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UNITED STATES DISTRICT COURTSOUTHERN DISTRICT OF NEW YORK

X

IN RE NORTEL NETWORKS CORP .SECURITIES LITIGATION

Consolidated Civil Action

No. O1-CV-1855 (RMB)

This Document Relates To: All Actions X Jury Trial Demanded

SECOND CONSOLIDATED AMENDED CLASS ACTION COMPLAIN T

Lead plaintiff, the Trustees of the Ontario Public Service Employees' Union Pensio n

Trust Fund ("Lead Plaintiff'), individually and on behalf of all other persons similarly situated ,

by its undersigned attorneys, alleges upon personal knowledge as to itself and its own acts, an d

as to all other matters, based upon an investigation made by its attorneys that included, among

other things : (i) interviews of former employees of Nortel Networks Corporation ("Nortel" or the

"Company"); (ii) interviews of Nortel customers ; (iii) review and analysis of the public filings of

Nortel, including its filings with the Securities and Exchange Commission ("SEC") and th e

Canadian securities regulators ; (iv) review and analysis of news articles, press releases and

analysts reports by or relating to Nortel ; and (v) review of the SEC filings and bankruptcy filings

of certain of Nortel's customers. Lead Plaintiff believes that further evidentiary support for th e

allegations set forth below will exist after a reasonable opportunity for discovery .

NATURE OF THE ACTIO N

1 . Lead Plaintiff brings this action as a class action on behalf of itself and on behalf

of all other investors in securities of Nortel between October 24, 2000 and continuing throug h

and including February 15, 2001 (the "Class Period"), to recover damages caused by defendants '

violations of the anti-fraud provisions of the federal securities laws. Members of the Class (as

defined infra), include purchasers of Nortel common stock and call options during the Class

Period, and sellers of Nortel put options during the Class Period (collectively referred to herei n

as "Nortel Securities"), including, but not limited to, those persons who traded in Norte l

Securities on the New York Stock Exchange and/or the Toronto Stock Exchange .

2. Defendant Nortel, one of the largest global suppliers of networking solutions an d

services that suppo rt the Internet, and the Individual Defendants (as defined infra), knowingly or

recklessly issued a series of materially false and misleading statements and engaged in a variet y

of accounting manipulations that : (i) overstated Nortel's reported third quarter and year-end 200 0

revenues and earnings ; and (ii) falsely represented and reassured the investing public that despit e

a massive contraction and retrenchment of the Internet and telecommunications sectors in th e

United States, Nortel's strong growth, revenues and earnings trends would continue through 200 1

without any significant interruption. Nortel represented that its key customer base, the Interne t

and telecommunications sector in the United States, and its business model werefar superior to

its competitors like Cisco and Lucent (who were suffering serious financial setbacks), that Norte l

was not as vulnerable to the adverse business conditions that were hurting its competitors, and

that it would continue to grow faster than the rest of the market .

3 . More specifically, in the midst of this dramatic and continuing slowdown in th e

Inte rnet and telecommunications sectors in the United States, and with Internet- and

telecommunications-related company stock price valuations suffering precipitous and hug e

declines, starting no later than October 24, 2000, defendants knowingly or recklessly issued a

stream of materially false and misleading representations to the investing public that wer e

designed to reassure the public that Nortel continued to be on a track of strong growth i n

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revenues and earnings . These positive statements caused Nortel 's stock p rice to rise to, and

remain at, artificially inflated levels so that No rtel could continue , for so long as possible, its

strategy of acquiring other Inte rnet- or telecommunications-related comp anies, using its shares as

a takeover currency . Typical of these false and misleading reassurances to the investing publi c

were statements made on November 1, 2000 :

'We continue to expect that our percentage growth in revenue andearnings per share from operations in 2000 over 1999 will be in thelow 40's,' said John Roth, president and chief executive officer,Nortel Networks. 'In response to specific requests for guidance on

the fourth quarter of 2000, we expect our revenue and earnings pershare from operations in the fourth quarter of 2000 will be in the

range of US$8.5 billion to US$8.8 billion and US$0.26 per share

on a fully diluted basis, respectively . Overall, we expect continuedstrong growth in Optical Internet, Wireless Internet, Local Internet

and eBusiness solutions. We continue to expect our optical Internetrevenues to grow in excess of 125 percent in 2000 over 1999, toexceed US$10 billion .' [Emphasis added . ]

'Looking forward to 2001, we continue to expect the overall market

to grow in excess of 20 percent . Given our strong market positionand leadership in high performance Internet solutions, we continueto expect to grow significantly faster than the market, withanticipated growth in revenues and earnings per share fromoperations in the 30 to 35 percent range,' said Roth. 'For the firstquarter of 2001, consistent with historical profile trends, we expectour revenue and earnings per share from operations will be in the

range of US$8.1 billion to US$8.3 billion and US$0.16 per share

on a fully diluted basis, respectively .' [Emphasis added ; footnotes

omitted . ]

4. As alleged in detail below, defendants made substantially similar materially fals e

and misleading statements at the outset of the Class Pe riod (October 24, 2000), several time s

throughout the fourth quarter of 2000, and again in January 2001, shortly before the end of the

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Class Period . In fact, at the same time that defendants were aggressively reassuring the investin g

public that Nortel was continuing to achieve historical strong growth and increasing revenues ,

and would continue to do so into 2001, demand for Nortel's mainstay products was declining and

its revenues and revenue growth were substantially contracting .

