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Nortel Aims for $2.5 Billion Settlement

The company is in talks to clear the deck of shareholder class action suits.
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Nortel (NT) agreed to pay $2.5 billion in cash and stock in a bid to settle class action lawsuits brought in the wake of the networker's financial scandals of recent years.

The Toronto-based company said it will pay $575 million in cash and issue 629 million shares, representing a 14.5% stake in the company, to settle the suits. The agreement was reached with the lead plaintiffs in two significant class action lawsuits pending in the Southern District of New York and based on the recommendation of a senior federal judge, following a mediation process.

The proposed settlement would be part of, and is conditioned on, the company reaching a global settlement encompassing all pending shareholder class actions and proposed shareholder class actions commenced against the company and certain other defendants following the company's announcement of revised financial guidance during 2001, and the company's revision of its 2003 financial results and restatement of other prior periods. The proposed settlement is also conditioned on Nortel and the lead plaintiffs reaching agreement on corporate governance-related matters and the resolution of insurance-related issues.

The agreement in principle is also conditioned on the contribution of available insurance, which has yet to be resolved. The total settlement amount will include all plaintiffs' court-approved attorneys' fees. Nortel has agreed to respond to the corporate governance proposals of the lead plaintiffs and enter into a dialogue to review the company's corporate governance.

The proposed settlement would contain no admission of wrongdoing by the company or any of the other defendants.

"Today's agreement in principle is an important milestone for Nortel," said CEO Mike Zafirovski. "We continue to work vigorously on the implementation of our remediation plan and addressing our outstanding regulatory matters. In addition, we continue to improve our governance provisions and financials systems and controls. These are critically important for the company. We remain fully committed to rebuilding value for the benefit of all stakeholders."

Nortel said it would take a charge of 57 cents a share after taxes to cover the costs of settling the suits.

The proposed settlement comes after a long hard road back to financial clarity at Nortel. The company changed management a number of times and spent years restating its financials after a series of accounting missteps came to light. Only recently did the company become current on its regulatory filings.

Shareholders have sued ex-chief Frank Dunn and other former top execs in light of the so-called bonusgate scandal, where Nortel fudged its numbers just as execs were in line to collect big return-to-profit incentive awards. Nortel said Wednesday that it would give the plaintiffs in its proposed settlement half of any payout it gets in a shareholder derivative suit against the former execs.