Nortel Latest Victim Of Class-Action Lawsuit Spree

Communications Today, Feb 21, 2001

By Bruce Sullivan, bsullivan@phillips.com

Those darned Americans. First, according to CEO John Roth, the U.S. economy went south and cut into the revenues of Nortel Networks [NT]. Now, the Canadian network equipment manufacturing giant is getting entangled in that other great American pastime - litigation. Haven't the Blue Jays and Expos suffered enough on the baseball diamond?

On Monday, a third U.S law firm announced a class action lawsuit against Nortel, alleging that the world's largest supplier of fiber-optic networking equipment misled investors about its growth prospects.

According to a suit filed by the Law Offices of Charles J. Piven, P.A., in Baltimore, Nortel issued an overly-optimistic press release on Jan. 18 that misrepresented the company's revenue estimations for 2001 by predicting that Nortel would "continue to outpace the market and gain profitable market share" even if capital tightens in the telecom sector. After the Jan 18 announcement, Nortel's stock price rose 10 percent.

However, the lawsuit charges that on Feb. 15, Nortel reversed its rosy projections with another press release warning it was lowering guidance for 2001 due largely to spending cuts by telecommunications companies. The next day, Nortel shares fell more than 34 percent.

Roth blamed the sharp change in investors guidance to an "abrupt downturn" in the U.S. economy, which exacerbated sudden budget cuts among many of Nortel's largest customers.

"It's becoming very clear that all our customers are starting to adjust their budgets to take account of the realities of the very sharp and severe downturn that the U.S. is experiencing," Roth reportedly said Monday in a speech At Toronto's Canadian Club. He dismissed the lawsuits as the byproducts of "a whole industry of class action lawyers around."

Nortel is not the first telecom company to get sued by investors in the aftermath of the telecom meltdown. Last week, WorldCom [WCOM] settled a class action suit with Digex [DIGX] shareholders, which sued the carrier over WorldCom's acquisition of Intermedia Communications [ICIX].

Lawyers who specialize in securities fraud say they are not the hyenas alluded to by Roth, but are a necessary part of the investment machine. With publicly traded companies, whose livelihoods depend on investors, just the knowledge that they can be sued for issuing misleading statements helps keep the spin down, said Securities Fraud Attorney William S. Shepherd of Shepherd & Smith in Houston.

"Class action suits keep most companies very conscious of what they are saying," Shepherd said "Companies are always quick to talk about the good things, and just like little kids, they try anything they can to get out of saying something bad."

But a sudden change in a company's stock price can sometimes bring out the ambulance chasers, said Telecom Attorney Rick Brecher of Greenberg Traurig in Washington, D.C.

"Investors don't like that, and the class-action lawyers circle around like vultures with visions of dollar signs dancing in front of their heads" Brecher said.

The Bottom Line

There is not a whole lot of good news in the telecom sector right now. Lawsuits, layoffs, shrinking stock prices all will likely get worse until the shakedown is over and the industry gets back on course - whenever that may be.