Nortel Networks Corp has offered to pay $2.4bn in cash and shares to settle class action lawsuits that were launched against the company after a revenue-recognition scandal that led to the firing of three top officers in April 2004.
After a mediation process with the two lead plaintiffs in lawsuits pending in the Southern District of New York, Nortel has agreed to pay $575m in cash and issue 628.7 million of its shares, representing 14.5% of its current equity and worth $1.9bn. Nortel will also contribute one-half of any recovery in the existing litigation against former CEO Frank Dunn, CFO Douglas Beatty, and controller Michael Gollogly, who were fired with due cause.
The payment is conditional on the contribution of available insurance, which Nortel says has yet to be resolved. This is insurance that was paid out to shareholders as a result of the collapse in the company’s share price. Nortel has also agreed to pick up all legal bills on the case and enter into a dialog to review the company’s corporate governance.
However, the deal is conditional on settlement of all class action lawsuits launched following the announcement of revised financial guidance during 2001, and the revision of its 2003 financial results and restatement of other prior periods.
Nortel chairman Harry Pearce said the company wants to avoid a prolonged, uncertain, and costly litigation process. He said a final settlement would remove a significant impediment to Nortel’s future success and allow CFO Mike Zafirovski and the Nortel team to move forward.
While the proposed settlement will remove a cloud that has hung over the company for nearly two years, it will leave it will a horrible look to its 2005 accounts. It expects to record a total charge of $2.473bn or $0.57 per share. It will fund the cash contribution to the settlement fund out of its cash balances.
Securities regulators, the Royal Canadian Mounted Police, and the US Attorney’s office have all been probing events at the company and the affair is likely to rumble on for years. The central allegation is that revenue was depressed during a market slump and then inflated during the recovery to boost executive bonuses.