Nortel probe one of Canada's biggest
Investigation could distract management, hurt customer relations, analysts warn
By SIMON AVERY AND PAUL WALDIE
Wednesday, August 18, 2004 - Page B1
In what will be one of Canada's largest white-collar crime
investigations, the RCMP will assign as many as two dozen officers and
forensic accountants to the criminal investigation of Nortel Networks
Corp., a source familiar with the probe says.
While the news of the probe late Monday came as little surprise to the
Street -- Nortel shares gave up little ground yesterday -- the
widening scale of the investigation could pose longer-term problems
for the company, including damaging customer relations or distracting
management from its game plan in a rapidly changing industry, some
analysts said.
The RCMP's white-collar crime unit, called the Integrated Market
Enforcement Team (IMET), has spent months developing a plan for
investigating the Brampton, Ont.-based telecommunications equipment
maker, which began revealing a series of accounting problems more than
a year ago.
RCMP officers are expected to launch their probe in full within the
next few weeks, according to the source familiar with the probe.
The unit plans to fan out across North America and start interviewing
dozens of former and current company officials. The Mounties are also
likely to use search warrants to secure company files and they will
almost certainly be in touch with the FBI and other U.S. regulatory
bodies.
Several outside accountants and experts are also expected to be hired
as part of the probe, the source said.
Superintendent Craig Hannaford of IMET would not comment on the
specifics of the case. However, he said investigations of this kind
typically involve interviewing numerous company officials and
extensive forensic accounting work.
"These are resource-intensive investigations so when we move to that
step obviously we are saying that we are going to devote some
resources to it," Supt. Hannaford said.
He added that he had no idea how long the investigation will take.
Tina Warren, a spokeswoman for Nortel, said yesterday that the company
had not received any search warrants from the RCMP.
News of the criminal probe is the latest in a string of troubling
events for what was once Canada's most valuable company.
Nortel has been unable to offer investors any financial certainty
since announcing in April that it would cut its 2003 profit of
$732-million (U.S.), its first year in the black since 1997, in half.
The company is restating results for 2001, 2002, and 2003. Tomorrow,
Nortel is scheduled to give a preliminary look at results for the
first two quarters of 2004.
The U.S. Attorney's Office in Dallas, home to Nortel's U.S.
headquarters, has issued subpoenas for financial statements,
accounting records and personnel information dating back to Jan. 1,
2000. The U.S. Securities and Exchange Commission and the Ontario
Securities Commission are also investigating.
Analysts say Nortel remains well-positioned in the telecommunications
equipment market, especially in the growth areas of wireless networks
and networks that carry voice using Internet technology, but some
question how much more bad news the company can handle.
"The issue is when will the financial hanky-panky be behind them. The
investigation isn't particularly a surprise at this point, but you've
got to believe that their customers are saying 'please let this be the
last bad news on this front,' " said Jim Slaby, a senior analyst with
Yankee Group Canada .
For now at least, some of Nortel's most important customers are
standing by the company.
"Nortel provides a lot of our infrastructure and I assume that they
will continue to service and take care of the equipment," said Ritch
Blasi, a spokesman for AT&T Wireless Service Inc., the second-largest
wireless carrier in the United States, which announced last month that
Nortel had been chosen to provide the core and most of the network for
its next-generation service.
The numerous investigations, along with more than two dozen
shareholder lawsuits filed, put growing pressure on the schedules of
Nortel's senior management. For example, Bill Owens, who was appointed
president and chief executive less than four months ago, has spent
many days travelling to reassure both customers and employees.
Increasingly, it may be difficult for the people running Nortel to
stay focused on a long-term strategy, said Paul Sagawa, an analyst
with Sanford Bernstein & Co. LLC.
"The fact that so much of the financial organization's time will be
spent dealing with these many different investigations and
authorities, all of which demand full co-operation, is time not spent
on strategic projects, acquisitions or whatever," he said.
Even as Nortel continues to announce customer wins and new product
launches, bad news on the legal front may continue to trickle out for
more than two years, Mr. Sagawa said. "The stock will bounce around
like a Cessna in a hurricane."
Many investors are betting that most of the risk around Nortel is
already priced into the stock and that the company continues to have
strong fundamentals. Shares closed yesterday on the Toronto Stock
Exchange at $4.43, down 5 cents (Canadian).
"The company itself will continue to exist. It's not an Enron or a
WorldCom where the entire reported results were a fabrication. This is
a company that had real revenue last year on real bookings and
continues to do so," said Gabriel Lowy, director of technology
research at Baylock and Partners LLP. The New York-based firm doesn't
have a banking relationship with Nortel, but Mr. Lowy said he owns
shares of the company.
Ms. Warren, the Nortel spokeswoman, declined to comment on the effect
the criminal investigation might have on customer relations, but said
Nortel has continued to win important contracts since it announced the
latest financial problems in March and since the U.S.
Attorney-General's office launched a criminal investigation in May.
The RCMP probe is "all part and parcel of the restatement period," she
said. "We're very focused on getting this completed and continue in
this environment, which is a difficult environment, to win new
contracts, to innovate and design."
