Prosecutors have made “preposterous” allegations against three former Nortel Networks executives, a defence lawyer has told an Ontario Superior Court judge.

In an opening address in the fraud trial on behalf of all the accused, David Porter said the prosecution is trying claim there was a conspiracy involving dozens of people within Nortel and its external auditors, Deloitte & Touche, to play with contingent liabilities to make the company’s books look good in 2002-2003.

And while prosecutor Robert Hubbard alleged in his opening statement that Nortel’s board of directors were sometimes sandbagged by executives on the state of the company, Porter said the defence will cite documents showing Nortel staff worked with the audit committee of the board and Deloitte to ensure the company’s financial results were accurate.

“This openness and candor between Nortel management, the auditors and the audit committee speaks to honesty in dealings, not fraud,” he said.

The charges against former Nortel CEO Frank Dunn, chief financial officer Douglas Beatty and controller Michael Gollogly are “entirely without merit.”

The three are charged with defrauding the public and Nortel between 2000 and April 2004 by improving the public financial statements with manipulated accrued liabilities so they could qualify for performance bonuses. 

The trio each have their own lawyers, but Porter was giving an opening statement for all of them.

Nortel went into bankruptcy protection in 2009 and has since sold off almost all of its assets.

The first witness in the trial, to be called Friday, will be Brian Harrison, Nortel’s former director of financial planning and analysis, who prepared financial results for senior management until June, 2003.

In his opening remarks, Porter also attacked the heart of the prosecutor’s allegation that the motive for the claimed misleading statements was that the accused wanted to qualify for cash and stock performance bonuses. The executive bonuses, established in 2002 after Nortel had a string of losses, depended on Nortel achieving pro forma (or unaudited) profits in consecutive quarters.

In his opening address, the prosecutor made much of the fact that Nortel had to correct its financials in 2003 and 2005 for previous years in part because of restated liabilities in part proved the financials were manipulated.

But Porter said that even after the restatements Nortel still met the pro forma profitability test for one of the bonuses in 2003, proving that they didn’t have to play with the numbers.

“Simply stated, the Crown fundamentally misunderstands the history and the goals of the RTP (return to profitability) bonus,” said Porter.

“The fundamental honesty of the accused’s conduct” is reflected in that in “virtually every respect” the accounting judgments and decisions of Nortel’s finance personnel were known by Deloitte, Porter said.

The prosecutor is honing in on the use of hundreds millions of dollars in accrued liabilities recorded by Nortel’s head office on the company’s balance sheet which it says were used to manipulate the financials. Accruals – such as an expected payout a company would have to pay when a lawsuit is eventually settled – are recorded as a liability, the Crown says. Over time the value of the accrual has to be measured. Ultimately when the liability is paid out it affects the company’s income.

In Nortel’s case, the prosecution alleges some of Nortel’s non-operational accruals were allowed to accumulate to a huge amount, which were then used to tailor profits and losses. This scheme wasn’t created by the accused, the prosecution says, but was a long-held Nortel habit.

At the time of the charges (2000-2004), with Nortel billions of dollars in debt, senior management sought to save the company and return it to profitability, not engage in fraud, Porter said.

Among the accounting challenges, he said, was the accumulation of excess accrued liabilities.

Deliotte worked with and approved of Nortel’s strategies on this, Porter said, describing the firm as making as a continuous and comprehensive audit involving hundreds of its accountants in the countries where Nortel had offices around the world.

The trial is scheduled to carry at least into May, although that includes several breaks.