For all its presumed progress, Nortel ( NT) hasn't forgotten how to infuriate investors.

What's worse than having to restate three years' worth of financial reports? Maybe having to restate the restatements just a few months later, as Nortel said Thursday it might have to do.

Adding to the problem, the company says it might be late with its annual report, missing federal deadlines and violating agreements with its lenders. And though some investors who have driven the stock up sharply this year were willing to give Nortel the benefit of the doubt, all the bumbling with the books up in Brampton, Ontario, may have caught the attention of the Securities and Exchange Commission.

"If there wasn't an SEC investigation before today, there almost certainly will be one now," says John Gavin, president of SEC Insight, a Plymouth, Minn., research shop.

A SEC representative declined to comment. A Nortel spokeswoman declined to comment on whether the SEC was investigating, but said that the company has informed all the proper regulatory agencies.

Gavin says that in October his firm asked the SEC for Nortel documents under the Freedom of Information Act. That request was rejected based on a so-called law-enforcement-related exemption, says Gavin. Typically in the past, the SEC has used the law-enforcement exemption when it has been involved in some sort of investigation, he says.

Nortel shares fell more than 11% at one point in early trading Thursday, but they had mostly recovered by early afternoon on heavy volume. And though the accounting screw-ups are a Nortel problem, Wall Street was quick to lash fellow gear peers like Ericsson ( ERICY), Corning ( GLW), JDS Uniphase ( JDSU) and Lucent ( LU).

The redoubled attempts at accountability at Nortel could undercut the confidence investors had gained as the company started talking about turning the corner on its massive restructuring and guiding for stronger sales growth.

The company's press release Wednesday evening pointed to the timing of accruals and provisions as the focus of the internal audit. To analysts and investors, this suggests that, unlike accounting misdeeds of Lucent and Qwest ( Q), any problem could stem not from phony sales but whether Nortel booked revenue on the correct schedule.

Unlike many products that are booked as a sale the moment they are delivered, telecom equipment has to be shipped, installed and certified before the proceeds can be recognized. This process can take months if large network systems are involved and that usually requires gear suppliers to spread the revenue over several quarters independent from when the actual payments arrive.

"Assuming the cash is real and this isn't Parmalat, this could prove to be an opportunity," says Paul O'Neil with Knight Bain Seath & Holbrook, a Canadian pension fund that holds Nortel stock.

"If it comes out that they were being conservative, then what will the Street say? Shame on you?" says O'Neil.

But SEC sleuth Gavin isn't quite as confident. Though there's no indication whether the SEC would be looking into something as big as accounting fraud or as minor as some junior officer's insider trading, Gavin says any probe should give investors some pause. After all, the audit committee now wants to re-examine the work it just completed a few months ago.

To say it's a case of Nortel being too conservative with the books "requires a leap of faith that the audit committee's behavior doesn't seem to allow," says Gavin.

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