SUPERIOR COURT OF JUSTICE - ONTARIO

COURT FILE NO.: 10-00145
DATE: 20120116

RE: HER MAJESTY THE QUEEN
Respondent

• AND -

FRANK A. DUNN, DOUGLAS C. BEATTY and MICHAEL J. GOLLOGLY
Applicants

BEFORE: Mr. Justice Marrocco

COUNSEL:
Robert W. Hubbard, Amanda Rubaszek & David Friesen, for the Crown

David M. Porter, H. Michael Rosenberg & John A. Dent , for the Applicant, Frank A. Dunn

Gregory L. Lafontaine , for the Applicant, Douglas C. Beatty

Brian Greenspan & Sharon Lavine , for the Applicant, Michael Gollogly

HEARD: January 12, 2012

ruling concerning particulars

[ 1 ] The defendants moved for an order that the Crown provide particulars:

• specifying the entries that constitute the allegedly deliberate misrepresentations of the financial results of Nortel Networks Corporation in counts 1 and 2 of the indictment;

• specifying the alleged fraud on the public in count 1 of the indictment;

• specifying the alleged fraud on Nortel in count number 2 of the indictment; and,

• specifying the false entries referred to in count 3 of the indictment.

[ 2 ] A court may order a prosecutor to furnish particulars under s. 587 of the Criminal Code , R.S.C. 1985, c. C-46 where it is necessary for a fair trial. As a practical matter, this means particulars will be ordered where a charge, although sufficient, lacks the detail necessary for the preparation of a defence (see: R. v. Armour Pharmaceutical Company (2006), 2006 811 (ON SC) , 205 C.C.C. (3d) 97 (Ont. S.C.) per Benotto J., at para. 21). In deciding whether to order particulars, the court can consider the information available to the accused (see: R. v. Robinson , 2001 24059 (ON CA) , [2001] O.J. No. 1072 (C.A), at para. 23 ). Particulars also assist the trial judge in making evidentiary rulings (see: Armour , at para. 21). The onus of proof in a particulars motion lies upon the accused/applicant (see: The King v. McGavin Bakeries et al. (1950), 1950 372 (AB KB) , 99 C.C.C. 330, [1950] A.J. No. 7 (S.C.)). An important countervailing consideration is whether ordering particulars unduly binds the Crown in the presentation of its case (see: R. v. Govedarov et al. (1974), 1974 33 (ON CA) , 16 C.C.C. (2d) 238 (Ont. C.A.)).

Preliminary issues

[ 3 ] The defence objected to the Crown filing the results of a review of the facts and circumstances leading to the Nortel Networks Corporation’s First Re-statement of Financial Results. This review was undertaken at the request of Nortel’s Audit Committee and carried out by the Boston law firm of Wilmer Cutler Pickering. On a pre-trial motion, this report was ruled inadmissible at this trial. The Crown and defence agreed that this ruling by Justice Nordheimer would be binding at trial.

[ 4 ] The fact that the results of the Wilmer Cutler Pickering review are inadmissible at trial does not mean that the results are inadmissible on this motion if the results are helpful when deciding whether the defendants know the case against them. Similarly, civil pleadings, filed on behalf of any or all of the defendants, are relevant and admissible if they are helpful on the same question.

[ 5 ] It was suggested that the Canada Evidence Act Notice recently served and filed by the prosecution exacerbated the problem that the defendants have in knowing the case that they have to meet. I do not view this as a serious objection. The Notice is required by the Canada Evidence Act . Should the prosecution seek to tender some obscure document and should there be genuine prejudice arising to the defence, the court can fashion an appropriate remedy at that time.

[ 6 ] The Crown indicated, during the course of argument, that it will only proceed on counts 1 and 2 in the indictment. The Crown indicated that the fiscal quarters referred to in count 3 are still relevant periods and that the books and records of Nortel Networks Corporation relevant to count 3 are relevant documents.

[ 7 ] The Crown also indicated that the only reason count 2 remains on the indictment is to address the possibility that Nortel Networks Corporation is not included by the word "public" in count 1. If Nortel Networks Corporation is included in the term "public", then the only count at issue in this trial is count 1.

The defendants’ knowledge of the case against them

[ 8 ] The defendants have been investigated by the Security Exchange Commission in the United States, the Ontario Securities Commission and the law firm of Wilmer Cutler Pickering. Each investigation concerned the time-frame described in this indictment; each investigation concerned the defendants’ roles in the accrual, maintenance and release of reserves or provisions in the financial statements of Nortel Networks Corporation.