--
Best regards,
JanadatGmaildotcom
http://janada.blogspot.com
By SIMON AVERY AND PAUL WALDIE
Wednesday, August 18, 2004 - Page B1
In what will be one of Canada's largest white-collar crime
investigations, the RCMP will assign as many as two dozen officers and
forensic accountants to the criminal investigation of Nortel Networks
Corp., a source familiar with the probe says.
While the news of the probe late Monday came as little surprise to the
Street -- Nortel shares gave up little ground yesterday -- the
widening scale of the investigation could pose longer-term problems
for the company, including damaging customer relations or distracting
management from its game plan in a rapidly changing industry, some
analysts said.
The RCMP's white-collar crime unit, called the Integrated Market
Enforcement Team (IMET), has spent months developing a plan for
investigating the Brampton, Ont.-based telecommunications equipment
maker, which began revealing a series of accounting problems more than
a year ago.
RCMP officers are expected to launch their probe in full within the
next few weeks, according to the source familiar with the probe.
The unit plans to fan out across North America and start interviewing
dozens of former and current company officials. The Mounties are also
likely to use search warrants to secure company files and they will
almost certainly be in touch with the FBI and other U.S. regulatory
bodies.
Several outside accountants and experts are also expected to be hired
as part of the probe, the source said.
Superintendent Craig Hannaford of IMET would not comment on the
specifics of the case. However, he said investigations of this kind
typically involve interviewing numerous company officials and
extensive forensic accounting work.
"These are resource-intensive investigations so when we move to that
step obviously we are saying that we are going to devote some
resources to it," Supt. Hannaford said.
He added that he had no idea how long the investigation will take.
Tina Warren, a spokeswoman for Nortel, said yesterday that the company
had not received any search warrants from the RCMP.
News of the criminal probe is the latest in a string of troubling
events for what was once Canada's most valuable company.
Nortel has been unable to offer investors any financial certainty
since announcing in April that it would cut its 2003 profit of
$732-million (U.S.), its first year in the black since 1997, in half.
The company is restating results for 2001, 2002, and 2003. Tomorrow,
Nortel is scheduled to give a preliminary look at results for the
first two quarters of 2004.
The U.S. Attorney's Office in Dallas, home to Nortel's U.S.
headquarters, has issued subpoenas for financial statements,
accounting records and personnel information dating back to Jan. 1,
2000. The U.S. Securities and Exchange Commission and the Ontario
Securities Commission are also investigating.
Analysts say Nortel remains well-positioned in the telecommunications
equipment market, especially in the growth areas of wireless networks
and networks that carry voice using Internet technology, but some
question how much more bad news the company can handle.
"The issue is when will the financial hanky-panky be behind them. The
investigation isn't particularly a surprise at this point, but you've
got to believe that their customers are saying 'please let this be the
last bad news on this front,' " said Jim Slaby, a senior analyst with
Yankee Group Canada .
For now at least, some of Nortel's most important customers are
standing by the company.
"Nortel provides a lot of our infrastructure and I assume that they
will continue to service and take care of the equipment," said Ritch
Blasi, a spokesman for AT&T Wireless Service Inc., the second-largest
wireless carrier in the United States, which announced last month that
Nortel had been chosen to provide the core and most of the network for
its next-generation service.
The numerous investigations, along with more than two dozen
shareholder lawsuits filed, put growing pressure on the schedules of
Nortel's senior management. For example, Bill Owens, who was appointed
president and chief executive less than four months ago, has spent
many days travelling to reassure both customers and employees.
Increasingly, it may be difficult for the people running Nortel to
stay focused on a long-term strategy, said Paul Sagawa, an analyst
with Sanford Bernstein & Co. LLC.
"The fact that so much of the financial organization's time will be
spent dealing with these many different investigations and
authorities, all of which demand full co-operation, is time not spent
on strategic projects, acquisitions or whatever," he said.
Even as Nortel continues to announce customer wins and new product
launches, bad news on the legal front may continue to trickle out for
more than two years, Mr. Sagawa said. "The stock will bounce around
like a Cessna in a hurricane."
Many investors are betting that most of the risk around Nortel is
already priced into the stock and that the company continues to have
strong fundamentals. Shares closed yesterday on the Toronto Stock
Exchange at $4.43, down 5 cents (Canadian).
"The company itself will continue to exist. It's not an Enron or a
WorldCom where the entire reported results were a fabrication. This is
a company that had real revenue last year on real bookings and
continues to do so," said Gabriel Lowy, director of technology
research at Baylock and Partners LLP. The New York-based firm doesn't
have a banking relationship with Nortel, but Mr. Lowy said he owns
shares of the company.
Ms. Warren, the Nortel spokeswoman, declined to comment on the effect
the criminal investigation might have on customer relations, but said
Nortel has continued to win important contracts since it announced the
latest financial problems in March and since the U.S.
Attorney-General's office launched a criminal investigation in May.
The RCMP probe is "all part and parcel of the restatement period," she
said. "We're very focused on getting this completed and continue in
this environment, which is a difficult environment, to win new
contracts, to innovate and design."
--
Best regards,
JanadatGmaildotcom
http://janada.blogspot.com
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