Ontario Superior Court Justice Frank Marrocco acquitted former chief executive Frank Dunn, former chief financial officer Douglas Beatty and former controller Michael Gollogly on Monday.
In a lengthy ruling, the judge said the Crown did not meet the burden of proof required to find the three men guilty.
"I am not satisfied beyond a reasonable doubt that Frank A. Dunn, Douglas C. Beatty and Michael J. Gollogly deliberately misrepresented the financial results of Nortel Networks Corp.," Marrocco said.
"Therefore, I find each of them not guilty of counts one and two in this indictment."
They had been accused of deliberately orchestrating a scheme in 2002 and 2003 that triggered $12.8-million worth of bonuses for themselves while Nortel stock continued to tank, eventually becoming worthless as the company collapsed into bankruptcy.
Dunn, Beatty and Gollogly had been accused of adjusting the company's reserves to make it appear as though Nortel was hitting its targets.
In one instance, the company had $189 million in excess accruals, but only released $80 million so it could boost numbers during the first quarter of that year, while holding onto the rest for use in future quarters.
It's also alleged that a year earlier, Nortel's own accountants were aware of $303 million in cash reserves that were held without a legitimate reason.
Opening arguments were heard roughly a year ago, but the beginning of legal proceedings only came about after more than four years of behind-the-scenes machinations by prosecutors compiling their case.
The defence argued there were accounting errors made in the middle of a major restructuring at the company, but that no conspiracy or fraud was intended.
If convicted, each would have faced up to 10 years in prison.
The loss is a stinging one for prosecutors, who had hoped to make the case an example of Canadian law getting tough on financial misdeeds and ending the country's reputation for being soft on white-collar crime.
"When you look at white-collar crime, there is always going to be incentives for manipulating financial statements," accounting professor Darren Henderson at the Richard Ivey School of Business at Western University said ahead of the ruling.
The global telecom giant was once Canada's most valuable company, with 90,000 employees, and stock that was trading —at its peak — at more than $124.50 a share. The firm was worth nearly $300 billion at its height.
It accounted for as much as one-third of the value of the S&P/TSX composite index at its peak.
But the company eventually collapsed under the weight of the accounting scandal and the bursting of the technology bubble.
In 2009, Nortel began bankruptcy proceedings. In the ensuing years, the company's assets have been sold off piecemeal, raising almost $8 billion to pay back creditors.
In a statement to the media after court proceedings, Dunn said he takes the ruling as a vindication of the corporate governance environment he oversaw during his time at the company.
"I am pleased with today's decision, and after waiting almost nine years, I am grateful to have received vindication," Dunn said.
"I am looking forward to turning the page on this chapter of my life and have no further comment at this time."