Nortel Probe Goes Criminal

The company is subpoenaed by a federal grand jury in Texas.
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Updated from 8:54 a.m. EDT

Federal prosecutors in Texas have come calling on

Nortel

(NT)

, seeking financial statements and accounting records, as the bookkeeping scandal at the giant gear-maker takes a turn for the worse.

The Canadian-based company said early Friday that it had received a subpoena from a federal grand jury in Dallas seeking "financial statements and corporate, personnel and accounting records, prepared during the period Jan. 1, 2000 to date."

A Nortel spokeswoman would not say when the company received the subpoena. She also declined to say when the company first learned that federal prosecutors had begun the criminal inquiry.

News of the probe comes two weeks after Nortel fired Chief Executive Frank Dunn, Chief Financial Officer Douglas Beatty and controller Michael Gollogly. At that time, the company said it would again have to restate earnings for the past year.

In addition to firing three of its top executives, Nortel suspended with pay four senior finance executives.

Nortel has been plagued with accounting issues for months now. In October, the company announced it would restate its numbers for the past three years to fix some $900 million worth of accounting mistakes. The time period in the restatement coincides with the grand jury document request.

Nortel's main headquarters in the U.S. is located in Richardson, Texas, a suburb of Dallas. One of the four finance executives suspended two weeks ago worked in the Richardson office.

In the aftermath of the big corporate accounting scandals at

Enron

and

Worldcom

, it has become common for federal prosecutors to open criminal inquiries anytime a major accounting scandal erupts at a large corporation.

The

Securities and Exchange Commission

and the Ontario Securities Commission also are investigating potential accounting irregularities at Nortel. A company spokeswoman says Nortel is cooperating with all the investigations.

In early morning trading, shares of Nortel were down 23 cents, or 6%, to $3.57. Over the past year, the stock has traded as low as $2.68 and as high as $8.50. For the year, the stock is down 15%.

A Nortel spokeswoman, in attempt to calm anxious investors, says the opening of a criminal inquiry will have no immediate impact on the company's outstanding debt obligations. She says the receipt of the subpoena does not constitute a "default'' under terms of any of Nortel's bond covenants.

Nortel has about $3.7 billion in long-term debt outstanding.

Earlier this year, investors believed Nortel was on the road to recovery and getting its house in order. The company's shares doubled during the first two months of 2004, as investors noted the company's progress on its massive restructuring, along with an improving outlook for telecom spending.

But the stock has been in a freefall as the accounting issues appear much more serious than most had previously thought.