)) HER MAJESTY THE QUEEN – v. –, 2013 ONSC 137

CITATION : R. v. Dunn, 2013 ONSC 137 COURT FILE NO.: 10-00145 DATE: 20130114 ONTARIO SUPERIOR COURT OF JUSTICE BETWEEN: )) HER MAJESTY THE QUEEN – and – FRANK A. DUNN, DOUGLAS C. BEATTY AND MICHAEL J. GOLLOGLY Defendants )) )) )) )) ) ))))))))))) Robert Hubbard, Amanda Rubaszek & David Friesen , for the Crown David M. Porter, John Dent, Sarit Batner, Harry Underwood & Andrew Matheson, for the Defendant, Frank A. Dunn, Gregory Lafontaine &, Lori Anne Thomas , for the Defendant, Douglas C. Beatty Sharon Lavine & Robin McKechney , for the Defendant, Michael J.

Gollogly HEARD: January 12, 16, 17, 18, 19, 20, 30, 31, February 1, 2, 3, 6, 7, 8, 9, 13, 14, 15, 16, 17, 21, 22, 27, 28, 29, March 5, 6, 26, 27, 28, April 2, 3, 4, 5, 10, 11, 17, 18, 30, May 1, 2, 3, 10, 14, 22, 23, 24, 28, 29, June 4, 5, 12, 13, 14, 19, 20, 21, 22, 25 & 26, September 27, 28, October 2, 3, 2012 Contents Nortel’s Circumstances during the time-frame of this indictment 7 The law of fraud as it applies to the allegations against the accused in this case . 9 Materiality . 11 SAB 99 and Mr. Dunn, Mr. Beatty and Mr. Gollogly . 13 The presumption of innocence, reasonable doubt, R. v.

W.(D.), [1991] 1 S.C.R. 742 . 13 Business Records . 14 Should the evidence of some of the Nortel and Deloitte’s employees be viewed with caution? . 14 A few basic accounting principles . 18 More generally . 21 Considerations concerning the set-up and use of accrued expenses/liabilities . 21 Nortel specific circumstances . 21 Deloitte’s historical relationship with Nortel 21 Target setting and Nortel’s culture . 22 The employment of Mr. Dunn, Mr. Beatty and Mr. Gollogly at Nortel 23 Mr. Frank Dunn . 23 Mr. Douglas Beatty . 24 Mr. Michael Gollogly . 25 Mr. Dunn, Mr. Beatty and Mr. Gollogly . 25

Nortel was a complex corporate organization . 26 The Financial Results of Nortel Networks Corporation . 27 Nortel’s Consolidation Close Process . 27 Excess accrued liabilities & Nortel’s policy of Conservatism .. 30 The accused knew there were excess liabilities on the balance sheet 33 Unsupported and excessive accrued liabilities on the balance sheet 33 Nortel’s Pro Forma earnings calculations . 34 Pro Forma earnings and Bonus Thresholds . 35 Nortel’s Re-statement of previously-published financial statements . 35 The First restatement 37 A short chronology . 37 Who was Responsible . 37 Nortel Restatements are complex . 37 How the Restatements came about 37 The Comprehensive Balance Sheet Review .. 39 Was the Comprehensive Balance Sheet Review Comprehensive? . 41 The results of the second restatement 43 Inferences concerning Nortel’s restated financial results for Q1 03 and Q2 03 . 47 Q4 02-the 4 th quarter of 2002 . 48 The participation of Mr.

Dunn and Mr. Beatty . 51 The specific late entry accrued expenses/liabilities solicited by Mr. Harrison . 52 The solicitation of late entries from Karen Sledge . 52 Late entry Fringe and Vacation accrued liability balances . 52 Fringe Benefit Accrued Liability Balances . 52 Vacation Expenses . 54 Soliciting accrued expenses in Asia . 54 The solicitation of additional accruals from Ken Crosson . 56 Excess and obsolete inventory . 56 Use of Mr.

Crosson’s $30 million as an offset 58 The JDS Uniphase Corporation transactions . 58 Perot Systems . 61 The solicitation of additional accruals from Jim Kinney for the period Q4 02 . 62 Mr. Gollogly’s knowledge generally . 64 360 Networks . 65 The manipulation of Nortel’s pro forma earnings before taxes to get a bonus . 66 Did the late entry accrual expenses/liabilities misrepresent Nortel’s US GAAP financial results for Q4 02? 66 Susan Shaw’s 2002

Summary of Accrued Liabilities . 67 Corporate . 70

Non-Op . 71 Q4 2002 Conclusion . 72 Q1 03 & Q2 03 . 74 The release of $361 million in Q1 03 and $372 million in Q2 03 . 74 The Crown’s Chart – “operations” Ex. 42E .. 75 The PWC release – $19 million-originally released Q1 03 . 76 The Genuity release – $23 million originally released Q1 03 . 77 The Optical Warranty release – $8 million released in Q2 03 . 78 Conclusion . 79 The release of $80 million in Non-op accrued liability balances and the entitlement to a bonus . 79 The effect of the $80 million on earnings . 85 Conclusion concerning the Bonus Payments & earnings . 85 The materiality of the release of $80 million of Non-op accrued liability balances . 86 Conclusion . 89 Susan Shaw’s list of $189 million Non-op accrued liabilities . 89 Should the $189 million have been dealt with in Q4 02? . 93 The knowledge of Mr.

Dunn, Mr. Beatty and Mr.

Gollogly . 94 The accrued liability balance for the Degree of Difficulty bonus – $25 million . 95 The accrued liability balance for the General Provision $10 million . 96 The $142 million in accrued liabilities which Nortel wished to release in Q2 03 . 98 Conclusion . 99 The use of Outlooks and Roadmaps in 2003 . 100 The Arris Proposal 105 Deloitte’s interest in forecasting . 105 The 2003 Outlooks and Roadmaps tracked proposed releases . 107 The February 19, 2003 teleconference . 107 The June 6, 2003 Outlook and the surrounding events . 111 The release of the $4 million Siemens accrued liability balance . 113 The Restricted Stock Unit Bonus Plan . 115 Conclusion . 116 The draft letters Mr.

Gollogly prepared for the Board of Directors and the Audit Committee in July 2003 117 Mr. Gollogly’s draft letter to the Chairman of the Board of Directors, the Chairman of the Audit Committee and the Chairman of the Joint Leadership Resources Committee . 120 Conclusion . 121 Mr. Gollogly’s draft letter to Mr. Beatty . 121 The “now infamous intercompany out of balance provision” . 122 Mr. Gollogly’s reference to the unsupported accrued liability balances . 123 Mr. Gollogly’s reference to the forecasted Q3 03 loss . 125 Mr. Gollogly’s concern about Nortel’s internal controls . 125

Conclusion . 125 The language in the 2003 press releases and the notes to the first restatement 126 The Crown’s criticism of the Q3 03 financial results . 129 Preservation of the integrity of the Q3 03 General Ledger 131 Conclusion . 132 Conclusion . 132 The excess and unsupported accrued liabilities . 132 Q4 2002(Q4 02) 133 The $80 million in Non-op Accrued liability balances released to the Q1 03 profit and loss statement 134 The Return to Profitability Bonus . 134 The Restricted Stock Unit Bonus . 134 The $80 million generally . 135 The attempt to release the $142 Million . 136 Nortel’s published financial results for Q3 03 . 136 The Comprehensive Balance Sheet Review .. 136 The Q1 & Q2 03 accrued liability balance releases . 138 Verdict 139 MARROCCO J.: [ 1 ] The defendants are charged with two counts of fraud. [ 2 ] The first count alleges that, between January 1, 2000 and April 28, 2004, the three accused did, by deceit falsehood or other fraudulent means, defraud the public by deliberately misrepresenting the financial results of Nortel Networks Corporation. [ 3 ] The second alleges that, between January 1, 2000 and April 28, 2004, the three accused did, by deceit falsehood or other fraudulent means, defraud Nortel Networks Corporation by deliberately misrepresenting the financial results of Nortel Networks Corporation. [ 4 ] In both counts, it is alleged that the extent of the fraud exceeded $5,000. [ 5 ] For the sake of completeness, I make two observations: first, the events captured by this indictment concern matters which occurred between 2000 and 2004.

Nortel did not commence Companies Creditors Arrangement Act proceedings until January 14, 2009. The evidence in this proceeding did not describe events linked to the commencement of those proceedings. Second, Nortel Networks Corporation’s shares traded publicly on the New York and Toronto Stock Exchanges. It ceased trading publicly on January 14, 2009. Nortel’s Circumstances during the time-frame of this indictment [ 6 ] All allegations of criminal conduct are made within a factual fabric or context.

