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POSTED AT 8:19 AM EDT Thursday, Apr. 29, 2004
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Nortel axes CEO, top officials; markets quake, dollar struck
CEO Frank Dunn fired, RCMP taking closer look at accounting scandal
Nortel Networks president and CEO Frank Dunn , along with CFO Douglas Beatty and controller Michael Gollogly were fired 'for cause'on Wednesday. (CP Photo/Chris Wattie)
By DAVE EBNER AND KAREN HOWLETT
With files from Andrew Willis, Paul Waldie and Sinclair Stewart
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Nortel Networks Corp. fired its chief executive Frank Dunn and two other top officials yesterday, savaging the stock markets and drawing the scrutiny of the RCMP, as the company took extreme measures to clear its name amid a deepening accounting scandal.
Nortel shocked the markets -- its own stock was crushed, losing about 30 per cent -- in the latest development in a saga that began quietly last July when the company began reviewing its books after the telecom industry collapse that gutted its sales and work force by about two-thirds.
The news of the scandal at Canada's flagship international company -- 94 per cent of Nortel sales are outside the country -- gave the country a black eye. The S&P/TSX composite index lost 3.5 per cent to mark the worst day on the Toronto Stock Exchange since the Sept. 11 terrorist attacks. The Canadian dollar sank 1.31 cents (U.S.) on its second worst day in two decades, partly because of Nortel.
The tumultuous Tuesday that led to the firings began in the early morning when several black Cadillac limos delivered directors to Nortel's Brampton, Ont., headquarters.
Nortel's announcement yesterday means the company has no reliable financial statements since Jan. 1, 2001. In a stunning statement, the company said figures after that "should not be relied upon."
"It's about accountability for financial reporting," Lynton (Red) Wilson, Nortel's chairman, said on a conference call. "That is the concern, that is the issue."
The Royal Canadian Mounted Police has been monitoring the situation but its new white-collar crime unit said yesterday that it is too early to say whether there has been criminal activity at the Brampton, Ont.-based company.
"The Nortel press release raises a number of questions that we will want to look into," said Craig Hannaford, head of the RCMP's integrated market enforcement team in Toronto. "There is a lot of new information here."
RCMP Superintendent John Sliter, who is responsible for the market enforcement units across the country, said the aim is to focus on large companies and "there are some pretty significant developments" at Nortel.
The company said accounting mistakes will halve its reported profit of $732-million for 2003 -- its first year in the black since 1997. An extensive review to determine the full extent of the problems is not yet finished and will take until at least June. This has delayed official 2003 results and will lead to a second restatement of 2001, 2002 and 2003 numbers, most which were first restated last December.
Nortel appointed director and former top U.S. Pentagon official Bill Owens as president and CEO. He is a retired Navy admiral who has run a failed satellite telecom venture as well as several successful tech-telecom ventures after a long career in the military.
Mr. Owen was handed the job at about 9 p.m. Tuesday following a marathon day of board meetings after which Mr. Dunn was told he was fired.
"Under new leadership," Mr. Wilson said, "the board believes that we will be better positioned to put the accounting issues behind us [and] restore confidence in the company's financial reporting."
Mr. Owens, in an interview, said he has a variety of experience managing large tech and telecom businesses and is well-qualified to lead Nortel.
"Am I daunted?" he said. "I am quite confident."
TD Securities Inc. said in a report that Mr. Owens will just be an interim "healer" and a "long-term leadership solution . . . will emerge in due course."
Nortel stock closed at $5.26 (Canadian) on the Toronto Stock Exchange yesterday, down $2.32 or 30.6 per cent, among its worst one-day percentage declines. It has fallen by more than half since late January, when it soared after reporting better-than-expected unaudited 2003 results that have now been revealed as massively overstated.
The stock remains down 95.8 per cent following the collapse from its $124.50 all-time high of July, 2000.
