The story behind The Ottawa Citizen’s coverage of the Nortel criminal trial
James Bagnall changed his view of Nortel’s accounting in advance of the yearlong trial involving Frank Dunn, Douglas Beatty and Michael Gollogly. The trick was being open-minded enough to go where the facts led him.
James Bagnall changed his view of Nortel’s accounting in advance of the yearlong trial involving Frank Dunn, Douglas Beatty and Michael Gollogly. The trick was being open-minded enough to go where the facts led him.
By James Bagnall for Media magazine
This feature, above all, reminded me to be wary of conventional wisdom. The epiphany for me came a few days before Christmas in 2011. I had begun to research what I then believed would be a very straight-forward story. The Citizen planned to publish a feature early in the New Year explaining the likely progression of the upcoming fraud trial involving Nortel’s top three financial executives.
This was potentially a very boring assignment and there was every risk readers would think so too. The accounting was complicated and a guilty verdict seemed pre-ordained. After all, Frank Dunn, Douglas Beatty and Michael Gollogly had years earlier been fired by their employer for cause. Nortel had also published a summary of their alleged transgressions in a report by Wilmer Cutler, the Washington law firm hired to provide an independent assessment of Nortel’s numbers.
In a criminal case such as this, pre-trial interviews with the accused or the witnesses were out of the question. The independent investigators from Washington also declined comment. However, I found a great deal of information buried in a pair of civil proceedings that had also alleged accounting fraud at Nortel.
Related content on J-Source:
The most fruitful of these was the action brought in 2007 by the U.S. Securities and Exchange Commission. While this and a similar proceeding at the Ontario Securities Commission had been halted pending a verdict in the criminal case, I was able to comb through more than 100 pre-trial filings involving Nortel’s executives and the SEC. These were available online (for 10 cents a page) through www.pacer.gov – an indispensable tool for business journalists.
Unlike Canada’s online legal database – www.canlii.ca – the pacer website makes available the complete docket in civil and criminal cases, not just the courts’ final rulings. Dunn and Beatty had filed dozens of documents — including some that would prove central to their defense in the 2012 criminal trial. One of these contained a detailed response by the OSC to questions posed by Dunn – something I couldn’t find through the Commission’s own website.
Dunn’s lawyers had asked what, exactly, was wrong with how Nortel had accounted for more than 30 allegedly fraudulent transactions. As I examined the OSC’s answers, I realized its investigators didn’t have an answer. They referred often to the report by Wilmer Cutler or, even more telling, noted that these were matters to be determined at trial. Also through the SEC, I located the synopsis of the criminal case prepared by the RCMP. This, too, was unclear about the alleged accounting misdeeds. While the Crown obviously hadn’t had a chance yet to prove the allegations in court, its case seemed surprisingly thin.
I returned to the 2005 Wilmer Cutler report. Its conclusions – that the three executives had deliberately shifted liabilities on Nortel’s balance to trigger executive bonuses – were couched in generalities. This report had been the starting point for investigations by the U.S. Securities and Exchange Commission, OSC and the RCMP – and it offered no specific examples of accounting transgressions.
I considered more seriously the possibility that no crime had been committed. Once I did, the evidence began to acquire a different look. So did the story I was working on.
I examined the nature of accounting and its many gray areas. In a fast-moving industry such as telecommunications equipment, the permutations were many. Nortel’s balance sheet contained hundreds of thousands of estimates – each offering the possibility of fraud but also the greater likelihood of error, especially in a corporation that sacked two of every three employees from 2001 to 2003.
I consulted the relevant accounting rules, including the crucial one that laid out tests for determining how to account for future exposures to items such as the potential cost of breaking multi-year leases and canceling contracts with suppliers – accounting transactions that lay at the heart of the Nortel case. While I have some training in university-level accounting, it was useful only at a conceptual level. What gave me comfort, as it always does in situations like this, was speaking on background with auditors and accountants familiar with Nortel’s industry, people not directly tied to the litigation.
