Nortel Networks has reached a preliminary settlement in two major class-action lawsuits relating to an accounting scandal that hit the company in 2004, with a payout that could reach US$2.5 billion ($2.87 billion).

The telecommunications giant announced today that it has reached an agreement in principle with lead plaintiffs in the two lawsuits.

The resolution to the long-standing lawsuits came after a lengthy mediation process with the plaintiffs, the courts in the Southern District of New York, with the recommendation of a senior federal judge.

In April 2004, Nortel fired former CEO Frank Dunn and several other senior executives, and revealed it would have to restate financial results going back to 2001.

Under the proposed settlement, Nortel would make a payment of US$575 million in cash, issue 629 million shares or 14.5% of the total outstanding, and pay one-half of any settlement in the lawsuits against a number of executives who were fired in April 2004.

Nortel said it has put aside US$2.47 billion, or 57 cents a share, to cover the cost of the settlement. About US$575 million will come out of its cash reserves. The equity issue would cost another US$1.9 billion at Tuesday’s closing price of US$3.02 on the NYSE.

On Tuesday, Nortel shares closed at $3.47 on the Toronto Stock Exchange.

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

“Today’s agreement in principle is an important milestone for Nortel,”
said Mike Zafirovski, president & CEO, Nortel, in a release.

“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,” he added.

The Ontario Teachers’ Pension Plan Board was a court-appointed co-lead plaintiff in the securities class actions.

“We pursued this class action on our 250,000 members’ behalf and are pleased with the tentative settlement,” said Claude Lamoureux, Ontario Teachers’ president and CEO.