While the rest of the world, especially the SEC, is coming down hard on ex-Nortel (NT) CEO Frank Dunn these days, Financial Post editorialist Terry Corcoran has a different view. Based on the Ontario Securities Commission’s belief that Dunn received an undeserved bonus of only $3.5-million, Corcoran said the “effort to turn Mr. Dunn into the Jack the Ripper of accounting reached absurd proportions” when the OSC and SEC simultaneously laid charges.
Corcoran believes the regulatory campaign to nail Dunn as the “sacrificial scapegoat” may become “a nightmare they’ll wish they hadn’t started” given the time, resources and money involved.
If anything, Corcoran is going hard against the grain given the SEC’s filing earlier this week strongly alleged the financial manipulation of Nortel’s bookkeeping started as early as late-2000. What Corcoran seemed to brush over is the fact that while the financial amounts in accruals and reserves involved are, in the scheme of things, modest, the false nature of Nortel’s results misled investors who happily pumped money into the stock on the belief all was okay when, in fact, there was trouble brewing.
Pahapill: Minor Player?
Of the four ex-Nortel executives named in the SEC’s civil fraud lawsuit last week, a name that may be unfamiliar to many people is MaryAnne Pahapill, who joined Nortel in 1998 and became the company’s assistant controller a year later.
In the lawsuit, the SEC alleges Pahapill was involved in the manipulation of Nortel’s books that began in late-2000. And while the SEC alleges that ex-CEO Frank Dunn, ex-CFO Doug Beatty and ex-controller Michael Gollogly were involved in a second scheme that triggered a lucrative plan, Pahapill appears to have not been involved. In fact, Pahapill was promoted to controller. When she left to join TD Bank in 2005, she was lauded by ex-CEO Bill Owens for her “extraordinary commitment and dedication” in helping get Nortel’s books back in order.
While there was a lot of comment and conjecture last week about the SEC’s allegations, there are usually - if not always - two sides to every story. It’s hard not to believe that Frank Dunn will wage a spirited defense. He may not only try to set the facts straight but could shed light on who else may have been involved or, at least, knew what was happening. This could get even more interesting.
The official line from Nortel is revenue in 2007 wil be “flat to slightly” due to the sale of its UMTS business to Alcatel (ALU). Gross margins will be in the low-40% range while operating margins will be at least 5% of revenue.
Some analysts, meanwhile, appear to be cautious. Last week, Merrill Lynch’s Vivek Arya said that Nortel’s weak product portfolio may not be getting enough attention, highlighted by his belief that only 14% of the company’s sales last year came from growth markets where the company increased its market share.
Arya, who rates Nortel shares as a “neutral”, is looking for the company’s sales to climb by 0.7%. RBC analyst Mark Sue is looking for 2007 revenue of $11.3-billion and 2008 sales of $12-billion. He has a sector-perform rating on Nortel with a target price of $32.
Nortel said on Friday that it had a fourth-quarter loss of $80-million, compared with a restated loss of $2.9-billion a year earlier, which included a $2.5-billion charge for a class-action lawsuit settlement. Revenue climbed 10% to $3.32-billion. The Q4 and 2006 results can be found here.