A true appreciation of the nature of the alleged criminal conduct is impossible without a description of that fabric or context. [ 7 ] Part of the factual context for this matter is set out in Exhibit 251D. Exhibit 251D was received in evidence as a business record of Deloitte & Touche. [ 8 ] Nortel Networks Corporation (“Nortel”) was in the business of providing data, wireless and optical networking products and services to telecommunications carriers and enterprise customers around the world.

Between 1998 and 2001, Nortel Networks Corporation and its predecessor, Nortel Networks Limited, undertook a total of twenty-two acquisitions for an aggregate purchase price of $29 billion. These acquisitions were undertaken during a period of both strong economic growth in 1999 and 2000 and rapid infrastructure build-out by the telecommunications industry. [ 9 ] By 2001, the telecommunications industry began to experience a slowdown attributed to excess capacity created as a result of the build-out, the consolidation of service providers within the industry and lower capital spending by industry participants.

As a result, there was a dramatic and significant reduction in the demand for Nortel’s products and services.

[ 10 ] In response to the industry and economic downturn in 2001, Nortel attempted to streamline its operations. Nortel reduced its overall workforce from approximately 94,002 to approximately 52,000 and incurred severance and termination charges in excess of $3.3 billion. Nortel discontinued aspects of its operations and divested itself of investments. Nortel recorded a write down of $12.4 billion for goodwill and other intangible assets in the quarter ending June 30, 2001. [ 11 ] In 2002, Nortel reduced its workforce to 37,000 as at December 31, 2002.

Nortel experienced a write down of its goodwill in its Optical business of approximately $595 million and, on December 13, 2002, Nortel pledged substantially all of its assets in favor of certain lenders. [ 12 ] Nortel experienced net income losses of $197 million in 1999, $2.9 billion in 2000, $27.4 billion in 2001 and $3.6 billion in 2002. [ 13 ] The equity of Nortel’s shareholders shrank from $28.7 billion in 2000 to $1.9 billion in 2002. [ 14 ] The circumstances had become so dire at Nortel that, when a quarterly result was announced, the auditors had to take a view of the next twelve months from the date of the quarterly report and opine on the likelihood of Nortel continuing as a going concern. [ 15 ] Nortel Networks was publicly-traded on the New York Stock Exchange.

The New York Stock Exchange ran on Nortel equipment. Nortel’s decline was so severe that the closing share price for the company’s common shares in September 2002 fell below the minimum for continual listing on the New York Stock Exchange. The Chairman of Nortel’s Board was advised that Nortel might be de-listed although, in fact, this did not occur. [ 16 ] The compelling but rather sterile economic reality described above was put into more human terms by Mr. Bruce Richmond, who testified as a Crown witness. During the time-frame of the indictment, Mr.

Richmond was the Vice-Chair and Deputy Chief Executive of Deloitte & Touche LLP (Canada). He is a chartered accountant; he is a Fellow of the Institute of Chartered Accountants since 1997, a designation conferred on approximately 2% of the Institute’s members. [ 17 ] During the time-frame set out in the indictment, Mr. Richmond was responsible for overall management of Deloitte’s clients across the entire Deloitte organization, which comprised sixty-seven offices with $1.4 billion in revenues. [ 18 ] Mr.

Richmond was professionally associated with Nortel through Deloitte & Touche from the late 1970’s. [ 19 ] Through the time-frame described in the indictment, Mr. Richmond served as the Deloitte & Touche Senior Advisory Partner to Nortel. Specifically, Mr. Richmond had been the Senior Advisory Partner at Nortel since 1992. In addition to Nortel, Mr. Richmond also served as the Advisory Partner to approximately a dozen of Canada’s major corporations. [ 20 ] I accept Mr. Richmond’s entire evidence in this matter without qualification. [ 21 ] As Advisory Partner, Mr.

Richmond had two primary responsibilities; first, to interface with the directors, particularly members of the Audit Committee, as well as the CEO and the CFO; second, to be a sounding board for the Deloitte partners conducting Nortel audits and reviews. [ 22 ] Mr. Richmond attended virtually all Audit Committee meetings. [ 23 ] Mr. Richmond described Nortel as a major client in the same category as Canadian banks and other major Canadian corporations. Mr. Richmond indicated that approximately twenty companies in Canada would be described as major clients. [ 24 ] Mr.

Richmond described Nortel’s situation during the time period set out in the indictment as follows: “Nortel was descending down a very slippery path at a very fast rate… The notion of where the bottom was going to be was not understood at that point in time by anybody… One day a client existed the next day it was out of business… The team was clearly on red alert in terms of what they were facing… ….endeavoring to the best of our collective ability, and I’m talking Nortel folk and I’m talking Deloitte folk, to put your arms around a situation that frankly, having had 20 years in the profession and having been the lead client guy and the senior client service guy for the largest firms in the country, this was a situation that we had never seen before”. [ 25 ] Later on in his evidence, Mr.

Richmond said: “in the years 2001, 2002, the company was fighting for its very survival…” [ 26 ] Mr. Richmond indicated that the free-fall that Nortel was experiencing resulted in a situation where Nortel could be comfortable with the value of an asset on one day and next day be convinced that the asset was severely diminished in value. [ 27 ] As a result of that situation, Nortel’s Audit Committee and Board of Directors were in Mr.

Richmond’s words: “focused like a laser beam in terms of ensuring from their perspective in the discharge of their responsibilities that the Corporation was doing whatever was required to ensure that they had identified and appropriately quantified provisioning in connection with any exposure of the Corporation”. [ 28 ] Nortel’s Audit Committee and Board of Directors had succeeded in communicating this concern about providing for every risk to senior management and the field. [ 29 ] Nortel’s first re-statement re-stated more than $900 million in excess accrued liabilities into previously-published Nortel financial statements.

I am satisfied that one of the underlying reasons for the presence of these excess accrued liability balances was the determination of Nortel’s Audit Committee, auditors, senior management and field staff to provide for every risk and, thereby, avoid unpleasant surprises.

The law of fraud as it applies to the allegations against theaccused in this case [30] It is the Crown’s position that the accused told lies and that the lies put investors at risk of economic deprivation. It is also theCrown’s position that the accused told lies which put Nortel itself at risk of economic deprivation. The lies, according to the indictment,are found in the deliberate misrepresentation of Nortel Networks Corporation`s financial results. [31] The offence of fraud is set out in the Criminal Code, RSC 1985, C. C-46 s. 380 in the following terms: 380.

(1) Every one who, by deceit, falsehood or other fraudulent means, whether or not it is a false pretense within the meaning of thisAct, defrauds the public or any person, whether ascertained or not, of any property, money or valuable security or any service, (

a) is guilty of an indictable offence and liable to a term of imprisonment not exceeding 10 years, where the subject matter of the offenceis a testamentary instrument or the value of the subject matter of the offence exceeds $5000. [32] At the outset of the trial, the Crown provided the court with a factum setting out the general principles of the law of fraud, aswell as helpful references to s. 397(1)(

a) of the Criminal Code. That factum was quite helpful and I have attempted to apply thoseprinciples in this case. [33] In R. v. Zlatic (1993), (SCC), 79 C.C.C. (3d) 466 (S.C.C.) at para. 26, the court stated that the actus reus offraud will be established by proof of: (

i) the prohibited act, be it

an act of deceit, a falsehood or some other fraudulent means; and (ii)deprivation caused by the prohibited act, which may consist in actual loss or the placing of the victim’s pecuniary interests at risk. [34] The court, in R. v. Zlatic, at para. 26, held that the mens rea for fraud was established by proof of: (

i) subjective knowledge ofthe prohibited act; and, (ii) subjective knowledge that the prohibited act could have as a consequence the deprivation of another (whichdeprivation may consist in knowledge that the victim’s pecuniary interests are put at risk). [35] Finally, the court stated that, where proof of these two elements was established, the accused was guilty if he or she actuallyintended the prohibited consequence or was reckless concerning the consequences (see: R. v. Zlatic (supra), at para. 27). [36] In R. v. Eizenga 2011 ONCA 113 [2011] O.J.

No. 524, at para. 81, the Court of Appeal emphasized that a subjective intent tomislead was not an essential element of fraud. [37] In R. v. Theroux (1993), (SCC), 79 C.C.C. (3d) 449, at paras. 16-17 (S.C.C.), McLachlin J. [as she then was]defined the actus reus for the offence of fraud as requiring two elements: a dishonest act and deprivation. [38] McLachlin J. indicated that deprivation was established if it was proven that the dishonest act caused detriment, prejudice orrisk of prejudice to the economic interests of the victim. [39] In R. v.