Some were extraordinarily cynical about the inevitable conflicts of interest in the financial services industry, which arise because the client – Nortel in this case — pays the fees. The key to understanding the upcoming trial, I realized, would lie in the unique and detailed accounting entries alleged to be fraudulent.
[node:ad]For perspective on these, I got in touch with former members of Nortel’s finance group, dating from earlier stories I had done for the Citizen – impressing upon me once again the importance of cultivating and maintaining sources. The former insiders provided valuable off-the-record perspective on the entries cited by the OSC in its reply to Dunn’s lawyers. They offered explanations other than fraud – business reasons — to account for Nortel’s shift from losses to profit early in 2003.
All of this helped to shape my thinking during the writing of the pre-trial feature – and throughout the yearlong criminal proceeding. As a mountain of evidence accumulated, it seemed clear to me the fraud charges would eventually be dismissed. My reporting reflected this belief.
But then I confronted an unexpected difficulty: the vast majority of the people who were following the trial believed the three Nortel executives were guilty, and that I was naïve to believe otherwise. This included members of the Citizen’s newsroom. Every few weeks I paused to ask myself if I had I missed something profound. And if so, why wasn’t I seeing it? But each time I re-examined the hard evidence it seemed to point only in the direction of acquittal.
I am grateful that my editors gave me the benefit of the doubt, though their relief at the not-guilty verdict betrayed some nervousness. Also to their credit, we discussed very early the possibility of my writing a book about the trial and the circumstances that led to it. The Citizen was establishing an online store and wanted to offer readers a variety of e-books. The newspaper lined up HarperCollins as the publisher. My job was to deliver a manuscript as quickly as possible after the Jan. 14, 2013 verdict.
I was prepared to spend some time on this – I didn’t want merely to recite the key events of the trial. The idea was to explain how it was possible that so many players – the OSC, SEC, RCMP, the Crown and Nortel’s board of directors – so readily accepted the rushed conclusions of Wilmer Cutler, leaving the three accused to twist in the wind for nearly a decade.
I caught a break when the Crown in mid-February decided not to appeal the original verdict. This made a few sources feel more comfortable about sharing their experiences. Even so, the threat of continuing litigation in civil court (at the SEC and OSC) meant everyone still had to be careful about what they said. Most conversations remained off the record.
A Citizen colleague, Christine Brousseau, volunteered to edit the book, which was forwarded to HarperCollins under the title “100 Days: the rush to judgment that killed Nortel”. The publisher, in turn, translated our Word document – all 33,000 words — into electronic books suitable for reading on Kindles, iPADs, KoboReaders and other electronic devices. In addition I wanted a paperback version. Because that had not been part of the Citizen’s arrangement with HarperCollins, I produced one myself – something I had never done before.
For this, I relied on CreateSpace.com – a unit of Amazon.com that caters to self-publishers. I spent an intensive week working out the technical kinks but eventually got a paperback that looked presentable, though it would not become available for a few days following our April 26 e-book launch. What I didn’t realize at the time was that people could order the paperback only through Amazon.com, not Amazon.ca – which proved confusing for Canadian buyers. Other readers had trouble locating the e-book because our publisher used ‘judgement’ in the title, not the more conventional spelling that appears on the book cover.
To rectify these issues, The Citizen made all versions of the book available here.
Another mistake involved marketing. We had concentrated so heavily on getting the book done, we failed to think clearly about the next steps. Yes, we drafted a press release, but failed to cultivate potential reviewers beforehand. I also neglected to line up testimonials that are so important in the rankings of online publications. The book briefly made it to the top of the business book rankings on iTunes and Amazon.ca – then promptly drifted back down to earth.
Nevertheless, this was an editorial project worth doing – and the catalyst was the explanatory piece written a year ago January.
You can find the story here.
James Bagnall, the associate business editor of The Ottawa Citizen, has been reporting on business since 1978. He began his career at The Financial Post, then an independent weekly, and worked for several years at The Financial Times of Canada. He joined The Citizen as a columnist in 1993. Bagnall graduated in 1975 from the University of Toronto’s Trinity College.
This article is part of the upcoming 2012 Media magazine awards edition and has been republished here with permission.
