Tuesday, October 16, 2007

Does Nortel's $35 Million Settlement With SEC Further Victimize Stockholders?

Nortel Networks (NT-$16.76), the Canadian manufacturer of telecommunications equipment, brought closure to an accounting scandal when it agreed to pay a civil penalty of US$35 million and consented to injunctions against it from violations of certain provisions of federal securities laws.

The payment settles a
civil suit filed by the Securities and in New York alleging that Nortel's previous management engaged in two fraudulent accounting schemes, one involving earnings and the other revenue, between 2000 and 2003.

Further, Nortel will provide to the SEC quarterly written reports detailing its progress in implementing its remediation plan and actions to address its outstanding material weakness in internal controls.

“The settlement reached today reflects the seriousness of the company's past activity,” said Christopher Conte, an Associate Director of the Commission's Division of Enforcement. “Nortel's fraud was long-running, intentional and pervasive.”

In 2006, Nortel agreed to pay nearly $2.5 billion in cash and stock to settle two shareholder class-action lawsuits over the company's accounting scandal.

SEC commissioner
Paul S. Atkins criticized the latest settlement, saying the penalty was no more than “a public relations gesture.”

“Congress anticipated that we would take previously paid restitution into account before imposing an issuer penalty,” Atkins said. “We should have refrained from further victimizing shareholders.”

In our view, the $35 million should be extracted—through penalties and disgorgement orders—from those
Nortel executives who knowingly engaged in and profited from the fraud-- former CEO Frank Dunn, former CFO Douglas Beatty, former Controller Michael Gollogly and former Assistant Controller MaryAnne Pahapill.

“As with all costs imposed upon a corporation,” said Commissioner Atkins, “the penalty will be paid by Nortel shareholders, many of who were victims of the financial fraud.”

Atkins' comments may
reopen a debate among the regulator's leaders over whether such actions help or harm investors.
Editor David J. Phillips does not hold a financial interest in Nortel Networks. The 10Q Detective has a Full Disclosure Policy.

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