For nearly eight years, ever since he was summarily sacked as chief executive officer of Nortel Networks, Frank Dunn has been living in the twilight.
Unemployed, and unemployable, the former financial executive has spent much of his time systematically combing through the four million documents that have been available to his lawyers in the various court proceedings in which he is defendant. Dunn, who turns 58 later this month, has declined interviews, preferring to let his lawyers to do the talking -- and they don’t like to talk.
When Dunn was charged by the RCMP in 2008 with accounting fraud, along with former Nortel colleagues Douglas Beatty and Michael Gollogly, the silence deepened. Dunn was shocked by the criminal charges, according to friends who have stayed in touch. All the more so, because of the ramifications to his family and his finances. Despite his nearly three decades at Nortel and the fact he was worth tens of millions of dollars during the tech boom, Dunn is effectively broke.
That may sound odd, considering that in mid-2009 he had roughly $500,000 in cash and securities, plus a bank line of credit of $1.5 million secured against his half of the family home, then on BelAir Drive in Oakville, just west of Toronto. This is according to a court filing arising from a civil suit launched in 2007 by the U.S. Securities and Exchange Commission, alleging accounting fraud. However, Dunn at the time had drawn down $786,000 of the credit line and was facing legal bills estimated at $2.8 million to $3.9 million for just the Canadian criminal case that goes to trial Monday.
Dunn had already advanced $2.1 million to his legal team from McCarthy Tétrault, led by David Porter. Included in that sum was at least $700,000 borrowed from seven former Nortel colleagues. Among the lenders were former CEO John Roth and former chief marketing officer Ian Craig.
The filing helped Dunn secure a stay of the SEC’s proceedings until the Canadian criminal matter is settled. Neither Dunn nor his colleagues could afford to fight both actions at the same time.
In a separate filing to the SEC, Beatty noted that he was "substantially behind on his payments to his defence counsel in the present action, is unemployed, and has extremely limited financial resources."
The SEC legal action may prove to be the most expensive. Morvillo Abramowitz, the U.S. firm representing Dunn in Washington, told him he could expect to pay $3 million to $5 million for his defence there.
Nor was that the only troublesome item on Dunn’s personal books in 2009. He had been expecting Chubb Insurance Company of Canada -- which provided insurance for Nortel’s directors -- to pick up most of the tab for his legal expenses. However, Chubb was paying just 50% of Dunn’s costs at the SEC and Ontario Securities Commission because it denied coverage for anything directly related to charges of manipulating Nortel’s earnings. The OSC also alleges Dunn, Beatty and Gollogly committed civil accounting fraud. And Chubb further refused to pay Dunn’s legal expenses in the criminal proceedings launched by the RCMP.
However, Dunn’s financial situation has since improved. He took Chubb to court and forced the insurance firm to pay at least 90% of his legal costs in the SEC and OSC proceedings, currently both on hold. As Beatty (though not Gollogly) was also a Nortel director, the same would apply to him. It’s not clear whether the court’s final ruling, rendered early last year, also applies to the criminal proceedings, but the same contract law would appear to apply. Nor is it known whether the court decision applies retroactively, or how the Nortel bankruptcy proceedings affect proposed insurance payments involving this and other legal battles.
One sum of cash that Dunn did receive upfront -- he and his wife Nancy also sold their Oakville home late in 2009 for $2.75 million, according to land registry documents. Neither Beatty nor Gollogly have sold their homes. Beatty is being defended in the criminal proceeding by Toronto lawyer Gregory Lafontaine. Brian Greenspan, who three years ago represented Livent co-founder Myron Gottlieb, represents Gollogly.
The defendants have had years to sift through the mountain of material this case has produced. However, anyone hoping to see the three ex-Nortel financial executives take the witness stand in the criminal trial will almost certainly be disappointed. The defence lawyers have decided their best tack is to tear down the Crown’s arguments and trust that Justice Frank Marrocco will draw the appropriate conclusions. Marrocco has been on the bench for nearly seven years and has accumulated a lot of experience in securities cases. Before his appointment, Marrocco was lead prosecutor in the case involving former Bre-X Minerals Ltd. chief geologist John Felderhof.
Starting Monday, Ontario Crown attorney Robert Hubbard will try to prove Dunn, Beatty and Gollogly cooked the books in 2002 and 2003 in order to trigger executive bonuses tied to profits. To do this, Hubbard must establish that the three executives knew their accounting was improper, and that they shifted liabilities this way and that for the express purpose of turning losses into profits, thereby triggering executive bonuses.
That’s it. Hubbard’s storyline will be as direct as possible, and will not veer into the imponderables of what might have happened had Nortel not fired its executives for cause in 2004. Hubbard has thousands of accounting entries from which to choose during the relevant period, from late 2002 to mid-2003. But, judging by documents that have surfaced courtesy of the SEC proceedings, the Crown prosecutor will likely focus on 30 or so key accounting entries to help him build his case. These are line items that helped Nortel to transform operating losses into profits, and the other way around.
The bookings varied widely -- from complex, multistage contracts for specialized wireless networks to inventory writedowns -- and they are divided into two categories. One set consists of liabilities that were allegedly put on the books improperly. Another group includes accounting provisions that were restated, such as items involving Global Crossing, Swisscom and a GSM wireless network in Germany. The latter activity covers the first two quarters of 2003. Hubbard argued in a pre-trial motion on Thursday that Dunn, Beatty and Gollogly falsified the restatement of numbers associated with that period.
However, Porter responded. "A restatement is not evidence of fraud."
The accounting entries in question have a common characteristic. Each is in excess of $1 million. That’s significant because a fraud conviction involving amounts greater than that carry a minimum jail sentence of two years and a maximum of 14.
Hubbard’s focus on accounting entries is a means to an end. He intends to show there was a culture of deceit at the heart of Nortel’s accounting organization, that Dunn and the other leaders were driven to bend the rules to achieve the earnings they sought. This approach can be seen in the preliminary witness list unveiled on Thursday, during a pre-trial motion. The first three witnesses will be Brian Harrison, Karen Sledge and Sue Shaw -- three mid-level employees in what was once a 1,500-member finance group at Nortel.
Harrison, a former director of Nortel’s financial planning and analysis group, had the job of collecting accounting data from the company’s various global divisions and assembling them into a spreadsheet. Sledge, who joined Nortel in 1985, worked out of the company’s offices in Texas. In 2003, she was assistant controller, reporting to Gollogly. Shaw’s precise role is unclear. Hubbard is expected to try to show through these witnesses the mindset of the top financial executives.
The defence, for its part, will likely suggest that the drive to achieve earnings is part and parcel of an aggressive, competitive company -- that all entries were done according to sound accounting principles and that there was a legitimate trigger for each of them.
One surprise towards the end of Thursday’s court session was the revelation by Hubbard that he would be calling the former lawyers for Dunn and Beatty as Crown witnesses. Toronto lawyer Thomas Heintzman -- a colleague of Porter’s -- is to be one of them. Hubbard said the lawyers will testify about what they were asked at meetings with their clients early in 2004, before they were fired.
Also present at those meetings were partners of WilmerHale, the Washington-based firm that Nortel had hired the previous November to conduct a forensic investigation of the company’s books. Because WilmerHale representatives were there, normal client-lawyer privilege may not apply. Nevertheless, given Heintzman’s key role in the firm representing Dunn, it’s unlikely damaging information would emerge from such testimony -- assuming the Crown actually does call the lawyer to the stand.
Indeed, this is one development Dunn probably doesn’t need to worry about.
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