[ 9 ] In this proceeding, the defendants brought a motion for disclosure before Justice Boswell. On that motion, the defendants stated that the Crown's case was that they improperly used the set-up and release of accrued liabilities or provisions to manage earnings tied to their bonus payments. The defendants maintained that the Crown alleged that this manipulation occurred in three ways: in the third quarter of 2002, Nortel management compiled a list of accrued liabilities or provisions that were available for release and the release of which would increase earnings; in the fourth quarter of 2002, Nortel management managed earnings by setting-up enough provisions to avoid attaining a profit and paying a bonus in that quarter; in quarter one and quarter two of 2003, Nortel management managed earnings by releasing enough provisions to attain a profit and pay a bonus to the accused in those quarters.

[ 10 ] The defendant, Dunn, sued Nortel Networks Corporation for defamation in 2006. In his claim, Mr. Dunn alleged that he had been defamed as a result of allegations of dishonesty made by Nortel Networks Corporation. Mr. Dunn alleged, in his Statement of Claim, that the allegations of dishonesty consisted of allegations that he had

• manipulated reserves and provisions to trigger the payment of bonuses;

• participated in false or improper accounting practices;

• endorsed accounting practices relating to the reporting and release of provisions that were not in accordance with GAAP;

• purposely caused Nortel to report a loss in the fourth quarter of 2002;

• purposely manipulated Nortel Networks Corporation's accounting records to release provisions in the first and second quarters of 2003.

[ 11 ] The defendants have known for years that their management of Nortel's earnings, as disclosed in its financial statements for the time-frame described in the indictment, is fundamental to the legal and regulatory proceedings with which they have been involved. Any other conclusion is unrealistic.

The defendants’ understanding of Nortel’s financial results during the time-frame of the indictment

[ 12 ] The time-frame in the indictment is January 1, 2000 to April 28, 2004. During the course of argument, the Crown indicated that it was concerned with the fourth quarter of 2002 and the first, second and third quarters of 2003. The Crown indicated that, in the fourth quarter of 2002, the defendants manipulated the reserves to precipitate a loss and then reversed the manipulation of the reserves in 2003 to create an illusory profit.

[ 13 ] For the time period set out in the indictment, there are eighteen sets of financial results and press releases. Counsel for the defendants listed each of the eighteen sets of financial results in paragraph 4 of the factum filed on this motion. Analyzing this information is a substantial undertaking. However, it is undeniable that the defendants were respectively, for all or part of the time period of the indictment, the Chief Executive Officer, Chief Financial Officer and Corporate Controller of Nortel Networks Corporation. In addition, prior to being the Chief Executive Officer, Mr. Dunn was the Chief Financial Officer of Nortel Networks Corporation. The defendants are not without experience concerning the financial affairs of Nortel Networks Corporation. Whatever their state of knowledge, when the contentious financial results were created and made public, it is not now suggested that they have been unable, since 2008 when these charges were initiated, to apply themselves to the task of understanding and explaining those financial results.

The Crown's view of the underlying transactions

[ 14 ] The Crown has identified transactions of interest which, in its view, led to the false financial results. The Crown has identified documents that underlie these transactions. This aspect of the case is apparently set out in binders and charts which have been disclosed.

[ 15 ] The Crown maintains that the defendants knew, when they certified Nortel's financial results, that some of these transactions were not GAAP compliant. With respect to other transactions in the binders, the Crown maintains that the defendants were indifferent to whether they were GAAP compliant so long as the transactions led to the results desired by the defendants.

[ 16 ] The Crown indicated that it takes the view that indifference to the appropriateness of the underlying transactions is sufficient to establish criminal responsibility because the defendants were certifying that Nortel's financial results were GAAP compliant.

[ 17 ] I do not wish to imply that I accept this legal assertion as correct; I simply refer to it to describe the Crown’s approach to the transactions which led to the alleged false financial results.

The Crown’s view of what is necessary for a conviction

[ 18 ] The Crown filed a brief setting out its view of the law of fraud and the authorities which support that view. The Crown disclosed that, according to its view of the law, the fraud described in counts 1 and 2 was proved if the Crown established that the defendants knowingly told one material lie during the time-frame of the indictment and knew, when they told the lie, that deprivation was a consequence of telling it. The Crown asserted that the mechanism of the lie can be the press releases, the published financial results and even oral statements made to the Board of Directors.

[ 19 ] I refer to the Crown's position in this regard to indicate that this issue is part of the case that the defendants have to meet.

The First and Second Re-statement of Nortel Networks Corporation's financial results

[ 20 ] In addition to the manipulation of reserves, the Crown contends that the fact that there was a First Re-statement of Financial Results demonstrates that the financial statements which required re-statement were false. The Crown suggests that, therefore, the only issue in this trial is whether the defendants knew those statements were false when they issued them.

