“Nortel Networks Corp. gave some top executives millions of dollars in cash bonuses — rather than the usual award of stock — just weeks before the company’s shares plunged on a March 10 warning that earnings would have to be restated for a second time,” writes Ken Brown in today’s Wall Street Journal.

“Meanwhile, Nortel said Friday it is the subject of a criminal investigation by the U.S. attorney’s office for the Northern District of Texas, Dallas division. Nortel said it received a federal grand jury subpoena to produce financial statements and corporate, personnel and accounting records as far back as Jan. 1, 2000. ‘The company will fully cooperate with the authorities in this matter,’ Nortel said.”

“The Dallas investigation is in addition to ongoing investigations into Nortel’s accounting by the U.S. Securities and Exchange Commission and the Ontario Securities Commission.”

“According to a review of regulatory filings, the bonuses, awarded in February, were part of the telecommunications-gear maker’s long-term compensation plan. In past years, most recently in July 2003, the award had been granted entirely in the form of restricted stock. This time around, when the board’s compensation committee voted to award the shares on Jan. 29, it decided to give the executives half of that compensation in cash.”

“Nortel’s stock has since fallen nearly 44%, meaning that if the executives had received Nortel stock instead of cash, they would have fared far worse. In addition, the company withheld about a quarter of the shares granted to the employees to pay the taxes on the bonuses. As a result, the executives received only about a quarter of their bonus in the restricted stock plan in shares.”

“Compensation and insider-trading experts say that giving employees cash instead of stock in what the company itself calls a long-term compensation plan is unusual. They also say that the way the payouts were disclosed in regulatory filings — the executives received stock that they technically sold back to the company for cash the same day — was confusing. Typically, restricted stock must be held for months or years before it can be sold in order to get executives to focus on the company’s long-term health and to align their interests with those of shareholders.”

“Lon Gerber, director of insider research at Thomson Financial, which analyzed the Nortel filings, said the arrangement where the executives immediately sold the stock back to the company was ‘a unique situation.’ He added that normally ‘you wouldn’t see that, you would see the award happening and then you wouldn’t see the sale until the future.’ “

“Nortel has fired its chief executive, chief financial officer and controller and put four finance officials on leave amid the accounting probe. Last fall, the company restated its financial results to move $952 million of liabilities to prior periods’ income, among other moves. Last month, Nortel said the second restatement would slash its reported net income of $732 million in 2003 in half and turn that year’s first half profit to a loss. Nortel, of Brampton, Ontario, is one of the world’s largest equipment makers for telecommunications carriers and one of Canada’s largest companies.”