Theroux, McLachlin J. [as she then was] defined the mens rea requirement for the offence of fraud. [40] McLachlin J. stated that the mens rea of fraud was established by proof of subjective awareness that one was undertaking theprohibited act, i.e. the deceit, falsehood or other dishonest act, and that the prohibited act could cause deprivation in the sense ofdepriving the proposed victim of property or putting the proposed victim’s property at risk. [41] McLachlin J. also stated that the fact that an accused person may have hoped that the deprivation would not take place or mayhave felt that there was nothing wrong with what he or she was doing was not a defence (see: R v Theroux, at para. 22). [42] Later on, McLachlin J. stated, at para. 29: “the accused must have subjective awareness at the very least that his or herconduct will put the property or economic expectations of others at risk”. [43] This case deals with false financial results.

Where the omission or misstatement complained of is not material to thosefinancial results, it stands to reason that it will be difficult to prove that there was any risk of prejudice to the economic interests of thepublic. [44] The public are not defined in the indictment in count one. Obviously, the public can be divided into different groups orsegments. I am satisfied that a fair

interpretation of the public in this case is the investing public. [45] In count two, the victim is defined; namely, Nortel Networks Corporation. [46] As indicated earlier, the Crown advances the proposition that, in this fraud case, the accused told lies. McLachlin J.specifically commented in R. v. Theroux, at para.29: “But in cases like the present one, where the accused tells a lie knowing that otherswill act on it and thereby puts their property at risk, the inference of subjective knowledge that the property of another would be at risk isclear”. [47] In R. v. Drabinsky, 2011 ONCA 582 [2011] O.J.

No. 4022, one of the charges in the indictment was that the accused in thatcase had provided false financial information to persons who invested in an IPO. In that case, at para. 80, the Ontario Court of Appealstated: “the Crown had to prove the appellants knew that the financial statements contained misrepresentations and that they werematerial to the decision to invest in the IPO”. [48] The matter before me is different; there is no IPO. In this case, the defendants are, in count one, facing a charge of defraudingthe public by deliberately misrepresenting the financial results of Nortel Networks Corporation.

Accordingly, if one applies the same

conclusion that the Court of Appeal expressed in R. v. Drabinsky , supra , the conclusion in this case must be that the Crown has to prove that the accused knew that Nortel’s financial statements contained misrepresentations that were material to the decision of a member of the investing public to buy, hold or sell Nortel publicly-traded securities. [ 49 ] With respect to count two, the essence of the matter seems to be that the misrepresentation of Nortel’s financial results created the economic risk that Nortel Networks Corporation would pay money to the defendants that ought not to be paid to them.

Materiality [ 50 ] In R. v. Drabinsky , at para. 83 , the Court of Appeal commented on the notion of materiality. The court said that materiality in the context of that case was a fair inference from the nature of the misrepresentations, the documents in which they appeared and the context in which those documents were used. [ 51 ] At paras. 81 & 82, the Court of Appeal, in R. v.

Drabinsky , upheld the trial judge’s decision that the misrepresentations in the financial statement relied on in support of the IPO were material to the decision to purchase shares through the IPO. [ 52 ] The materiality of a misstatement or omission is, therefore, important. In its opening, as part of a Glossary of Terms, the Crown provided a definition of materiality.

In the context of financial statements, an omission or misstatement is material according to this glossary if “the judgment of a reasonable person relying on the statements would have been changed or influenced by the inclusion or correction of the item”. [ 53 ] The Crown offered expert evidence on various aspects of the accounting issues of concern in this proceeding. This evidence was received on consent in the form of a written report from Asset Risk Advisory Inc. The Asset Risk Advisory Inc. Report was prepared by Mr.

Robert Chambers, who is a lawyer, a chartered accountant, a certified fraud Examiner and a Fellow of the Institute of Chartered Accountants of Ontario. [ 54 ] At paragraph 31 of his report, which was appended to his affidavit, Mr. Chambers made the following observation about materiality: “According to FASB, materiality is the quality of being important.

The omission or misstatement of an item in a financial report is material if, in the light of surrounding circumstances, the magnitude of the item is such that it is probable that the judgment of a reasonable person relying upon the report would have been changed or influenced by the inclusion or correction of the item.” [ 55 ] Mr. Chambers referred the reader of his report to SEC Staff Accounting Bulletin 99 (“SAB 99”) for guidance in determining materiality.

SAB 99 was published in 1999 – the same year that Nortel’s world began to unravel. [ 56 ] In SAB 99, SEC made it clear that exclusive reliance on dollar thresholds cannot be used as a substitute for a full analysis of all relevant considerations when determining materiality. [ 57 ] SAB 99 states that, among the considerations that may render material a quantitatively small misstatement of a financial statement item, are: • Whether the misstatement arises from an item capable of precise measurement or whether it arises from an estimate and, if so, the degree of imprecision inherent in the estimate; • Whether the misstatement masks a change in earnings or other trends; • Whether the misstatement hides a failure to meet analysts' consensus expectations for the enterprise; • Whether the misstatement changes a loss into income or vice versa; • Whether the misstatement concerns a segment or other portion of the registrant's business that has been identified as playing a significant role in the registrant's operations or profitability; • Whether the misstatement affects the registrant's compliance with regulatory requirements; • Whether the misstatement affects the registrant's compliance with loan covenants or other contractual requirements; • Whether the misstatement has the effect of increasing management's compensation – for example, by satisfying requirements for the award of bonuses or other forms of incentive compensation; and, • Whether the misstatement involves concealment of an unlawful transaction. [ 58 ] Apart from Mr.

Chambers’ general statements, no expert evidence concerning materiality was offered in this case. Representatives of Deloitte performed a materiality analysis, which was admitted as a business record and to which reference will be made. [ 59 ] Count number one alleges a fraud upon the public. Nortel was publicly-traded. I am satisfied that the public in this case includes the investing public. Persons who own publicly-traded Nortel securities are included in the term “public”. Persons who are thinking of purchasing publicly-traded Nortel securities are included in the term “public”.

I accept and intend to apply the notion of materiality that is described in Mr. Chambers’ report. A misrepresented financial result is material if, in light of the surrounding circumstances, the magnitude of the item is such that it is probable that the judgment of a reasonable member of the investing public would have been changed or influenced by the correction of the item.

The omission of a financial result is material if, in light of the surrounding circumstances, the magnitude of the item is such that it is probable that the judgment of a reasonable member of the investing public would have been changed or influenced by the disclosure of the item.

SAB 99 and Mr. Dunn, Mr. Beatty and Mr. Gollogly [60] Mr. Gollogly was aware of SAB 99. Mr. Gollogly sent a memo to selected Nortel employees dealing with SAB 99 on March3, 2003. His memo attached SAB 99 itself. Mr. Gollogly made a presentation to Nortel’s Audit Committee on April 23, 2003, in whichhe explained the concept of materiality. Mr. Beatty and Mr. Dunn were normally in attendance at Audit Committee meetings. [61] I am satisfied that Mr. Dunn and Mr. Beatty were present when Mr. Gollogly made this presentation to the Audit Committee. [62] Mr. Beatty was aware of SAB 99. On April 19, 2003, Mr.

Beatty sent an e-mail to Mr. Gollogly which stated: “would youplease email me the charts (if possible) for SAB 99 that speak to the need to disclose, particularly if management comp’n is achievedetc. – probably useful to have the SAB 99 text as well for Monday a.m.” [63] Mr. Dunn was Nortel’s CEO during the time with which we are concerned. Prior to that, he was Nortel’s CFO and, prior tothat, he was Nortel’s Corporate Controller. [64] Mr. Dunn, Mr. Beatty and Mr.

Gollogly were senior officers of a corporation publicly- traded on the New York StockExchange with annual revenues of approximately $10 billion per year during the time frame of the indictment. [65] I am satisfied that Mr. Dunn, Mr. Beatty and Mr. Gollogly were aware of the specifics of SAB 99, the importance ofdetermining whether items of financial information were materially important and, finally, the importance of making the appropriatedisclosure to the public. The presumption of innocence, reasonable doubt, R. v.

W.(D.), (SCC), [1991] 1 S.C.R. 742 [66] I have instructed myself on the presumption of innocence, the burden of proof and reasonable doubt. In a criminal case, theaccused is presumed to be innocent unless and until the Crown has proved his/her guilt beyond a reasonable doubt. It is not theresponsibility of any accused under our law to establish or to demonstrate or to prove his innocence. If the Crown should fail to proveguilt in respect of a particular crime beyond a reasonable doubt, then the accused is not guilty of that crime.

