Ex-Nortel CEO concerned over use of accounting reserves: testimony

Former Nortel Networks Corp. chief executive officer Frank Dunn told company investigators "a lot concerns me" about Nortel's use of accounting reserves to meet profit targets in 2003, but he maintained he was not involved in any improper use of provisions.

Dunn made the remarks in 2004 during an interview with company investigators. A summary of the conversation was revealed Thursday at the Toronto fraud trial of Dunn and two other former Nortel executives.

During the interview on March 21, 2004, Dunn said he was "surprised" by what he was learning from investigators about e-mails sent between Nortel staff members who were working to identify accounting reserves that could be used to help meet profit targets in 2002 and 2003.

"Dunn noted that on reading all of the e-mails together, 'a lot concerns me,'" the interview summary says. "He later remarked, 'Do I think someone is going to be able to explain away all of this? No.'"

Crown attorney Robert Hubbard read portions of the interview summary -- which was prepared by investigators from U.S. law firm Wilmer Cutler Pickering Hale and Dorr LLP -- while questioning two lawyers for Dunn who were called as witnesses at the long-running fraud trial.

Lawyers Abbey Sirivar and Thomas Heintzman were subpoenaed to testify about the interview they attended with Dunn in 2004, when he was questioned by Wilmer Cutler investigators hired by Nortel's audit committee.

Both lawyers testified Thursday they recalled almost nothing that was said at the meeting, despite having reviewed notes this week that Sirivar took at the meeting. Hubbard read portions of Wilmer Cutler's meeting summary to ask whether it helped "refresh" their memories, but both men said the excerpts did not help them recall details of the meeting.

Dunn has made no direct public comments about the alleged accounting fraud at Nortel, so the interview summary offers a rare glimpse into his views on what occurred at the company.

The interview took place just days after Nortel suspended chief financial officer Douglas Beatty and controller Michael Gollogly over concerns about accounting issues. Dunn was still CEO at the time of the meeting, but all three men were fired the following month.

The meeting summary said Dunn reported he was unaware of any wrongful behaviour by either Beatty or Gollogly.

But he also said he was unaware that Nortel had identified $189 million of "unsupported" reserves that it was continuing to carry on its balance sheet in 2003 even though they should not have been maintained.

"If these are right, I have a big problem with my CFO and controller," the summary quoted him saying at the interview.

The interview summary also said Dunn "questioned how the CFO and controller could have certified the accuracy of the financial statements if they knew that unsupported corporate and [non-operating] provisions were maintained on the balance sheet."

The summary said Dunn concluded the interview by suggesting there were matters that needed further review.

"Dunn indicated that based on what he heard during the day there were 'clear facts that need an answer,'" the report said.

Dunn, Beatty and Gollogly are accused of fraudulently manipulating Nortel's accounting reserves to push the company to profitability in 2003 and trigger "return to profitability" bonuses for executives.

The trial heard Thursday that during his 2004 interview, Dunn insisted Nortel reported legitimate profits in the first and second quarters of 2003 and they were not created by improper use of accounting reserves.

"Dunn maintained that he was unaware that any such activity had taken place in Q1 and that such activity makes no sense," the Wilmer Cutler summary says.

Sirivar and Heintzman told the court Thursday they remembered almost nothing of what Dunn said at the interview, including discussions about the company's "return to profitability" bonus plan or the use of accounting reserves to bolster profits.

In a ruling last week, Justice Frank Marrocco of the Ontario Superior Court said Hubbard was not allowed to look at the notes made by lawyers at the meeting or enter them as evidence at the trial.

Heintzman said his one clear memory was of a discussion of the financial results for the fourth quarter of 2002.

At the interview, Wilmer Cutler staff suggested Dunn had told them previously that Nortel had created new provisions in the fourth quarter of 2002 to turn a profit into a loss for the period because he didn't want to report a profit and pay bonuses for a single quarter of profitability after losing so much in the first nine months of the year.

But Dunn replied that he had never previously made those remarks.

"He said, 'I never said that. The provisions used were properly used,'" Heintzman recalled Thursday.

"That's the only thing I could remember about the meeting."