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Nortel execs lied about financials, says prosecutor

On the eve of the Canadian criminal trial of three former Nortel Networks Corp. executives, the prosecutor has dropped five of seven charges, but left the most serious allegation: That the trio fraudulently misstated the financial results of the network equipment maker.

The move was made Thursday at a pre-trial hearing involving charges against former CEO Frank Dunn, chief financial officer Douglas Beatty and controller Michael Gollogly.

The purpose of the hearing was to meet defence demands that prosecutor Robert Hubbard add more detail to the charges -- which simply allege fraud was committed between 2002 and 2003 -- so the accused can properly defend themselves.

The trial, before a judge alone, is set to start Monday (Jan. 16) in Toronto and scheduled to last for months.

But Hubbard replied by saying defence lawyers know very well what he will allege because they already have virtually the entire text of his upcoming opening address.

Then he used the opportunity to give Justice Frank Morrocco and early outline of what he'll say, and didn't hold back.

His case will be "the books were cooked," he said, so the trio could be entitled to bonuses. In particular, he said, he'll show the three accused lied in approving financial statements between 2002 and 2003 and a later restatement of the numbers.

After the tech bubble burst in 2000, Nortel had to restate its financials several times, changing profits into losses.

In one restatement, Nortel admitted the books were out almost $1 billion, Hubbard said. The problem is the restatement was cast publicly as a comprehensive review of the previous accounting. In fact, Hubbard alleged, it was not. One proof is that soon after a second restatement of the financials had to be released.

The practice of misusing accruals to initially turn losses into profits wasn't created by the accused, Hubbard said he'll try to show. In fact, he said, it was a habit deeply ingrained at Nortel. But, he said, the accused knew about it when the financial statements were approved.

The judge will rule Monday afternoon on whether the prosecution will have to add more detail to the charges. Depending on the ruling Hubbard will either start his official opening address then, or later in the week.

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