To put the matter somewhatdifferently, in order to find an accused guilty of a particular offence, the Crown must prove each and every one of the essential elementsof that offence beyond a reasonable doubt. If I should entertain a reasonable doubt about the proof of one or more of those essentialelements, then I must find the accused not guilty of that offence. [67] A reasonable doubt is not a far-fetched or frivolous doubt. It is not some fanciful doubt. It is not a doubt based upon sympathyor prejudice. Rather, it is an honest and fair doubt based on reason and common sense.

It is doubt that logically arises from the evidenceor lack of evidence. It is not enough that I believe that Mr. Dunn, Mr. Beatty or Mr. Gollogly is probably or likely guilty of count one orcount two of this indictment. In those circumstances, I must find any or all of them not guilty because Crown counsel has failed tosatisfy me of guilt beyond a reasonable doubt. Proof of probable guilt or likely guilt is not proof of guilt beyond a reasonable doubt. Ishould also remember, however, that it is virtually impossible to prove anything with absolute certainty. Crown counsel is not required todo so.

Absolute certainty is a standard of proof that is impossibly high. [68] If, based on all the evidence, I am sure that Mr. Dunn, Mr. Beatty or Mr. Gollogly committed the offence described in eithercount one or count two in the indictment, I should find Mr. Dunn, Mr. Beatty or Mr. Gollogly guilty of such offence since I would havebeen satisfied of guilt beyond a reasonable doubt. If, at the end of the case based on all the evidence, I am not sure that Mr. Dunn, Mr.Beatty or Mr. Gollogly committed either count one or count two in this indictment, I should find Mr. Dunn, Mr. Beatty or Mr.

Golloglynot guilty of such offence. If, after a full consideration of all the evidence admissible against any one of defendants, there remains in mymind a reasonable doubt concerning the guilt of such defendant, then the Crown has failed to meet the standard of proof which the lawrequires, the presumption of innocence prevails and it is my duty to acquit. On the other hand, if, after a full and careful consideration ofall the evidence, I am left with no reasonable doubt concerning the guilt of Mr. Dunn or Mr. Beatty or Mr.

Gollogly on either or bothcounts in the indictment, the presumption of innocence has been displaced and it is my duty to convict. [69] Reasonable doubt applies to issues of credibility. I am not required to firmly believe or disbelieve any witness or set ofwitnesses. I must ask myself whether, on the basis of the evidence which I do accept, I am convinced beyond a reasonable doubt by thatevidence of the guilt of one or more of the accused )see: R. v. W.(D.), (SCC), [1991] 1 S.C.R. 742, at para. 28). Business Records [70] During the course of this trial, the Crown and the defence tendered hundreds of documents.

These documents were receivedas business records. As such, they are capable of proving the facts contained within them. However, I am not bound to accept thebusiness records as proof of facts contained within them. Should the evidence of some of the Nortel and Deloitte’semployees be viewed with caution? [71] The Crown indicated that several of the witnesses listed in the Appendix to its submissions were accomplices.

The Crownindicated that these witnesses sought to minimize their involvement or distance themselves from wrongdoing and that this took the formof acquiescing quickly with defence suggestions on cross-examination.

[72] Leading questions were asked on cross-examination and it is correct that, on many occasions, witnesses accepted thesuggestions contained in those questions. [73] At the same time, the Crown submits that there was strong confirmatory evidence of aspects of the testimony of thesewitnesses in the documents which were tendered. The witnesses in respect of whom the Crown urges caution played a role, according tothe Crown, in the planning, analysis and use of accrued liability balances to meet earnings targets.

Without the co-operation of thesewitnesses, the Crown submits the three accused would not have been able to shift Nortel from a profit to a loss in Q4 02 (the fourthquarter of 2002) and engineer profits in Q1 03, Q2 03 and Q3 03 (the first quarter of 2003 etc.). [74] This is perhaps an appropriate place to observe that there is nothing about the background of any of these witnesses whichmakes them inherently “unsavory”. The evidence has disclosed that regulatory proceedings against the defendants are in abeyancepending the outcome of this matter.

The evidence has not disclosed that any of the witnesses listed in the Crown’s Appendix are facingcriminal charges themselves. There is no suggestion in the evidence that any of these witnesses are the subject of outstanding regulatoryproceedings. [75] The Crown submits that there was a long-standing culture of Conservatism at Nortel and many of the witnesses who arechartered accountants or certified management accountants had to know that accrued liability balances therefore existed and were beingused to meet earnings targets.

The Crown submits that compliant employees assisted the accused in misrepresenting the financial resultsof Nortel Networks Corporation. [76] I am satisfied that, during the time-frame of the indictment, there was at Nortel a culture of Conservatism, in the accountingsense of that term. I am satisfied that this culture existed for in excess of twenty years.

It has to be remembered, however, that, until1999, the SEC and the Ontario Securities Commission had not prohibited the practice of releasing accrued liability balances to bridge thegap between a company’s actual performance and a previously announced financial target.

Coincidentally, it was in the same year, 1999,that Nortel began experiencing significant losses. [77] Finally, one has to remember that Nortel’s culture concerning the recording of accrued liability balances was slow to changebecause for fiscal 2000, 2001 2002 Nortel reported losses in the billions and, as a result, the Board of Directors, Nortel’s auditors and itssenior management were preoccupied with survival. [78] The accused called no defence.

All of the witnesses who testified were called by the Crown. [79] The ten witnesses listed in the Crown’s Appendix gave evidence which was capable of both inculpating and exculpating theaccused. As well, this is not a case in which it is relatively straightforward to delineate evidence which implicates any one or all of theaccused in either of the offences set out in the indictment. [80] With respect to those portions of the evidence which, in my view, are exculpatory, the question is whether such evidencealone or in combination with other evidence leaves me with a reasonable doubt (see: R. v.

Rowe, 2011 ONCA 753, 2011 OJ No. 5382(Ont.

CA), at para. 42). [81] With respect to those portions of the evidence which implicate the accused, I have to decide whether the credit of thesewitnesses is such that I should caution myself about accepting, in the absence of confirmatory evidence, testimony from them whichimplicates any one or more of the three accused. [82] As indicated earlier, the Crown suggested that these witnesses were accomplices and that their evidence implicating theaccused should be viewed with caution in the absence of confirmatory evidence. [83] I propose now to consider a few highlights of the testimony of the witnesses named by the Crown. [84] Mr.

Brian Harrison was, during the time-frame of the indictment, the Vice-President of Performance Management and, later,when the position of Vice-President Performance Management was eliminated, Nortel’s Director of Financial Planning and Analysis.Mr. Harrison was directly involved in the process of soliciting accruals during Q4 02. It is the Crown’s view that he actively assisted inchanging a Q4 02 pro forma gain before taxes into a loss before taxes. Mr. Harrison was a CMA or certified management accountantduring the time-frame of the indictment.

He no longer has that designation for reasons which were not disclosed. He was interviewedmany times by different police forces and regulatory authorities. At one point, he was told that he was a target of the investigation intothe matters described in this indictment. Prior to actually testifying, he was told by the police and the Crown that he was no longerconsidered a target of the investigation into these matters. [85] In my view, I should exercise some caution before accepting unconfirmed evidence from Mr.

Harrison which I thinkimplicates any of the accused in this matter [86] Linda Mezon, Nortel’s Assistant Corporate Controller for a portion of the time-frame described in this indictment, indicatedshe was not aware of the fact that there was a point in time in Q4 02 when Mr. Harrison’s Outlook (forecast) suggested positive proforma earnings before taxes of $73 million. Ms.

Mezon also played a central role in the JDS offset in the fourth quarter of 2002 (Q4 02).While I will discuss this in more detail later, it is sufficient to say that the JDS offset resulted in expenses being reduced to reflect areduction in revenue at a late point in Nortel’s close of the books for Q4 02. [87] Even if I were to disbelieve Ms.

Mezon concerning what she knew about Nortel’s preliminary pro forma earnings before taxesduring the early part of the Q4 02 close, this would not make her a witness, whose testimony implicating any or all of the accused,should be viewed with caution in the absence of confirmatory evidence. It simply means that she knew something which she claimed notto know. While this could affect her credibility, it does not make her a Vetrovec witness (see: R. v. Winmill (1999), (ON CA), 131 C.C.C. (3d) 380 (Ont. C.A.), at para. 113).

Similarly, her participation in the JDS offset does not make her a witnesswhose evidence implicating the accused ought to be viewed with caution unless confirmed by other evidence. It simply means that, withthe knowledge and consent of her superiors and Nortel’s auditors, she accepted an entry to offset the loss of revenue caused by the

accounting for the JDS transaction. This conduct does not make her a witness whose evidence implicating the accused I should be cautious about accepting in the absence of confirmatory evidence. [ 88 ] Helen Verity was the Director of Consolidations for Nortel from 2001 – 2003. She received Outlooks or forecasts during the Q4 02 close process. Her handwriting is on some of them. Ms. Verity testified that she was not aware of the skepticism which greeted Mr. Harrison’s assertion that Nortel’s pro forma earnings before taxes were positive in Q4 02. While this may be a credibility issue as far as Ms.

