Nortel CEO John Roth defends company against lawsuits

Under fire for his company's handling of a mid-February earnings warnings, Nortel Networks CEO John Roth promised to fight a slew of class-action lawsuits filed against his business.

In a letter to shareholders issued Thursday, Roth said Nortel (T.NT) believes the lawsuits are without merit.

"I can assure you that your company is committed to maintaining the highest integrity and credibility of business practices," Roth said in the letter.

On February 15, Nortel issued a profit warning essentially cutting its 2001 revenue by half and predicting a first-quarter loss. The company blamed a rapidly cooling United States economy for the drastic revision, citing the fact the majority of Nortel customers are U.S. firms. The earnings warning prompted a next-day $44-billion sell-off in Nortel shares.

Shareholders and the press bombarded Nortel and questioned Roth's leadership because the earnings warnings came less than one month after the company said it expected revenue and operating earnings growth for the year of 30 per cent, and a first quarter operating profit of 16 cents a share.

In between those two crucial dates, a pair of company executives, William Connor, president of Nortel's e-business solutions group, and Chahram Bolouri, president of Nortel's global operations, sold over $7 million US of company stock.

The lawsuits all accuse the company executives of insider trading and are seeking compensation for investors who lost money.

In Thursday's letter, Roth reiterated that Nortel issued the profit warning as soon as it became aware of the sharp decline in its customers' spending.

"Based on previous experience, we had anticipated a longer lead-time for the effects of a downturn to be felt by our sector and by our company," Roth said.

"The current downturn occurred with unprecedented suddenness and severity. Our decision to revise guidance on February 15 occurred as soon as the effects of this downturn were clear to us," he said.

Roth added that Nortel, instead of being late to become aware of the economic downturn, was actually at the front of the pack.

"Since February 15, a growing number of technology companies with heavy dependence on the U.S. market have also revised their forecasts. This is clearly a broad market/economic slowdown that has affected companies in our sector with unprecedented speed," he wrote.

In a speech in Toronto shortly after the Feb. 15 profit warning and the following market plunge, Roth dismissed the practice of filing class-action lawsuits after a big stock move. "Any time there is any meaningful movement in the stock, either up or down, for that matter, you can expect a class-action lawsuit," he said.

At the time, Roth also pointed out that the two executives accused of insider trading would have been financially better off if they had wanted until after the Feb. 16 sell-off to do their trading.