Updated from 5:44 p.m. EST
chief financial officer resigned Monday after the company told regulators that he had traded mutual funds holding the company's stock, during investment blackout periods.
The Toronto-based networking-equipment maker said Terry Hungle, whom it named financial chief late last year, would be supplanted as acting CFO by CEO Frank Dunn. Nortel said it would search for a new financial chief, and emphasized that Hungle's trades had no impact on its business or operations.
The departure comes as the fallout from the
scandal continues to reverberate through the market. Accounting rumors have increasingly moved stocks in recent weeks, prompting executives at a number of companies to go out of their way to say their accounting and disclosure practices are appropriate. The notion that executives and directors often receive preferential treatment when it comes to their stock holdings has become particularly widely held in the wake of the Enron fiasco.
After rising 55 cents to $6.84 during regular trading Monday, Nortel shares were halted after hours.
Nortel said after the close of trading Monday that it "voluntarily" told the
Securities and Exchange Commission
and the Ontario Securities Commission of "the circumstances surrounding certain personal investment transactions carried out in 2001 by Hungle in the Nortel Networks U.S. Long-Term Investment (401k) Plan."
The transactions "occurred outside the trading windows imposed by the Corporation upon certain employees, including Hungle, and prior to news releases issued by the Corporation on March 27, 2001 and Dec. 21, 2001," Nortel said.
The company issued earnings preannouncements those days. The March 27 release forecast an earnings shortfall; before that release hit the wires, Nortel said, Hungle transferred $78,500 (U.S.) from a fund investing primarily in Nortel stock into a bond fund. That release, issued after the market closed March 27, sparked a 16% selloff in Nortel's stock March 28.
The Dec. 21 release generally painted a rosier picture and said Nortel and its banks had agreed to restructure a credit line, easing Wall Street's liquidity worries. Before that release was made public, Hungle transferred $86,300 from the bond fund into a Nortel stock fund, Nortel said. That release, issued the morning of Dec. 21, pushed Nortel's shares up 11%.
Allegations of Hungle's trading activity stunned one corporate watchdog, Patrick McGurn, director of corporate programs for Institutional Shareholder Services, a firm that advises large investors on corporate governance and proxy issues.
"It's beyond belief," says McGurn, saying that he couldn't think of any other incident in which the chief financial officer of an
company was said to have traded shares during the no-trading window.
If indeed the allegations about Hungle's trades are true, says McGurn, the burning question is, "How did such an idiot get to be a CFO of a major telecom company?"
What's especially bizarre, says McGurn, is why Hungle would take such a risk for $80,000. The current salary for Hungle, who was promoted to the CFO position in November after serving as president of finance, Nortel Networks Americas, couldn't immediately be determined. Nortel Prsident Frank Dunn, for purposes of reference, earned $1.5 million in salary and bonus as CFO in 2000, according to an SEC filing.
"You're not talking a huge return here," McGurn says.