Verity’s concerned, it does not make her a Vetrovec witness ( see: R. v. Winmill , supra , at para. 113 ). [ 89 ] Mr. Crosson was a long-standing Nortel employee who, during the material time, was the Vice-President of Global Operations. Mr. Ken Crosson, despite the fact that he was satisfied with the original financial results he submitted to Nortel headquarters in Brampton during the Q4 02 close, came up with additional accrued liability balances upon request. These additional balances resulted in increases in expenses and a corresponding decrease in earnings. This clearly assisted Mr.

Harrison, who was canvassing for accrued liability expenses/liabilities which, by definition, would decrease earnings. [ 90 ] Mr. Crosson, in my view, was responding to requests from his superiors, but I am not satisfied that he responded in an inappropriate way. He indicated in his estimation there was some flexibility concerning excess and obsolete accrued liability balances relating to inventory.

While his responses arguably were not entirely consistent with United States Generally Accepted Accounting Principles (“US GAAP”) and while that may be a concern for securities regulators, the accrual balances which he agreed to increase could be changed without distorting Nortel’s underlying financial reality. [ 91 ] I am not satisfied that Mr. Crosson’s conduct changes his character as a witness such that I ought to be cautious, in the absence of confirmatory evidence, about accepting inculpatory evidence from him. [ 92 ] Mr.

Glenn Morita was the Director of Finance for the Europe Middle East Asia Region during the time-frame of the indictment. Mr. Morita was also satisfied with his original financial results submitted to Nortel headquarters in Brampton during the Q4 02 close but, nevertheless, located additional accrued liability balances upon request from Mr. Harrison. The fact that Mr. Morita provided additional accrued liability balances which he thought were genuine does not change Mr.

Morita’s character as a witness such that, in the absence of confirmatory evidence, caution should be exercised before accepting evidence from him implicating any or all of the accused. [ 93 ] Mr. Jim Kinney was, during the time-frame in the indictment, Vice-President Finance of Wireless, which was a business unit within Nortel. Mr. Kinney and his group worked very hard to meet their Q4 02 target. Despite this, Mr. Kinney submitted additional accrued liability balances that moved him off target in Q4 02.

He testified that he was not concerned because he had been requested by his superiors to find additional accruals and that is what he did. [ 94 ] I do not find that Mr. Kinney’s behavior in this regard changes his character as a witness and that I should, therefore, be cautious in the absence of confirmatory evidence about accepting evidence from him implicating any or all of the accused. [ 95 ] Ms. Karen Sledge was the U.S. Controller during the Q4 02 close. She became Assistant Corporate Controller in 2003 where she remained until 2005. When she was Assistant Corporate Controller Ms. Sledge reported to Mr.

Gollogly until he was suspended in March 2004. Ms. Sledge changed the Fringe accrued liability balance as a result of repeated calls from Mr. Gollogly and others. Ms. Sledge was not comfortable with making this change and mentioned it to the representatives of the Wilmer Cutler Pickering law firm. Wilmer Cutler Pickering, about one year later, were conducting, at the request of Nortel’s Audit Committee, an independent review of the circumstances leading to Nortel’s re-statement of previously-published financial results.

Her conduct does not change her character as a witness such that I should, in the absence of confirmatory evidence, exercise caution before accepting inculpatory evidence from her. A few basic accounting principles [ 96 ] Mr. Robert Chambers, the Crown’s expert, provided some basic accounting principles in his report. [ 97 ] A general principle underlying US GAAP is that expenses are to be matched with revenues as long as it is reasonable to do so.

When work or a product makes its contribution to revenue, expenses associated with that work or product are recognized even if those expenses cannot be known with precision. This matching principle is applied through accrual accounting. In such a situation, the accrued expenses are estimated. [ 98 ] An accrued expense is an expense that has been incurred but not yet paid.

An accrued liability is an obligation disclosed on the balance sheet that is not yet payable. [ 99 ] Recording an accrued expense reduces income on the profit and loss statement and, simultaneously, results in the recording of an accrued liability on the balance sheet. [ 100 ] Once the accrued liability is recorded on the balance sheet of a publicly-traded corporation like Nortel, the corporation is required to assess that accrued liability balance at the end of each financial quarter to determine whether something has occurred within that quarter which requires a change ( i.e ., an increase or decrease) in the estimate of the liability. [ 101 ] If an event has occurred within that quarter which requires a change in the estimate of the accrued liability balance, then the accrued liability balance should be either increased or decreased in that quarter.

This is sometimes referred to as a “change in estimate”. [ 102 ] If an accrued liability balance is increased as a result of the change in estimate, earnings are negatively affected. [ 103 ] If an accrued liability balance is decreased as a result of a change in estimate, earnings are positively affected. [ 104 ] In Nortel speak, the event which required a change in the estimate of the accrued liability balance was called a triggering event

or a trigger. Put simply, trigger was a word used to denote an event or some other situation that drove a change in an accrued liability balance. [ 105 ] When the accrued expense becomes certain and is paid, the earnings of the corporation can be favorably affected. The following example, borrowed and slightly-amended from the Crown’s expert evidence, illustrates this. [ 106 ] Assume that, as a result of a contract into which it has entered, a publicly-traded corporation is involved in litigation at the close of its fiscal year ending December 31, 2002 and assume that an unfavorable outcome is probable.

Management does not know the exact amount it will have to pay, but its reasonable estimate is that the judgment against it will be for not less than $3 million and not more than $9 million.

If no amount within that range appears to be a better estimate than any other, Financial Accounting Standards No. 5 (“FAS 5”) requires that an expense of $3 million be recorded at December 31, 2002, i.e. , the expense estimate at the lowest end of the estimated range of appropriate exposures. [ 107 ] Recording this expense on the profit and loss statement will have a $3 million negative impact on earnings for the period ending December 31, 2002.

Recording this accrued expense also results in an accrued liability of $3 million being recorded on the balance sheet. [ 108 ] In the example above, if the company thought that $4 million was the best estimate of its liability, then it would record $4 million as an expense/liability despite the fact that it was not at the lowest end of the range of appropriate liabilities.

It is only when no amount within the acceptable range is a better estimate than any other that the lowest amount in the range must be chosen. [ 109 ] Assume, for simplicity’s sake, that the company settles the litigation for $2 million in the third quarter of 2003 and pays the plaintiff in that quarter. At the end of the third quarter of 2003, the company should eliminate the accrued liability of $3 million. $2 million of the liability was used to pay the plaintiff so the remaining balance is $1 million.

This remaining $1 million excess is removed from the balance sheet and $1 million is recorded on the profit and loss statement as a positive impact on earnings. This is sometimes referred to as a “releasing” the accrued liability balance to the profit and loss statement or “releasing the accrual” or a “releasing the $1million”. Sometimes it is referred to as “reversing the accrual”. [ 110 ] In some of the documentation received in evidence, accrued liabilities were referred to as “provisions”.

Setting up accrued expense/liability was sometimes referred to as “provisioning”. [ 111 ] There is a timing issue in the example. US GAAP, specifically SEC Bulletin 14, requires the elimination of the accrued liability and the recording of the $1 million positive impact on earnings in the quarter when the event precipitating the conversion of the liability occurred. In this example, it is the third quarter of 2003 because the precipitating event is the settlement of the litigation. [ 112 ] In the example, if the accrued liability balance was not adjusted in the third quarter of 2003, then an “error” has occurred.

In the third quarter 2003, accrued liability balances would be $3 million greater than they should be and earnings would be $1 million lower than they should be. [ 113 ] An accrued liability can be falsely stated on the balance sheet if any one of three things happens: • first, if, contrary to US GAAP, the liability is fictitious; • second, if, contrary to US GAAP, an artificially-high number is used to estimate the liability when it is first set up; • third, if an event occurs within a quarter which calls for a change ( i.e ., an increase or decrease) in the estimate of the accrued liability and, contrary to US GAAP, a change in estimate does not occur.

From that point on, accrued liabilities will be either overstated or understated on the balance sheet. [ 114 ] When there are excess accrued liability balances on the balance sheet, an opportunity is created to tailor earnings by arbitrarily “releasing the accrual” to positively impact earnings in the quarter where you want to increase earnings. The motive for tailoring earnings is often to meet a previously-publicized financial target. Such behavior is contrary to US GAAP. The financial results in the tailored quarter are misrepresented.

