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Nortel settles SEC accounting fraud lawsuit

[JURIST] The US Securities and Exchange Commission (SEC) filed suit [litigation announcement] on Monday against Nortel [corporate website] for fraudulent accounting practices and also reached settlement [press release] with the telecommunications giant. The lawsuit, filed in the US District Court for the Southern District of New York, alleged that Nortel engaged in two illegal accounting schemes from 2000 to 2003 designed to create a favorable market opinion of the company. As part of the settlement, Nortel will pay approximately $35 million in penalties to be distributed to stockholders. The company also consented to a permanent injunction against breaking any federal securities laws in the future, and agreed to submit quarterly reports regarding its actions to fix its accounting procedures. The lawsuit alleged that Nortel reported revenue earlier to meet quarterly and annual forecasts, and also decreased or increased earnings as necessary to create the appearance of profitability. The SEC also alleged that Nortel submitted a fraudulent earnings restatement in 2003 purportedly to correct the previous accounting problems. The SEC expects Nortel to reduce its 2003 earnings by at least half to correct the misleading restatement. Although Nortel did not deny or admit wrongdoing, the SEC noted the cooperation of the company and the board of directors in the investigation, particularly in the formation of an independent audit committee, the termination of officers and executives responsible for the improper accounting, and extensive remediation procedures for the company's accounting procedures.

Nortel had previously settled a lawsuit with the Ontario Securities Commission [official website] and resolved four material weaknesses in the company's accounting and reporting practices. Nortel has committed in the settlement to resolve the fifth material weakness and report its progress in doing so to the SEC. In March, the SEC filed a lawsuit [JURIST report; litigation release] against former Nortel executives Frank A. Dunn, Douglas C. Beatty, Michael J. Gollogly and MaryAnne E. Pahapill, who were terminated for their roles in the improper accounting schemes in April 2004, for violating federal securities laws and lying to auditors. In September, the SEC added as defendants [litigation release] four other former Nortel executives to the lawsuit. The Wall Street Journal has more. CNN/Money has additional coverage.

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