Nortel fires chief executive

PRINCETON, N.J. -- Nortel Networks Corp., North America's largest maker of telephone equipment, fired chief executive Frank Dunn, saying a second restatement in less than six months may reduce last year's earnings by 50 percent.

Nortel, under a US Securities and Exchange Commission accounting probe, also fired its chief financial officer and controller. Director William Owens, a 63-year-old retired admiral and former vice chairman of the US Joint Chiefs of Staff, will replace Dunn, 50. Nortel shares tumbled 28 percent.

"How trustworthy are any Nortel numbers? Anything they come out with now is going to have to be checked and double-checked before anybody believes anything," said Gavin Graham, director of investments at Guardian Group of Funds in Toronto, which manages the equivalent of $2.43 billion in assets including Nortel shares.

Investors had credited Dunn, chief executive since 2001, with returning Brampton, Ontario-based Nortel to its first profit since 1997 last year after cutting about 60,000 jobs and shutting plants. Executive bonuses based on that return to profitability are being reviewed, Nortel's new chief financial officer, William Kerr, said on a conference call with analysts and investors.

Nortel spokeswoman Tina Warren said she couldn't give details about the size of executive bonuses.

Shares of Nortel plunged $1.60 to $4.04 in New York Stock Exchange trading. The stock, which has risen 59 percent in the past year, traded as high as $89 in July 2000.

Dunn, who took the helm in November 2001 when former chief executive John Roth stepped down earlier than planned, in November presided over a restatement of Nortel's results from 2000 through the first half of 2003 in which total losses were reduced by $505 million to $33.2 billion and sales were pared by $121 million to $60.6 billion.

Nortel in March said it was re-examining the establishment of and release to income of certain accruals and provisions in 2003 and earlier periods and might have to restate results a second time. When companies set aside too much for anticipated expenses, they can reverse the expense, in effect creating income. Nortel has declined to elaborate what errors may have occurred.

Nortel said that although its current review isn't complete, a previously reported profit for the first half of 2003 will be restated as a net loss. Full 2003 net income, which Nortel had reported at $732 million, will be cut by about half, with those amounts applied to earlier periods, reducing reported net losses in 2002 and 2001. The company said there will probably be no material impact on prior revenue.

Standard & Poor's cut Nortel's long-term corporate credit rating to B- from B. In a statement, the ratings company cited an increased possibility that holders of Nortel securities could provide notice of noncompliance.

The fall in Nortel's shares led to a 3.5 percent drop in Canada's benchmark stock index, the Standard & Poor's/TSX Composite index, the largest fall since the 2001 terrorist attacks. Nortel dropped to the ninth-biggest firm by market value after starting the day as the third-largest.

The firings are an important step in restoring shareholder confidence, Nortel chairman Red Wilson said on the call. The company delayed today's scheduled release of preliminary first-quarter financial results, saying it wasn't in a position to reveal them.

Douglas Beatty, Nortel's former chief financial officer, and Michael Gollogly, its ex-controller, had been on paid leaves of absence before yesterday's firings. MaryAnne Pahapill, interim controller, was appointed to the job permanently.

Owens, a 1962 graduate of the US Naval Academy who also holds degrees in politics, philosophy, and economics from Oxford University, became a member of Nortel's board in February 2002.

He's also a director at DaimlerChrysler AG, the world's fifth-largest automaker; Wireless Facilities Inc., which helps companies build and manage wireless networks; Symantec Corp., the world's largest maker of software to stop computer viruses; and British American Tobacco PLC, the world's second-largest cigarette company.