Jurisper -
Did you noticed Nortel has a little problem to deal with now as well and tossed it's stock in the dumper! lol
Shares of Nortel Drop as It Places Financial Officers on Paid Leave
By MATT RICHTEL
Published: March 16, 2004
Shares of Nortel Networks, the biggest maker of telecommunications equipment in North America, plunged 18.5 percent today, after the company said it placed two of its top financial officers on paid leave.
Wall Street analysts said the suspension of Douglas C. Beatty, the chief financial officer, and Michael J. Gollogly, the controller, suggested that the company faced deeper accounting troubles than investors were led to believe when Nortel announced an internal audit in October. And the analysts said that the drop in shares of Nortel, which fell $1.19 yesterday to close at $5.24, and then slid further in after-hours trading, showed investors' sensitivity to corporate malfeasance in light of recent scandals.
"When there's a whiff of impropriety, the response is: shoot first, ask questions later,'" said Paul Sagawa, an analyst with Sanford C. Bernstein. He added that while this situation may turn out to be relatively benign, "People got pretty burned on Enron, WorldCom and the others."
Nortel, based in Brampton, Ontario, said the executives were on leave pending completion of the internal audit, and that it had hired an interim chief financial officer and an interim controller to complete the review.
Nortel has also alerted the Securities and Exchange Commission and Canadian regulators of the leadership change and is cooperating with inquiries from those agencies, said Christina Warren, a spokeswoman for Nortel.
"It's disappointing," Ms. Warren said of the company's decision to put two executives on paid leave. "But it nevertheless shows this company's commitment to high corporate governance."
On Friday, Nortel announced that it must restate earnings for 2003, as well as for some earlier quarters, though the company did not specify how many quarters or which quarters it would restate.
The company said, without elaborating, that those restatements were because of the need to re-examine "establishment, timing of, support for and release to income of certain accruals and provisions in prior periods." It also said that because of the need to restate past earnings, it would not meet the March 30 deadline for completion of the securities filings that it must deliver to satisfy agreements with its creditors.
Several Wall Street analysts said that they did not consider Friday's announcement to be cause for intense concern, given the nature of internal audits. But they said that yesterday's decision to put two financial executives on leave raised serious red flags, and suggested that the reasons for the delay in the audit might be more troubling than investors were led to believe.
"This is a big black eye," said Jim Kelleher, an analyst with Argus Research. "It shows real mismanagement in their accounting practices."
Mr. Kelleher said Nortel would not be in default of loans, but it could face automatic repayment within 90 days if it did not file its financial reports, or renegotiate its loan agreements with creditors.
This is not the first hint of accounting trouble for Nortel. In February 2002, its chief financial officer at the time, Terry Hungle, was fired amid allegations he violated rules for investing in the company's retirement plan. In October, the company said it would restate earnings and losses dating back three and a half years, after discovering mistakes in recording some restructuring costs and revenues.
The latest news comes as Nortel is enjoying revived business fortunes. Mr. Kelleher noted that in last year's fourth quarter, ended Dec. 31, Nortel had $390 million in operating income from its continuing business operations, surpassing the total returns for those operations for the previous three quarters.
The fortunes have revived, several analysts said, because Nortel has done an impressive job at helping its customers make the transition from the older telecommunications equipment to newer technology, based on delivering information in Internet data packets.
Its successes have driven up the stock price in recent months. The stock has climbed steadily since last July, when it was below $3. In the middle of February, it hit $8.50, only to fall to $5.24 yesterday.
With the company giving no explanation for putting the two executives on leave, Wall Street analysts struggled to understand why the company took that action.
Mr. Sagawa, the analyst with Sanford C. Bernstein, said the reason the two executives were put on leave could be as benign as the fact that the company wanted to bring in a new set of eyes to oversee the audit.
But he said the decision, which he described as "not standard practice," raises several other more troubling possibilities: that the suspended executives were themselves involved in some problematic accounting, or had obstructed the auditing effort, or that they were too inexperienced to do the job in a timely manner. The fact the company put the executives on leave, "suggests the scope of what went wrong was pretty large," Mr. Sagawa said.
Gina Sockolow, an analyst with Buckingham Research, said that she believed that the accounting problems might stretch back to the Internet bubble period.
Ms. Sockolow said Nortel, like other companies, gave no-interest loans to its customers, and that the company might not have properly accounted for that practice.
If so, Ms. Sockolow said, the problem could be traced back to Frank A. Dunn, Nortel's current chief executive, who was chief financial officer in 2001.
"Heads will roll," said Ms. Sockolow, asserting that the troubles could force out Mr. Dunn.
Mr. Kelleher said he did not agree that Mr. Dunn would necessarily be tarnished. Mr. Dunn, he noted, "has been partly responsible for steadying the ship" at Nortel
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