Analysts, who have consistently said there was nothing to worry about, were positive once again yesterday with several increasing their opinion on the stock to "buy" from "hold." The group generally said the company's business outlook is sound, with strong positions in key telecom areas, such as wireless and Internet protocol (IP) equipment.
They also cited the fact that Nortel said its reported sales figures won't be materially restated, even though half of 2003's profit will be pushed back into 2001 and 2002, reducing reported losses on those years.
"We applaud Nortel's board for taking quick action to respond to the situation, and see this as a very positive sign for investors," said Steve Kamman, a CIBC World Markets Corp. analyst. "We do not believe underlying fundamentals at Nortel have changed at all."
Some analysts took a more cautious stance. UBS Securities Canada Inc. cut its rating to "hold" from "buy" on "continued accounting uncertainty."
Besides Mr. Dunn, chief financial officer Doug Beatty and controller Michael Gollogly were fired, all with cause. Mr. Dunn and Mr. Beatty, reached at their homes, had no comment.
Four top finance officials, one for each of Nortel's divisions, have been put on paid leave. The jobs of William Kerr, appointed interim CFO in March, and MaryAnne Pahapill, interim controller, have been made permanent.
Today, Nortel was supposed to report its limited first-quarter results, figures now delayed. It provided a brief sketch yesterday, saying its wireless division was strong, and the enterprise business, which sells equipment to corporations, was weak. Fixed-line equipment was also weak; IP was strong but there was some "choppiness." Optical continues to "make progress."
The only figure it did report was an unaudited cash balance of about $3.6-billion (U.S.) as of March 31, down from $4-billion at the end of 2003. Money was spent on employee bonuses, restructuring and a real-estate deal, Nortel said.
The U.S. Securities Exchange Commission and the Ontario Securities Commission have been investigating Nortel over its financial statements. An SEC spokesman had no comment and an OSC spokeswoman said Nortel has been open and co-operative and the commission was "pleased the company has provided this level of disclosure."
Nortel also faces the possibility of seeing bondholders providing notice to accelerate repayment of money owed. No notice has yet been given, Nortel said, and in any case it would still have 90 days to file official 2003 results from the point of notice.
Nortel reported long-term debt of $3.9-billion as of Dec. 31.
"This is a company with $3.6-billion of cash," Mr. Owens said on a conference call. "If the event were to happen that we would be given notice, we would assess our options at the time."
Forensic accountant Al Rosen, a long-time critic of Nortel's accounting practices, said the latest developments are a huge embarrassment for the company's auditor, Deloitte & Touche LLP. The auditor had signed off on the financial statements that are now in the process of being revised for a second time, he said.
"It proves what we have always thought: If there's a problem in the company, the auditors aren't going to find it."
A Deloitte spokeswoman declined to comment.
Nortel needs another waiver from Export Development Canada, which has put up $326-million to support its foreign business. EDC could demand cash repayment because the company hasn't filed audited statements.
Daniela Pizzuto, a spokeswoman for EDC, said the agency is weighing its options. "The whole thing is under review, basically."
Fired
FRANK DUNN, 50, was "terminated for cause" as CEO, after being promoted from chief financial officer in fall, 2002, and leading the company through dramatic downsizing. "Under new leadership, the board beliwves that we will be better positioned to put the accounting issues behind us [and] restore confidence in the company's financial reporting," said Nortel chairman Lynton (Red) Wilson.
Hired
BILL OWENS, 63, retired U.S. Navy admiral and Nortel director, becomes emergency CEO after 34 years in the Navy and a second career as a high-technology executive. "I certainly don't see [myself] either as a caretaker or an interim CEO. I'm blessed with good health and a fairly broad exposure to the marketplace and I feel like I'm here for the long term."
Burned
ROSLYN RITZ, 80, of Montreal holds 2,400 Nortel shares and is "very resentful of the people who run the company because I don't feel they have any desire to help shareholders." Personal Finance writer Rob Carrick says investors like Ms. Ritz, if they want to simplify their investing live, will "flee this endless car accident of a stock."
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