Nortel acquittal shows challenges of prosecuting corporate fraud

In the last few years, Nortel has undergone a series of asset sell-offs and bankruptcy proceedings. Many attribute the company’s decline to a series of scandals in which some of the company’s top executives were implicated in an accounting restatement scandal that resulted in those executives being paid millions of dollars in bonuses. These executives were charged with fraud by the RCMP, but were acquitted this week by the Ontario Superior Court. The question is why, in the wake of being fired by Nortel and being charged by the SEC for civil fraud, were these executives acquitted on the criminal fraud charges?

Three of Nortel Networks’ top officers were charged with criminal fraud: ex-CEO Frank Dunn, ex-CFO Douglas Beatty and ex-controller Michael Gollogly. The Crown had alleged that these men had cooked the books so as to get $12.8 million in bonuses and stocks for themselves. Despite these allegations, Ontario Superior Court Justice Frank Marrocco acquitted the accused on Monday.

The acquittal is not actually a surprising decision.  The Crown had a tall order ahead of them in attempting to prove the fraud charges. In order to be successful they would have had to show all elements of fraud, including that the accused were aware they were carrying out a crime and that their actions would deprive someone of their property. They would then have to prove this criminal intent beyond a reasonable doubt.

Related Story: Nortel ‘not guilty’ verdict concludes prominent white collar crime trial

Burden of proof refers to the level of certainty you have to prove your case. Because there are greater consequences to being found guilty in a criminal action, the burden of proof for criminal cases is higher than those in civil actions. With a crime, the prosecutors have to prove their case beyond a reasonable doubt. This high burden of proof can make a Crown prosecutor’s life difficult – crimes do not take place in a controlled environment where things are set out in an accessible way and all of the evidence is available and reliable. Instead, prosecutors usually have to piece together their case from documents, eye witnesses, and other sources, putting it all together so that there is no doubt in a person’s mind that a crime was committed. This high burden of proof was not met in this case according to Justice Marrocco, who said that looking at the evidence, he was “not satisfied” the evidence showed the men had “deliberately misrepresented” the finances.

Frank Dunn, one of the accused, said he felt “vindicated” by the decision. “For a very long time, integrity has been the foundation of Nortel Networks’ corporate governance and business practices,” he said.

But what the case really did showcase is the difficulty prosecutors have in proving corporate fraud cases. Nortel’s former executives had talented and expensive legal representation that very few can afford.  To attempt to prove a fraud case against well-represented defendants like this, is very expensive, difficult, and time consuming. As such, this verdict has the potential to make government think twice about prosecuting executives on charges of fraud, or “white collar crime.”

In 2004, the Criminal Code was amended to address “white collar crimes” and impose harsher sentences for those convicted. The BDO in a 2011 post on “white collar crimes” in Canada states that these crimes occur in almost every organization to varying extents. They go on to say that “If an opportunity is present, those who commit employee fraud rationalize their own behaviour. Rather than making excuses to use on authorities if they get caught, they actually try to rationalize their crimes to themselves.”

If the consequences of the action are clear, such as criminal charges, then it could possibly deter this type of behavior and it would make it more difficult for organizations and their executives to rationalize illegal behavior. The Nortel executive’s acquittal may be construed as some that the risk of being caught and persecuted for white collar crime is extremely low.

This decision does deter corporate executives from acting in their own best interest, and awarding themselves huge bonuses or salaries even when a business is on the verge of bankruptcy.

Monica Goyal
Monica Goyal
Monica Goyal, Entrepreneur, Lawyer and Innovator is the founder of Aluvion, a legal solutions company offering technology, paralegal and lawyer-driven solutions with a special focus on the quality, cost, and accessibility of legal services for both businesses and individuals. Monica began her career working as an engineer in R&D for companies like Toshiba, Nortel and Nokia while earning her Masters of Engineering at Stanford. Monica's history conditioned her to solve problems in a efficient and tech-savvy manner, an approach she brings with her to legal solutions. Monica currently sits on the Canadian Bar Association's Futures Initiative, and will be teaching a course on Legal Technology at York University’s Osgoode Hall. She was recently named one of 10 Women to Watch in Tech in the Journal of the American Bar Association.

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