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Court dismisses fraud charges against three Nortel executives

By Allison Martell and Susan Taylor

TORONTO (Reuters) - An Ontario Superior Court on Monday dismissed fraud charges against former Nortel Networks Chief Executive Frank Dunn and two other top executives of the failed telecom equipment supplier after a year-long trial involving one of the most spectacular casualties of the 1990's dot-com bubble.

Dunn, along with former Chief Financial Officer Douglas Beatty and former Controller Michael Gollogly, had been accused of misrepresenting Nortel's financial results between 2000 and 2004 in a plan that prosecutors alleged brought them bonus payments while defrauding investors.

The crown had charged that the accused improperly manufactured a loss in one quarter and then engineered a profit in a subsequent three-month period in order to trigger lucrative cash and stock bonuses.

But Justice Frank Marrocco said he was not satisfied that the three accused had improperly accounted for accrued liability balances to misrepresent Nortel's 2002 financial results, nor had they improperly fudged income statements in the first-quarter of 2003 in order to earn a bonus.

"The accused are presumed innocent. The burden is on the prosecution. It was entirely appropriate that we go through this process to find out what happened. The burden, in my view, is not met. The charges are dismissed," he said.

The verdict is bound to focus attention on complaints that Canada is soft on corporate crime. It was released more than four years after the executives were first charged. All three had pleaded not guilty.

FORMER MARKET DARLING

Once the equipment manufacturing arm of Canada's biggest phone company, Nortel became a market darling in the late 1990's as the Internet revolution picked up steam and investors bet the company would make billions selling fibre optics networks.

In 2000, speculators drove the company's shares up to the point where its market capitalization topped out around C$400 billion, accounting for a full third of the entire Toronto Stock Exchange.

But the shares plunged as tech stocks fell out of favor and Nortel's sales came up well short of stratospheric analyst expectations. The stock dropped by more than 99 percent by 2002, decimating investment funds.

Nortel returned to profit in 2003 after several years of losses, but then was forced Nortel to restate its results several times, shaking investor faith in its prospects and triggering numerous investigations.

The scandal led to the firing of the three defendants in 2004.

Dunn had been Nortel's chief financial officer before his promotion to CEO in 2001, succeeding the affable John Roth at a time when no one else wanted the job.

With the company taking heavy losses, Dunn eliminated tens of thousands of jobs, sold plants, shut business lines and slashed costs.

Nortel filed for bankruptcy protection four years ago.

WHITE COLLAR CRIME

Critics have long argued that Canada is soft on white-collar crime, and some high-profile cases have dragged on for years, in contrast with cases in the United States that have led to long prison sentences for corporate criminals.

In 1997, shares of Bre-X collapsed after it emerged that samples from its Busang gold deposit in Indonesia had been salted to create the impression of a massive gold strike. Despite a prosecution that dragged on until 2007, no one was ever convicted.

(Additional reporting Andrea Hopkins, writing by Cameron French; Editing by Janet Guttsman, Nick Zieminski)

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