No More Cheering for Nortel

Watching the unfolding scandal at Nortel Networks (NYSE: NT) is almost like watching reruns of what took down the powerful WorldCom (now renamed MCI) and Tyco International (NYSE: TYC). While we don't know yet if the accounting problems are as serious as those at MCI and Tyco, now that Nortel has fired its president and CEO, CFO, and controller "for cause," there is absolutely no reason to hang around to find out what's next. Nortel also said yesterday that the accounting problems the Securities and Exchange Commission (SEC) is investigating ran deeper than expected.

When the SEC opened a formal investigation on April 5, it was time to stop cheerleading for Nortel. Cheerleaders defended MCI and Tyco to the bitter end, and it seems the same scenario is happening at Nortel. When the SEC steps up its investigation to formal status, it means subpoenas can be issued for documents and information. The SEC usually takes this step when it believes that at least some principals within the company are not cooperating. Hint, hint: It's not surprising top folks were fired for cause.

The law firm of Berger & Montague P.C. filed a class action suit April 21 on behalf of investors in Nortel between Dec. 23 and March 2004. The complaint alleges that "defendants' financial reports and statements which they publicly announced and/or filed with the SEC beginning on December 23, 2003 and throughout the Class Period were false and misleading."

Nortel was supposed to release "limited preliminary unaudited" results today. Its annual meeting, which was originally scheduled for today, is delayed indefinitely. The delay in filing its first-quarter results violates debt covenants and could have additional adverse impacts on the company. Standard & Poor's already cut Nortel's ratings deeper into junk territory yesterday, from B to B-, because of the increased risk debt holders now face if there is an "event of default and acceleration" of the debt.

It's too early to tell whether Nortel's problems are as serious as those at MCI, where investors were forced to face the music of their stock being worth zero, as announced in March. (The company told shareholders of MCIAV.PK and MCWEQ.PK that shares trading under these symbols would be canceled when it emerged from bankruptcy in April.) Tyco investors, on the other hand, escaped unscathed, with the company successfully turning around and now on the road to recovery.

Whatever happens, if you now hold shares in Nortel, you probably want to get out while the getting's good. Why take the risk of holding when your money could find a better home in a much less risky stock?

Just in case you haven't been keeping a scorecard, here is how the scandal developed:

• Jan. 2004: Thinking that Nortel was on the road to recovery, investors pushed the price of its stock back up to $7.86 from its low of $0.54 in Sept. 2002. The price had been gradually creeping up since that low. Nortel announced its new deal with Verizon (NYSE: VZ).
  
  
• February: Nortel's rebound stalled, as some concerns began to be raised about the bookkeeping. Hope you didn't buy in during January or February.
  
  
• March: Nortel put CFO Douglas Beatty and Controller Michael Gollogly on "paid leave of absence" pending an audit committee review. Nortel also announced it would miss a crucial filing for its 2003 financial statements. Also, the company announced an expected restating of its results for the first half of 2003 and previous periods. Isn't this how MCI and Tyco and their leadership started their downward spiral -- as with most of the recent scandals involving other companies on Wall Street?
  
  
• April: The SEC announced a formal investigation. The annual meeting is indefinitely delayed. The three executives were fired. Stock prices dropped rapidly, closing at $4.05 yesterday, which is down $4.34, or 48.8%, since the high of $8.39 on Feb. 17.

How much lower will it go before you decide to jump? Time to get out your parachute.

Share your thoughts on the unfolding Nortel drama on our Nortel discussion board.

Fool contributor Lita Epstein ponders money and politics under the palm trees in Florida; view her Fool profile here. She owns shares in none of the companies mentioned here.