Whether the misrepresentation is material is a separate consideration. [ 115 ] Returning to the example, if the corporation did not release the $1 million in Q3 02 but, instead, left it on the balance sheet for a rainy day, the corporation would be said to have a “cookie jar” of $1 million on its balance sheet. [ 116 ] A corporation can also tailor earnings by lowering them if, contrary to US GAAP, it creates an accrued expense/liability which is completely false or artificially high.

The false or artificially-high expense negatively affects earnings and results in earnings being misrepresented on the corporation’s profit and loss statement. Recording the false or artificially-high expense automatically results in the recording of a false or artificially-high accrued liability. When this happens, the corporation’s financial results are misrepresented.

Whether the misrepresentation is material is a separate consideration. [ 117 ] Finally, a corporation has to account for impairment of its assets even if there is uncertainty concerning the recognition of revenue or the incurring of an expense and uncertainty concerning how much money is involved. [ 118 ] The Financial Accounting Standards Board issued the Statement of Financial Accounting Standards No. 5 (“FAS 5”) in March 1975 to assist in accounting for uncertainties related to the occurrence of future events, commonly known as accounting for contingencies. [ 119 ] Nortel was required to record an expense related to a material contingency if information available prior to the issuance of its financial statements indicated that it was probable that an asset had been impaired or a liability had been incurred at the date of the financial statements and the amount of the impairment or loss could be reasonably estimated.

The evidence established that, during Nortel’s decline, assets thought secure became impaired overnight. The evidence established that great uncertainty existed in 2001 and

2002 concerning the extent to which Nortel’s assets had become impaired. More generally [ 120 ] First, when estimating and recording accrued expenses/liabilities, considerable discretion is accorded to management and, correspondingly, considerable judgment is required. [ 121 ] Second, Mr. Richmond testified that, while the basic concepts of accrual accounting were straightforward, their application could be quite complex. He testified that, between 2000 and 2005, the operating mechanics of accrual accounting did not change, the regulatory environment changed. To this, I would add sometimes reasonable differ; sometimes

interpretations and applications of basic principles change. Considerations concerning the set-up and use of accrued expenses/liabilities [ 122 ] Mr. Richmond explained that there are two considerations. The first is ensuring that your provisioning for expenses is appropriate at any point in time; that is, that you had identified every risk for which you should provide. The second consideration requires, if necessary, reducing accrued liability balances should they turn out, at any point in time, to be overstated. [ 123 ] It was Mr.

Richmond’s view that there had been a practice in corporate Canada and corporate America in the late 1990s to prepare financial statements in a professional, thorough and comprehensive way, but also in a way that made sure there was flexibility in the accrued liability levels of the corporation so that, at the end of a quarter if a CEO found himself slightly short of the market’s expectations of profitability, he or she might release accrued liabilities from the balance sheet and, thereby, positively impact earnings in order to meet the corporation’s publicly-stated targets. [ 124 ] Mr.

Richmond commented that this practice was ended by the SEC and the Ontario Securities Commission in 1999. The result of the change, according to Mr. Richmond, was that it was still permitted to provision in a prudent way, but not appropriate after the results of the corporation had been determined to go in and use “magic” to change numbers arbitrarily to comply with previously- publicized targets. [ 125 ] Mr. Richmond described this change in 1999 as “a huge deal”. Mr.

Richmond gave examples of corporations such as Microsoft, which had experienced difficulty with regulators because they failed to appreciate this change in the environment. Nortel specific circumstances Deloitte’s historical relationship with Nortel [ 126 ] The scope of Deloitte’s involvement with Nortel is an important part of the context of this matter. It is difficult to get a full appreciation of the total number of Deloitte & Touche partners and associates who worked on the Nortel file. Mr. Richmond indicated that younger partners, managers and senior accountants worked on the Nortel file full-time.

In terms of billings, Nortel was a major client of Deloitte. [ 127 ] Evidence in this proceeding indicated that external auditing fees for 2003 were approved by the Nortel Audit Committee in the amount of $19 million. [ 128 ] Some Deloitte’s auditors including the lead audit partner had their offices in Brampton at Nortel headquarters. [ 129 ] Deloitte had been Nortel’s auditors for approximately one hundred years. [ 130 ] I am satisfied that Nortel was a significant Deloitte & Touche client. I am satisfied that Deloitte & Touche were embedded in one form or another in all aspects of Nortel’s operations.

The evidence is replete with communications between Nortel staff and Deloitte staff. Many of the witnesses testified that, when Deloitte asked for information, it was provided. This assertion is amply borne out by the documentary record. Target setting and Nortel’s culture [ 131 ] Mr. Peter Dans testified in this matter. Mr. Dans worked at Nortel from 1990 to 2007. Mr. Dans served in a strategic planning role from 2001 to 2003. Specifically, Mr. Dans was assigned to the Global Planning and Reporting Group. [ 132 ] Mr. Dans has a degree in engineering.

He has an MBA; he is also a CMA – that is, a certified management accountant. [ 133 ] Mr. Dans described the setting of targets. He testified that Nortel, whose fiscal year was the calendar year, started working on its budget in August. In August 2003, Mr. Dans prepared budgets and potential targets for each of the business units for fiscal 2004. The initial targets came from the Global Planning and Reporting Group. They produced a target for revenue and profitability which was essentially in the form of a profit and loss statement. Mr.

Dans then reviewed these initial targets with the accused Douglas Beatty and it was Mr. Dans’ understanding that Mr. Beatty reviewed the target with the accused Frank Dunn. [ 134 ] The targets were sent to the Presidents and financial Vice-Presidents of the various business units so that they could provide their view on achieving their proposed target. [ 135 ] Mr. Dunn and the Presidents of the business units would hold a final meeting and set the budget targets for the year.

[ 136 ] Mr. Dans further testified that there were times during the year when targets were updated. Mr. Dans indicated that Mr. Dunn and Mr. Beatty set what were called “stretch targets”. This was a target that would be harder to achieve. It might be as much as 5% better than the budget. While Mr. Dans only had direct knowledge of this process for the fiscal year 2003, it was his impression that the target setting process employed in 2003 had not changed from earlier years. [ 137 ] Hitting the target was an important part of Nortel’s culture. Mr.

Kinney offered the observation that one negotiated targets which allowed one to succeed rather than fail. [ 138 ] Mr. Gollogly described the attitude at Nortel in an e-mail, dated July 31, 2003: “... General approach is to sandbag good news and close hard to the forecast”. [ 139 ] E-mails were received as business records in this trial. [ 140 ] Mr. Glenn Morita is a chartered accountant. He was the Director of Finance for the Europe Middle East Asia Region. Mr. Morita similarly expressed himself in an e-mail to a colleague, dated January 8, 2004. Mr.

Morita testified and confirmed the implication in his e-mail. [ 141 ] The inference I draw is that the Nortel business units made a very determined effort to meet their targets. The employment of Mr. Dunn, Mr. Beatty and Mr. Gollogly at Nortel [ 142 ] Mr. Richmond and other witnesses were able to provide some history and context to the employment at Nortel of all three accused. This evidence could not be elicited from the accused because they did not testify. Mr. Frank Dunn [ 143 ] Specifically, Mr. Richmond testified that Mr. Dunn, a certified management accountant by training, joined Nortel out of university.

Mr. Richmond, although aware of Mr. Dunn, only began to deal with him when Mr. Dunn became Corporate Controller (1992-1993). When Mr. Dunn was Nortel’s Controller, Mr. Richmond met with him both individually and at Audit Committee meetings. [ 144 ] Mr. Richmond indicated that, after Mr. Dunn became Nortel’s CFO, their dealings became more frequent. Mr. Richmond was present at Audit Committee meetings when Mr. Dunn, as CFO, made presentations and commented on issues. [ 145 ] Mr. Richmond pointed out that, when Mr.

Dunn was the CFO of Nortel, he was the CFO of a corporation with the largest capitalization value of any corporation in Canada. [ 146 ] Mr. Dunn became the CEO of Nortel in the fall of 2001. Mr. Richmond continued to deal with Mr. Dunn after that time. [ 147 ] Mr. Richmond testified that Mr. Dunn was technically competent as far as accounting skills were concerned. Mr. Brian Harrison indicated that Mr. Dunn was knowledgeable concerning accounting principles. Mr. Harrison also testified that Mr. Dunn was very interested in details; he described him as detail-oriented. In a similar vein, Ms.

