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Nortel Hit With Accounting Fraud Charges

Nortel Networks will pay $35 million to settle civil charges filed by U.S. regulators that accused the Canadian telecom equipment company of an accounting fraud that helped it meet Wall Street expectations.

Nortel , North America's biggest maker of telephone gear, engaged in two fraudulent accounting schemes, one involving earnings and the other revenue, the U.S. Securities and Exchange Commission said in the complaint filed in U.S. District Court in Manhattan.

The schemes enabled Nortel to meet "the unrealistic revenue and earnings guidance that it had provided to Wall Street in 2000 and again in 2002 and 2003," the SEC alleged in its suit.

Nortel settled the SEC's complaint without admitting or denying the allegations, according to court papers filed on Monday.

"We are pleased that we have reached final resolution in this matter," Nortel Chief Executive Mike Zafirovski said in a statement. "The settlement recognizes the extensive and proactive efforts made by Nortel's board and senior management to identify and address the accounting and internal control issues and conduct that led to the investigation."

The regulator said that demand for telecom and network equipment waned in 2000 and orders for Nortel's products softened.

"Starting no later than October 2000, Nortel responded to market pressures by engaging in a fraudulent accounting scheme in which it primed Wall Street's expectations by issuing unrealistic financial guidance," the SEC alleged.

Nortel "then used accounting adjustments that did not comport with U.S. generally accepted accounting principles to move its revenues and earnings upward or downward as necessary to meet Wall Street's unrealistic expectations."

The SEC alleged Nortel improperly pushed more than $1 billion in revenue into 2000, letting it report results in line with expectations.

"Nowhere was the existence or effect of this accounting scheme disclosed," the regulator said in its claim.

The alleged fraud also continued when Nortel's business began to stabilize in 2002, the SEC said.

When the company internally determined that it would return to profitability in the fourth quarter of that year -- sooner than it had told the investment community it would -- Nortel set up "unnecessary" reserves to reduce its earnings, the SEC alleged.

This let it avoid reporting a profit earlier than publicly expected and allowed it to "add to its existing stockpile of excess reserves that could be (and were) released in the future as necessary to improve its financial results," the SEC said.

Earlier this year, the SEC also charged Nortel's onetime management team -- including former Chief Executive Frank Dunn and former Chief Financial Officer Douglas Beatty -- with directing parts of the fraud.

Nortel has been working to turn a profit in the face of stiff competition from low-cost Asian vendors. It has not been able to return to its glory days before the tech bubble burst in 2001, which forced it to lay off thousands of employees and post billions in losses.