[ 21 ] The Crown also takes the position that the First Re-statement itself is a fraud because it is not comprehensive. The Crown also claims that the First Re-statement is false because it did not contain a statement that accruals or reserves had been mis-applied.

[ 22 ] It is the Crown's position that, as a result of these problems with the First Re-statement, Nortel Networks Corporation issued a Second Re-statement of Financial Results in 2005.

[ 23 ] The Crown also claims that the fact that there was a Second Re-statement proves that there was something wrong with the First Re-statement and that, therefore, the Second Re-statement is a relevant part of this case.

The certification of the various financial results released to the public

[ 24 ] The Crown also claims that, every time the defendants certified that they were filing financial results that were true, fair, proper and in accordance with GAAP, they knew that the financial results were false and not in accordance with GAAP. Therefore, in the Crown's view, their certifications were false. The Crown submits that, if it proves that the financial results and certifications were knowingly false, count 1 in the indictment has been proven.

The lawyers who will testify

[ 25 ] The Crown intends to call lawyers who acted for Mr. Dunn and Mr. Beatty and were present on one of the occasions when they were interviewed by the law firm of Wilmer Cutler Pickering during that firm’s review of the facts and circumstances leading to the First Re-statement.

The defence position

The defendants have been able to formulate a defence.

[ 26 ] The defendants indicated, in their factum filed before Justice Boswell in 2009, that the transactions at issue occurred in a manner consistent with Nortel Networks Corporation's policies and practices and that DeLoitte and Touche approved the relevant accounting entries. The defence took the same position on this motion.

[ 27 ] The defendants maintain that the accounting entries affecting the reserves in the relevant period were in accordance with GAAP principles.

[ 28 ] The defendants take the position that the Re-statement means that the original accounting was in error – not that it was false. On this motion, counsel acting for Mr. Gollogly indicated that the defendants will take the position that the Second Re-statement in 2005 occurred after a veritable army of accountants from a variety of firms did a more comprehensive analysis of Nortel's financial results than was usual. These firms, according to counsel, spent literally hundreds of millions of dollars to dig deeper and longer than was usual and produced a Second Re-statement of Nortel's financial results. It was counsel's implied submission that this extra effort explained why there was a Second Re-statement and that, therefore, no adverse conclusions should be drawn concerning the First Re-statement.

[ 29 ] Finally, counsel for Mr. Gollogly indicated that the defendants take the position that the Crown's case is based on hindsight. I am not persuaded that the defendants are unable to utilize the documents of Nortel Networks Corporation for the purpose of demonstrating the policies and practices of the Corporation prior to and at the time when the contentious financial results were prepared. While I agree that hindsight can be insidious, I am satisfied that the documentation was reviewable with this notion in mind. In addition, the concept of hindsight can also be developed on cross-examination.

The breadth and scope of the allegations

[ 30 ] The defendants maintain that the breadth and scope of the allegations require the Crown to particularize the counts in the indictment. This position is at odds with the position taken by Mr. Dunn on a motion, in 2008, to stay outstanding civil proceedings until the Ontario Securities Commission proceedings were concluded. On that motion, counsel for Mr. Dunn took the following position:

[D]espite the number of proceedings facing Mr. Dunn, the matters in each proceeding correspond to a narrow range of allegations relating to his tenure as president and CEO of Nortel Networks Corporation and Nortel Networks Limited. In essence all of the proceedings are based on allegations that Mr. Dunn knew or ought to have known that Nortel's accounting practices were not in keeping with GAAP, that he certified the accuracy of Nortel's financial statements that misstated Nortel's true financial condition, and that he failed to exercise reasonable care in his executive responsibility for overseeing Nortel's affairs.

[Emphasis added]

[ 31 ] I recognize that Mr. Dunn's characterization only applies to his own view of the proceedings outstanding against him, but I see no reason why this characterization should not apply to the other defendants, subject perhaps to the fact that Mr. Gollogly became Controller in July 2002 and was, prior to that time, stationed in financial positions with Nortel Networks Corporation in London, Hong Kong and Paris.

Particulars assist the court in making evidentiary rulings in determining relevance

[ 32 ] I am satisfied, based on the foregoing, that the areas of dispute are sufficiently delineated so that particulars are not required to assist me in making evidentiary rulings or determining relevance.

Particulars will unduly bind the Crown in the presentation of its case

[ 33 ] I do not find it necessary to address this countervailing consideration.

Conclusion

[ 34 ] I am satisfied that the defendants are aware of the case they must meet in these proceedings. I am also satisfied that I am sufficiently informed of the allegations in this matter to make evidentiary rulings and determinations of relevance.

[ 35 ] Therefore, this application is dismissed.

MARROCCO J.

RELEASED: 20120116