Helen Verity, a chartered accountant herself, testified that she worked with Mr. Dunn and Mr. Beatty at different times during her career at Nortel. Ms. Verity described Mr. Dunn as “a very smart man” with a good grasp of accounting principles. Mr. Ken Crosson testified that he had known Mr. Dunn for twenty-five years at Nortel and offered the opinion that Mr. Dunn was “very familiar with numbers, very efficient with numbers. Understood – – he – – he understood numbers”. Mr. Crosson also indicated that, on the occasions when he and Mr. Dunn discussed accounting issues, Mr.

Dunn was able to “understand it completely”. [ 148 ] I accept the assessments of Mr. Dunn offered by Mr. Richmond, Mr. Harrison, Ms. Verity and Mr. Crosson. They had years to observe Mr. Dunn and their evidence in this regard did not appear to be contentious. [ 149 ] Mr. Lynton R. Wilson also testified. Mr. Wilson was the Chairman, President and CEO of BCE Inc. and, as a result, joined the Board of Nortel in 1991. Mr. Wilson was a member of the Board of Directors throughout the period described in the indictment.

He was the Chair of the Board of Directors of Nortel for most of the period set out in the indictment. Mr. Wilson was, therefore, personally familiar with the period described in the indictment. [ 150 ] Mr. Wilson is an Officer of the Order of Canada and a Companion of the Order of the Business Hall Of Fame. During his career, Mr. Wilson served as CEO and as a director of a number of major Canadian corporations. [ 151 ] I accept Mr. Wilson’s evidence without qualification. [ 152 ] Mr. Wilson became the Chair of Nortel’s Board in 2001. He testified that Mr.

Dunn was asked to take on the role of CEO at Nortel in the fall of 2001 at a difficult time. At that time with reference to Nortel, Mr. Wilson stated, “the ship was listing pretty badly…” [ 153 ] It was Mr. Wilson’s opinion that it was a credit to Mr. Dunn’s leadership that he was able “to keep the ship afloat” after he became CEO in 2001. Mr. Douglas Beatty [ 154 ] The evidence established that Mr. Beatty was a C.A., who became the CFO of Nortel on July 17, 2002. Thus, Mr. Beatty’s first quarter as CFO was Q3 2002. Prior to being CFO, Mr. Beatty was the Corporate Controller. Mr. Beatty succeeded Mr.

Dunn as Corporate Controller. [ 155 ] Mr. Richmond testified that he felt it was part of his responsibility to assess Mr. Beatty’s ability to be CFO. Mr. Richmond

indicated that it never occurred to him to suggest to the Chair of the Board or the Chair of the Audit Committee that Mr. Beatty did not possess the technical and other expertise to carry out his responsibilities. To the contrary, Mr. Richmond testified that he recommended Mr. Beatty to the Board for the position of CFO. [ 156 ] Mr. Brian Harrison testified and I accept his evidence that Mr. Beatty was knowledgeable concerning accounting principles. Ms. Helen Verity also confirmed that Mr. Beatty was “a good accountant”. Mr. Ken Crosson testified that he was in contact with Mr. Beatty on at least a weekly basis.

He testified that Mr. Beatty was a very knowledgeable and efficient accountant. [ 157 ] I accept the evidence of Mr. Richmond, Mr. Harrison, Ms. Verity and Mr. Crosson concerning Mr. Beatty’s background and accounting acumen. Mr. Michael Gollogly [ 158 ] The evidence established that Mr. Gollogly is a C.A., who became Nortel’s Corporate Controller on July 25, 2002, eight days after Mr. Beatty became CFO. July 25 was in the third quarter of 2002. The fourth quarter of 2002 (October 1-December 31) figured quite prominently in the evidence in this case. [ 159 ] At an earlier point in his career, Mr.

Gollogly had been Nortel’s Assistant Controller (the late 1990s). He moved from Assistant Controller to senior executive positions with Nortel in France, Asia and England and then returned to the Brampton head office in July 2002 as Controller. [ 160 ] Quite significantly, immediately upon assuming his position, Mr. Gollogly made a better understanding of Nortel’s Balance Sheet a priority for him and his staff. [ 161 ] Exhibit 42 TT demonstrates that, in January 2003, Mr. Gollogly began Balance Sheet Reviews for all units and statutory entities within Nortel. [ 162 ] Mr. Richmond was of the view that Mr.

Gollogly was technically competent as far as his accounting skills were concerned. Mr. Harrison and Ms. Verity both indicated that Mr. Gollogly was knowledgeable concerning accounting principles. [ 163 ] In addition, Mr. Gollogly prepared draft letters and made presentations to the Audit Committee of Nortel staff which demonstrated that he was quite knowledgeable concerning accounting principles of interest in this proceeding. [ 164 ] I accept Mr. Richmond’s, and Ms. Verity’s assessment of Mr. Gollogly’s accounting ability. Mr. Dunn, Mr. Beatty and Mr.

Gollogly [ 165 ] The three defendants were, from Q3 02 (the 3 rd quarter of 2002), the three senior managers of the Corporation. [ 166 ] I am satisfied that all three of the defendants were knowledgeable and experienced accountants who had the principal responsibility for Nortel’s financial statements and records. [ 167 ] I am satisfied that they were, by reason of their training, their access to forecasts and their long association with Nortel, interested in and well-acquainted with all aspects of Nortel’s financial affairs. [ 168 ] I am satisfied that all three accused were aware of financial information which materially affected Nortel’s financial results.

Nortel was a complex corporate organization [ 169 ] Nortel, itself, is part of the fabric in context of this case. Because we are dealing with the consolidated financial statements, there is a tendency to think of Nortel as a single entity. This is not precise. [ 170 ] Mr. Richmond testified that Nortel operated in at least sixty countries in the world. He stated that the organizational chart included dozens of separate entities operating in geographies all over the world. He pointed out that, every time you had a subsidiary Nortel Corporation, generally speaking, you had to conduct an audit. [ 171 ] Mr.

Richmond described Nortel as a large, complex organization with a large and complex audit-processing team. He estimated that there were hundreds of people involved in Nortel auditing. [ 172 ] This fact is important because it means that the financial information which the Regions were forwarding to corporate headquarters each quarter was financial information which had been produced by entities which, themselves, had been audited. [ 173 ] Mr. Donald Hathway was Deloitte’s Lead Audit Partner on the Nortel audit commencing in the spring of 2003.

He was the DeLoitte person in charge of the conduct of the actual audit. Mr. Hathway stated that Nortel had a matrix organization. He said that responsibility for particular General Ledger accounts was divided between geographic entities and line of business entities. He said that responsibility for particular accounts was not always clear because of the complicated nature of the organization. Mr. Hathway testified that there were financial decisions made at the business level which were not controlled by Regional Controllers and for which Regional Controllers would have no responsibility. [ 174 ] Mr.

James Kinney testified. Mr. Kinney is a Certified Management Accountant. He started at Nortel in 1980 and continued there until 2004. From August 2002, he was the Vice-President Finance for the Wireless Business Group. Mr. Kinney indicated that, from a business perspective, Nortel was divided by both Business Lines and Regions. Mr. Kinney also indicated that the Business Lines, in turn, were divided by technologies and products. The products were also divided by Regions. Each Line of Business had a President;

each Region had a President. Each Line of Business had Vice-President Finance and each Region had Vice-President Finance. [ 175 ] Mr. Kinney testified that the Regions were also responsible for the contractual liabilities that went with the customer. Contractual liabilities were 40% of Nortel’s total liabilities. Contracts would be understood by the responsible person in the Regional organization and would have been set-up through the Regional organization.

Knowledge about the documentation of the contract and knowledge concerning the customer resided with individuals within the Regional organization. [ 176 ] Finally, it was Mr. Kinney’s view that ownership of the balance sheet resided in many sections of Nortel but, primarily, in the Regions. This aspect of Mr. Kinney’s evidence was not contentious and I accept it. [ 177 ] I am satisfied that Nortel’s business organization worldwide was composed of dozens of separate corporations operating in geographies everywhere and that it was internally a complex entity.

The Financial Results of Nortel Networks Corporation [ 178 ] Because the essence of these charges is that the defendants deliberately misrepresented the financial results of Nortel Networks Corporation, it is necessary to make some comments about Nortel’s financial results and Nortel’s decisions to re-state some of those results. [ 179 ] Nortel’s fiscal year ended on December 31. Nortel reported its financial results in accordance with US GAAP and Canadian Generally Accepted Accounting Principles (“Canadian GAAP”). The primary financial statements were prepared in accordance with US GAAP. [ 180 ] Mr.

Robert Chambers, the Crown’s expert on accounting matters, stated that US GAAP is the common set of United States accounting principles, standards and procedures that companies use to compile their financial statements.

