Judges Approve Nortel Fraud Settlement

Nortel Networks will pay US$2.45 billion to settle shareholder lawsuits stemming from accounting fraud at the telecom gear maker between 2000 and 2005; U.S. judges gave the settlement their final blessing on Tuesday.

Though Canadian courts have yet to clear the settlement of suits brought there, the U.S. judges ruled on two separate class action lawsuits brought in the U.S., saying the proposed agreements were fair to all parties.

U.S. District Richard M. Berman approved a $1.14 billion deal to settle a lawsuit brought on behalf of 1.4 million investors in Nortel who owned shares between Oct. 24, 2000, and Feb. 15, 2001.

Separately, U.S. District Judge Loretta Preska approved a settlement for about the same amount to compensate investors who bought common stock or sold options on Nortel stock between April 24, 2003, and April 27, 2004.

“The settlement is approved as fair, reasonable and adequate,” Judge Preska wrote in her decision.

The compensation will come in the form of $575 million in cash and about $1.64 billion worth of new shares of stock, or about 628 million shares.

Nortel’s insurance companies have already agreed to pay out $228.5 million to settle the suits. The deals also require that half of any funds recovered in private lawsuits pending against former CEO Frank Dunn and other senior executives be channeled to investors.

Moving On?

Brampton, Ontario-based Nortel has been attempting to turn its focus away from past misdeeds and toward its future as a provider of telecom and Internet infrastructure — once again a growing market as companies invest billions to build out high-speed fiber optic and wireless networks and as phone carriers become providers of television service.

The settlement approvals came after Nortel completed restating earnings over a prolonged swath of time starting in late 2000, when the telecom industry began to shake out after several strong years of heavy investment egged on by the dot-com boom.

Nortel had previously worked to settle charges brought by the Securities and Exchange Commission (SEC) and other regulatory bodies.

It had also conducted an extensive house-cleaning of top executives and was given high marks for its choice of a new CEO, selecting former Motorola executive Mike Zafirovski to turn the company around.

It has hit more than its share of bumps along the way, however, admitting earlier this year that it would again have to restate some earnings that it had already corrected to reflect the true extent of past problems.

Nortel shares were up 1.5 percent in morning trading Wednesday, to $26.56.

Back on Track

The settlement will rank as one of the largest ever involving securities, or stock, fraud. From the same era, investors in Enron have won $7 billion in settlements, while those who put money into the ill-fated WorldCom have settled for $6.1 billion.

Claude Lamoureux, president of the Ontario Teachers’ Pension Plan Board, a lead plaintiff in both cases, noted that the settlement was reached after months of mediation and also calls for extensive changes within Nortel to ensure strict corporate governance going forward.

The settlements, which contain no admission of wrongdoing, are a welcome development for Nortel, which has spent billions attempting to put the accounting issues — which involved overstating earnings and revenue during a period when sales were plummeting — to rest.

“Nortel has been saddled with these accounting issues for years,” telecom industry analyst Jeff Kagan told the E-Commerce Times. “Last year we thought it was done, and the company was going to start recovery — and it got set back. But now it appears the light really is at the end of the tunnel.”

Nortel, meanwhile, faces the challenge of reinventing itself in a changing telecom industry. It has already taken some steps toward that end, selling off one of its wireless technologies and announcing a long-term partnership with Microsoft to develop real-time communications and collaboration technologies.

“It’s a new telecom landscape, and that’s only going to add to the challenge of turning Nortel around,” Kagan added. Still, recent earnings reports suggest the company is keeping old customers in the fold and winning new ones, he said, as it becomes leaner and more efficient.

“If Nortel can get a few profitable quarters under their wing, the worst of this distracting, multi-year problem might be over,” he added.

Nortel’s turnaround efforts got another boost last week when Verizon Wireless signed a five-year, $2 billion contract to buy gear from Nortel, including radio base stations, switching, IP platforms, optical networking solutions and related equipment.