5 . Starting no later than the commencement of the Class Period, Nortel was facing

the same difficult and challenging Internet and telecommunications business environment that it s

main competitors, Cisco and Lucent, had been suffering with for several months . Except that,

whenever defendants were questioned about whether Nortel was expe riencing changing market

conditions , they falsely and aggressively reassured investors that these issues did not se riously

impact Nortel . In fact, however, prior to and during the Class Period, Nortel's customers, whic h

were largely Internet- and telecommunications-related companies, were suffering from a sever e

deterioration of their businesses as a result of the slowing United States economy, causing the m

to cancel or reduce orders of new products and either return or delay payment for products tha t

had already been received. Indeed, by the third quarter of 2000, several of Nortel's largest

customers, including WorldCom and SBC, substantially decreased orders for Nortel products

and informed senior Nortel sales personnel that orders in the fourth quarter of 2000 and

throughout 2001 would be even lower.

6 . In addition to issuing a stream of false reassurances and aggressive earning s

guidance throughout the Class Period, Norte[ also was able to prolong this illusion of stron g

revenue and earnings growth, when in fact it did not exist, by deliberately engaging in various

types of improper conduct, including, among other things, violations of several generally

accepted accounting rules and principles, as documented in detail herein from numerou s

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interviews of former high-level Nortel employees . It was only through these accounting

manipulations , which involved the cannibalization of 2001 first quarter revenues , that defendants

were able to report substantial revenues and growth in the third and fourth quarters of 2000 :

(Quarterly Period

Ending Sept. 30, 200 0)

(Quarterly PeriodEnding Dec. 31, 2000)

(Quarterl', PeriodEnding Jan. 1, 2001)

Projected Revenues - $ 8 .5 - 8 .8 billion $8.1 - 8 .3 billion

Actual Revenues $7.31 billion $8.82 billion $6.18 billion

7 . In general, Nortel : (i) improperly used "vendor financing" to generate hundreds o f

millions of dollars of illusory revenues ; (ii) engaged in a series of improper practices that caused

Nortel to recognize improperly hundreds of millions of dollars of revenue ; (iii) failed to properl y

account for hundreds of millions of dollars of uncollectible receivables ; and (iv) failed to timel y

and properly recognize approximately $12.5 billion in impairment losses in connection with four

of Nortel's recent Inte rnet and telecommunications acquisitions until the second quarter of 2001 ,

after the end of the Class Period .

First, Nortel improperly used "vendor financing" to a rtificially inflate an d

improperly recognize revenues . Nortel aggressively and improperly extended hundreds of

millions of dollars of credit and additional f financing to known uncreditworthy customers so that

they could purchase Nortel products that they normally could not afford, thereby generating or

manufacturing questionable revenues for Nortel .

9 . Second, Nortel used a variety of other means to improperly recognize and report

revenues :

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(a) Nortel pressured customers to purchase unwanted or unneeded productsthat were likely to be returned ;

(b) Nortel improperly "pulled forward" hundreds of millions, if not billions, ofdollars in revenues from 2001-2003 into the third and fourth quarters of 2000 inorder to bolster or seemingly meet the Company's aggressive forecasted financialresults ;

(c) Nortel improperly recognized revenues based upon letters of intent insteadof its general practice of requiring a formal purchase order ;

(d) Nortel improperly recognized revenue on the shipment of products that itknew would be returned or exchanged ; and

(e) Nortel improperly recognized revenue prior to the expiration of the date bywhich customers were permitted to return product .

10 . Third, Nortel failed to account or sufficiently rese rve for hundreds of millions of

dollars of highly questionable or uncollectible receivables that were generated by the improper

financial manipulations briefly described above. As discussed below, in addition to extending

hundreds of millions, if not billions, of dollars to uncreditworthy customers to enable them t o

purchase Nortel products, Nortel provided these same customers with huge "working capital "

loans, to provide them with funds to finance their ongoing business operations . These loans

carried significant risk because they were not secured by products and the customers to which the

loans were extended were experiencing a precipitous decline in their businesses as a result of th e

negative market conditions . As a result, after the end of the Class Period, Nortel conceded as

much by drastically increasing its reserve for collectibles by hundreds of millions of dollars o n

drastically declining revenues .