It is a combination of standards set by the Financial Accounting Standards Board Statements of Financial Accounting Standards, the Accounting Principles Board Opinions and Accounting Research Bulletins, the American Institute of Certified Public Accountants Statement of Position, the Financial Accounting Standards Board Emerging Issue Task Force, SEC Staff Accounting Bulletins, as well as other rules of the SEC. [ 181 ] Mr.

Chambers indicated that there were thousands of standards set by these various standards-setting agencies. [ 182 ] The evidence in the trial concerned compliance with US GAAP; compliance with Canadian GAAP was not an issue. Nortel’s Consolidation Close Process [ 183 ] Nortel had an accelerated closing process, which meant that financial results had to be reported publicly within less than four weeks. It is the General Ledger which is being closed. Nortel reported quarterly so the closing process occurred quarterly. Nortel reported annual results so the General Ledger was closed annually. [ 184 ] Ms.

Helen Verity, the Director of Consolidations, indicated that the Consolidation Close meant that Nortel consolidated its results. [ 185 ] Ms. Verity indicated that there were stages of consolidation. Each business unit closed its General Ledger. Ms. Verity referred to the Regional General Ledger as a sub-ledger. Sometimes, the sub-ledger was referred to as Advance 2. Each business unit may have had more than one entity for which it was responsible so each business unit had to consolidate those entries before it could close its sub- ledger. Mr.

Morita testified that the sub-ledgers (Advance 2) had to close within three to five days of the end of the fiscal quarter. [ 186 ] Backup for sub-ledger entries remained in the Regions. The Regions had their own management sign-off and they had their own auditors. The same was true for entries coming from Corporate Services. [ 187 ] After Day 4, late entries that were not material would not be considered. Despite this rule, if one of Ms. Verity’s counterparts from the Regions called and wanted to book a late entry, there would be a discussion about the entry.

If the entry was a re-classification between the business units, she would refuse to book the entry. If an entry was significant, Ms. Verity would tell Ms. Mezon, who approved late entries, to expect it. [ 188 ] Mr. Dans testified that an Outlook was prepared every time a consolidation took place and Mr. Dans pointed out that consolidations took place every day and sometimes more than once a day during the first days of a close as results came into corporate headquarters in Brampton Ontario. The Outlook prepared by Mr.

Dans during the closing of the books was a snapshot of Nortel’s financial results at that moment. The word “Outlook” denoted more than one document. One type of Outlook was a forecast. Forecasts were prepared throughout the quarter. [ 189 ] After the sub-ledgers were closed, draft financial statements were produced according to the number of adjustments and entries which occurred. Mr. Dans indicated that the draft financial statements were available to the Controller and the CFO upon request. [ 190 ] The corporate headquarters General Ledger was referred to as Advance 1.

When the last entry was made into that General Ledger, numbers were final. [ 191 ] Ms. Verity testified that management wanted to have a line of sight to the results earlier than waiting for the consolidated results and so, on Day 4 of the close, a draft of the results would be run. It is important to remember that the close process contemplates repeated drafts being produced after the sub-ledgers had been closed. Draft results can change due to entries from corporate headquarters. Mr.

McMillan, Nortel’s Director of Consolidations, indicated that, by Day Four or Day Five of the close process, corporate in Brampton would get their first complete view of the regional financial information. At this point, according to Mr. McMillan, they did

not have a complete view from a corporate perspective. [ 192 ] The evidence established that there were up to twenty draft financial statements produced over the close. Each draft statement was numbered. [ 193 ] Results can change due to entries to the General Ledger from corporate headquarters or late entries from the Regions. Corporate headquarters was not subject to the same deadlines as the Regions. [ 194 ] There were two headquarters units which submitted entries to the General Ledger. These units were called Corporate and Non- op.

Corporate was a consolidation of the various corporate functions such as real estate, human resources etc.; Non-op was a catchall – a collection of everything that was left over. [ 195 ] Releases of accrued liability balances to the profit and loss statement from Corporate and Non-op could be entered in the General Ledger after the Regions had closed their sub-ledgers. [ 196 ] The Assistant Corporate Controller, Linda Mezon, advised whether an entry from the Regions was appropriate for the General Ledger. Ms. Mezon would advise Helen Verity that an entry was appropriate and Ms.

Verity would sign the entry so that it could be recorded in the General Ledger. [ 197 ] Ms. Verity testified that she was responsible for managing the time-lines associated with the close process. Ms. Verity testified that there was a well-established close schedule. It was distributed by e-mail prior to the close and one of her responsibilities was to hold people accountable to that schedule. It was her responsibility to work with Nortel people to resolve timing issues. [ 198 ] Ms.

Verity was responsible for resolving posting issues that arose during the close process; she reviewed profit and loss statements and balance sheets; she prepared binders and provided information to the Investor Relations Group within Nortel. [ 199 ] Ms. Verity indicated that an entry was significant if it was significant to the profit and loss statement or the balance sheet. An entry was significant if it was not a “net to zero” or a re-classification entry. This distinction was made because dealing with such items would slow down the close process.

At the same time, management cared about trying to get things right and so the compromise was that after Day 4 of the close, entries that changed the consolidated results for external reporting purposes or changed the profit and loss statement would be processed. Ms. Mezon said even small items which met those criteria could be processed. [ 200 ] Ms. Verity indicated that Fringe was the last entry of the close because, if you made another entry to the General Ledger, it might affect the Fringe.

Typically, when all entries had been finalized, the business units released any Fringe accrued liabilities to the profit and loss statement. [ 201 ] The binders for which Ms. Verity was responsible contained a consolidation package which was an XL-based profit and loss statement and balance sheet. [ 202 ] The consolidation package was available to everyone at head office in her group; it was available to the auditors and it was available to Linda Mezon, the Assistant Corporate Controller. [ 203 ] There was a Frank Dunn binder which was prepared for the purpose of giving Mr. Dunn a

summary of the close. Douglas Beatty and Michael Gollogly and the Assistant Controller and several others received copies of this binder. [ 204 ] Mr. McMillan indicated that the executive package binder included financial statements prepared by Corporate Consolidations and detailed schedules. [ 205 ] The external auditors, according to Ms. Verity, had access to all of the close process material, including the Frank Dunn binder. Mr. Dans indicated that Deloitte & Touche had special access to and a special binder for late entries.

The Late Journal Entry Binder contained a copy of the late entries and a copy of the backup for those entries. Deloitte and Touche received regular profit and loss statement updates during the close process. [ 206 ] Ms. Verity indicated that there were regularly-scheduled update meetings during the close; there was also a Controller’s meeting and a CFO meeting. At the Controller’s meeting, there would be a discussion of entries outside the close process which remained outstanding. At the CFO meeting, the results were discussed with the CFO.

Excess accrued liabilities & Nortel’s policy of Conservatism [ 207 ] Nortel had a long-standing corporate policy concerning estimates of liabilities. Nortel Corporate Policy 300.33 provided that any anticipated decline in the value of Nortel assets and any anticipated liabilities must be provided for in accordance with the accounting concept of Conservatism. [ 208 ] On February 27, 2003, following a review of Nortel’s accounting policies including Corporate Policy 300.33, Deloitte & Touche reported to the Audit Committee that they considered Policy 300.33 to be an appropriate accounting policy. [ 209 ] Mr.

Chambers discussed Conservatism. [ 210 ] The accounting concept of Conservatism is a characteristic of financial accounting. It is referenced in paragraph 17 of Accounting Principles Board Statement No. 4, as follows: “Conservatism. Frequently assets and liabilities are measured in the context of significant uncertainties historically; managers, investors, and accountants have generally preferred that possible errors in measurement be in the direction of understatement rather than overstatement of net income and net assets. This has led to the convention of Conservatism…”

[ 211 ] It is also referenced in paragraph 35 of Accounting Principles Board Statement No. 4, as follows: “Conservatism.

The uncertainties that surround the preparation of financial statements are reflected in a general tendency toward early recognition of unfavorable events and minimization of the amount of net assets and net income”. [ 212 ] As indicated earlier, the Financial Accounting Standards Board issued Financial Accounting Standard 5 ( FAS 5), which provides that where there is a range of accrued liabilities and no estimate within the range is better than any other, the lowest estimate in the range must be used.

Significantly, paragraph 84 of provides that FAS 5 is not inconsistent with the accounting concept of Conservatism. [ 213 ] Mr. Richmond testified that Nortel had, for twenty years prior to the events described in the indictment, a Conservative accounting culture within the context of the rules. [ 214 ] Mr. Richmond stated that because of the precipitous descent that Nortel went through, those in the field took it upon themselves to identify as many risks as they could and to put an estimate of those risks at the conservative end of the range. [ 215 ] Mr. Richmond elaborated that, when an organization is ex

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