Nortel Under Investigation by Federal Prosecutors
By KENNETH N. GILPIN
Nortel Networks, the embattled manufacturer of telephone equipment whose accounting practices are already the subject of a Securities and Exchange investigation, said today that it is the subject of a criminal investigation by the United States attorney's office in Texas.
In a one-paragraph statement, the company, the biggest maker of telephone equipment in North America, said it had received a subpoena from a federal grand jury for "certain documents," including financial statements and corporate, personnel and accounting records dating back to Jan. 1, 2000.
In the statement, Nortel said the investigation was being conducted by the United States attorney's office for the Northern District of Texas, Dallas division. Nortel, which is based in Brampton, Ontario, has its largest operations in the United States in the Dallas area.
Nortel said it would "fully cooperate with the authorities in this matter."
The criminal investigation is the latest in a series of body blows to the company.
Last month, Nortel fired its chief executive, chief financial officer and controller and said it would cut its 2003 earnings in half, further extending an accounting debacle that goes back to at least 2001.
That announcement was preceded by a move in October to restate more than three years of earnings. The company undertook the restatement because it had recorded costs in certain years that should have been spread over future years.
Companies have been known to lump bad news into money-losing years as a way to improve earnings in the following years.
In addition to the S.E.C. investigation, the Ontario Securities Commission is also investigating Nortel's accounting practices. Nortel has also been contacted by the Royal Canadian Mounted Police. And the company now faces nearly two dozen class-action lawsuits filed since mid-March on behalf of investors who say they lost money because Nortel intentionally misled them.
"Paul Sagawa, a telecommunications analyst at Sanford C. Bernstein, said that he believed that some executives would face "some sort of criminal filings."
"In this environment, it is too tempting for that not to happen," he said. "And the shareholder lawsuits probably have a very good case."
Unhappily for Nortel, the inquiries into its recent past come at a time when the prospects for the telecommunications industry, including Nortel, have been improving.
Even as it said it would halve its earnings figures for 2003, Nortel said that it had no plans to restate its $49.8 billion in revenue for that year, and that the restatement in earnings in earlier years would have no bearing on its cash position.
Still, industry experts said Nortel was running the risk of alienating customers, who could use its troubles as an excuse to choose competitors' products or negotiate lower prices.
At the moment, Mr. Sagawa said, he sees "no evidence" that Nortel's problems are causing defections in its customer base.
"Telecommunication networks are built in big swaths," he said, "and once you are a major contractor in that swath," it is difficult to be driven from it.
Trading in Nortel's stock on the New York Stock Exchange was delayed until shortly after the opening bell today. By midmorning shares were down 20 cents, to $3.59.
Even though he has an "outperform" rating on Nortel's stock, Mr. Sagawa said, the company's problems cannot be ignored.
"The fundamentals of the business could well justify upside in the stock price from current levels," he said. "But I have been telling clients there is very significant headline risk" in the shares. "At this point," he added, "Nortel is swimming against some pretty strong currents." |
