasn't.
The Crown argued that this practice, which was kept from the board of directors and the firm's investors, generated return-to-profitability bonuses for themselves even though the company was in the red.
In his judgment, Marrocco said the decision to only release $80 million in excess accruals when it had $189 million to boost numbers during the company's first quarter of 2003 were not out of the ordinary.
This policy did not lead to misrepresenting Nortel's "financial results to the investing public or Nortel's audit committee or Nortel's board of directors," he wrote.
Marrocco concluded the company's statements were restated twice in one quarter to reflect differences of opinion in accounting practices, not as an effort to cover up fraud.
Although the judge found that genuine accrued liabilities were not released when they should have been nor adjusted when they should have been, he was "not satisfied that any or all of the accused understood the extent of the excess accrued liabilities on Nortel's balance sheet."
Furthermore, the amount was immaterial to the finances of such a large company, and even if they were not released, the executives would've received their profit bonuses anyway, Marrocco told the court.
At trial, Dunn's lawyer said his client approved the accounting at the telecom equipment maker but should not be held responsible if the figures given to him were inaccurate. At the time, Dunn was preoccupied with trying to save the company and trusted that the balance sheets were correct when he approved them, argued the defence.
"I am satisfied that non-cash impacting excess accrued liabilities on the balance sheet were not a priority," the judge wrote in his decision.
The Crown also alleged that Nortel's own accountants were aware of $303 million in cash reserves that were held without a legitimate reason as part of a "cookie-jar accounting scheme."
Ramy Elitzur, a professor with the Rotman School of Management at the University of Toronto, says the Nortel verdict has the potential to make prosecutors and law enforcement think twice about pursuing white-collar crime cases.
The verdict came on the same day that mediation talks on the distribution of nearly $9 billion in assets from the now-bankrupt Nortel began in Toronto.
The week-long proceedings, headed by Ontario Chief Justice Warren Winkler, are part of an effort to settle the company's creditor claims in Canada, the U.S. and around the world.
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