As another week unfolds, it will be interesting to see if the folks at Nortel have anything to talk about. You have to believe Nortel has to say something soon to calm the frayed nerves of investors. Then again, Nortel audit committee chair John Cleghorn is not going to risk revealing his cards before he's ready.

Looks like Manitoba Telecom Services CEO Bill Fraser really wanted to screw over those pesky hedge fund managers who wanted MTS to become a boring income trust. Turns out, the deal to buy Allstream for a cool $1.7 billion is locked down with no escape routes. Fraser has essentially told the hedge funds that if they don't like the cooking, get the hell out of the kitchen.

Meanwhile, the CRTC has decided not to let carriers take them out for smoozy, boozy dinners. The “Last Bash” was given by BCE CEO Michael Sabia, who hosted a dinner in Ottawa last year. It was fun while it lasted! If CRTC chair Charles Dalfen ever gets lonely and hungry, I'll be happy to buy him lunch – that is, if it's still allowed.

The biggest cloud now hanging over Nortel Networks Corp. is what will happen to chief executive Frank Dunn.

This is a legitimate question in the wake of Nortel's decision Monday to put CFO Doug Beatty and controller Michael Gollogly on paid leave — a move that surprised investors and caused Nortel shares to tumble 19%, eliminating much of the lustre the telecom equipment maker has gained in recent months.

At the heart of Mr. Dunn's future is the “independent” review being conducted by an audit committee headed up by former Royal Bank of Canada CEO John Cleghorn, which is looking into the company's financial statements for the past four years.

If the audit committee discovers serious financial problems, they will have to dig into what role Mr. Dunn played. After all, he was Nortel's chief financial officer from 1999 to 2001 before he became CEO.

If the audit committee finds relatively minor issues — something that several analysts speculated yesterday — then one has to question why Nortel's board and Mr. Dunn felt it was necessary to make Mr. Beatty and Mr. Gollogly walk the plank. Even if both executives are welcomed back into the fold, their reputations have certainly been impaired. More serious is the possibility that Nortel made a serious strategic error that may have prompted investors to panic for no good reason.

“I don't know how you put these guys back on the payroll after the crap that has unfolded, unless you are trying to protect Dunn,” said forensic and investigative accountant Al Rosen. “How did he get appointed CEO in the first place? Why hasn't he told these guys to clean up the damn mess?”

Nortel hasn't said very much. But we do know the five-member audit committee, which includes Mr. Cleghorn and Air Canada chairman Robert Brown, launched its review last October after Nortel started its own accounting review in July.

As part of the process, the audit committee hired Washington-based Wilmer Cutler Pickering LLP as its advisor. Wilmer Cutler is a large, high-profile firm that, among other things, specializes in securities enforcement. If the audit committee did not believe there was the possibility of something serious emerging, why would it hire a big U.S. law firm? Why wouldn't it hire a local firm such as Torys or McCarthy Tetrault?

According to its Web site, Wilmer Cutler assists “clients in responding to informal inquiries as well as formal SEC … investigations. This includes working with the SEC … staff in the course of its fact-finding. In that context, we present factual, legal, and policy arguments either to persuade the staff not to recommend enforcement proceedings, or to persuade the agency not to authorize such proceedings.”

Wilmer Cutler also says it has worked on SEC enforcement matters involving high-profile insider trading matters and accounting practices.

Heading up the firm's securities practice is William McLucas, who spent eight years as the U.S. Securities and Exchange Commission's director of enforcement. During his tenure, he led the division's staff in a number of investigations and enforcement actions. This included the SEC's case against junk-bond dealer Michael Milken.

In other words, Mr. McLucas is not a lightweight. He is a securities “robo-cop” who clearly liked his job with the SEC. For Nortel to hire Wilmer Cutler and Mr. McLucas's services suggests the audit committee wants to ensure it has the big guns on its side if a major problem comes to light.

This is an important consideration when one remembers that the most valuable asset a person such as Mr. Cleghorn possesses is his reputation. The last thing he wants to suffer through is an accounting scandal on his watch.

“If you were a big boy like John Cleghorn and you think of yourself as a very important person and something bad happens to a company, you want the best,” said an analyst who wished not to be named. “You will go to a Washington-based law firm and get the lead partner who has got experience in such matters that may involve the SEC.”

Anyone looking for quick answers to Nortel's accounting woes will be disappointed. Given developments this week, the role being played by the audit committee and Wilmer Cutler, this is going to be a drawn out process that may not produce any answers for a long, long time.

You have to like the nerve of Manitoba Telecom Services CEO Bill Fraser. Just when you thought he was destined to head up a boring, cash-producing income trust telecom, he pulls the $1.7 billion acquisition of Allstream out of his hat. Surprise, surprise to all those folks happily counting on MTS becoming an income trust. Who would have thought Fraser had aspirations of grandeur and growth?
In addition to the folks – Enterprise Capital, Highfield Capital, etc. – pissed at Fraser for skewering their income trust plans, how do you think the fine folks at BCE feel? When BCE acquired a 20% stake in MTS in 1999, the idea was it would keep rivals – can you say Telus? – - from making a takeover run at MTS. I guess they didn't count on MTS doing the buying.
So what happens now? As much as Fraser and Allstream CEO John McLennan were bubbling about their deal, if BCE and Enterprise Capital join forces, all of a sudden you'll have shareholders holding 30% of MTS shares opposed to the deal. Add in a few more of “the disappointed” and MTS may be looking at an income trust after all. Perhaps MTS had an inkling this was a possibility given there is no break-up fee if the deal falls apart.
Keeps watching 'cause this thing ain't over!

The notion that there's something terribly wrong at Nortel continues to gain momentum. If the audit committee looking at its financial statements for the past four years discovers something serious, it could mean serious trouble for CFO Doug Beatty, controller Michael Gollogly and, most important, CEO Frank Dunn – who was Nortel's CFO from 1999 to 2001.
It's strange that Beatty and Gollogly look like they're taking the fall, while Dunn quietly hides behind the curtain – hoping this controversy disappears soon.
On the other hand, if the audit committee only finds minor accounting issues, then you could accuse Nortel and Dunn of over-reacting with the decision to give Beatty and Gollogly the boot – at least temporarily – and spooking investors.
Ultimately, Dunn has to stand up and take responsibility for what's happened. From what I can tell, it looks like the board is trying to protect Dunn by keeping him out of the fray. The question is how long they can pull off this strategy.

So what's going on with Nortel and how have they managed to drop the ball from a communications perspective in the latest chapter of their accounting soap opera. It was bad enough last week when the company said its 2003 annual report would be delayed because an “independent” audit committee needs more time to compllete a review of its financial statements. Now, it has put its CFO and controller on paid-leave until the review is complete. So what gives? How come Doug Beatty and Michael Gollogly get to walk the plank while CEO Frank Dunn sends soothing e-mails to employees? It looks like Beatty and Gollogly are being sacrificed as scapegoats for Nortel's financial woes. What happens if the restatement is minor? Do Beatty and Gollogly get to walk back in from the cold with their reputations still intact? Bottom line: Nortel's IR and PR teams blew it.