11 . Fourth, when repossessing No rtel products from vendor-financed customers who

had defaulted on their credit agreements with Nortel, for purposes of inventory valuation ,

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defendants improperly failed to take a charge against earnings to account for the fact that th e

value of the products had deteriorated substantially below cost because the products were use d

and, in some cases, had been rendered obsolete by new technology.

12. Fifth, when the deterioration of the Internet sector, Nortel's key customer base,

evolved from a severe contraction to a genuine collapse in mid - to late-2000, Nortel deliberately

failed to write down the value (goodwill) of four of its recent acquisitions which similarly

suffered substantial declines in value that paralleled the deteriorating Internet and

telecommunications sectors . Instead , Nortel delayed taking any write-off for any amount fo r

approximately an entire year until it wrote off approximately $12.4 billion at one time in the

second quarter of 2001, after the end of the Class Period . Astoundingly, the combined purchase

price of these four acquisitions was approximately $17 billion, meaning that in the space of a

single quarter (i .e . between the first and second quarters of 2001), four of Nortel's recent

acquisitions lost approximately 75% of their value, when obviously, losses of that magnitud e

were spread out over an extended period of time . The $12.4 billion write-off, one of the largest

in history, was taken at one time as if all of this damage occurred in the space of one quarter ,

which obviously was not the case .

13 . The basis of Lead Plaintiff s allegations that defendants knew (or recklessly failed

to know) at the time that they made materially false and misleading representations relating t o

Nortel's third quarter and year end 2000 reported financial results and projections of futur e

results, that the statements were in fact false in large part derives from the numerous interview s

of former high level Nortel employees identified in the complaint . These employees admitted

that they were involved in and knew that the conduct that they engaged in, oftentimes at th e

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direction of their superiors, would inflate Nortel's reported revenues and earnings so that Nortel

could meet the previously-issued projections that the investment community was expecting .

14 . Norte] and the Individual Defendants were strongly motivated to perpetrate this

fraud for several reasons. The fraud was necessary to allow Nortel to continue its strategy of

acquiring leading-edge telecommunications companies using its increasingly valuable highly-

priced shares as currency . By no later than 1999, Nortel had embarked upon a business strategy

of aggressively and regularly acquiring other telecommunications companies . These companies

were developing potentially leading-edge products that could be integrated into, and thereb y

enhance , Nortel 's product offe rings and give Nortel a competitive edge . Most of these

acquisitions were made with Nortel stock which, in 1999 and early 2000, reached increasingly

higher levels and became a convenient and readily available currency to consummate suc h

transactions . However, Nortel's appetite for more and larger deals reaching into the billions of

dollars necessitated maintaining its stock price at the lofty levels that had been achieved during

the good times when the Internet and telecommunications sectors generated substantial deman d

for Nortel' s products .

15. Indeed, during the Class Period, using $2 .5 billion of Nortel's artificially inflate d

stock as currency, defendants negotiated and completed perhaps Nortel's most importan t

acquisition to date -- 980 NPLC, JDS Uniphase's Zurich , Switzerland-based subsidiary and

related assets in New York . Nortel's acquisition of 980 NPLC was critical to the future succes s

of the Company's optical business . Thus, when Nortel issued a press release on February 6, 200 1

announcing a "definitive agreement" for the purchase of the JDS subsidiary, securities analyst s

and the financial press immediately commented on the significance of the acquisition to Nortel' s

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business . For example, a February 6, 2001 C%Net Tech News story described the technology

Nortel would acquire as, "a technology that is becoming more essential in creating fiber-opti c

networks ." In addition, in a February 6, 200 ]L Reuters story, Jim Liang, an analyst at WR

Hambrecht & Co . was quoted as follows :

With Nortel's vision of spinning out its optical componentbusiness sometime this year, this acquisition of the 980 pump chipbusiness really gives them a key technology that's missing in their

portfolio . [Emphasis added . ]

16 . Thus, the acquisition of 980 NPLC : (i) was one of Nortel's most impo rtant

acquisitions; (ii) was negotiated by defendants during the Class Period ; (iii) was paid for using

billions of dollars worth of Nortel's artificially inflated common stock ; and (iv) was complete d

on February 13, 2001, just two days before the Company disclosed its true financial condition .

17. Defendants were further motivated to maintain Nortel's stock price at artificiall y

inflated levels in order to facilitate a $1 .5 billion bond offering completed just days before the

bombshell February 15, 2001 announcement which caused Nortel's stock price to plummet .

There is no question that Nortel could not have completed the $1 .5 billion offering at the prices

at which the bonds were sold if defendants had made a full disclosure of Nortel's adverse

financial developments prior to the bond offering .

18 . On February 15, 2001, at 4 :03 p.m., just after the close of trading on the Ne w

York Stock Exchange, defendants issued a press release over the Business Wire , suddenly and

dramatically lowering the Company's guidance for the first quarter and fiscal year 2001 . The

market was stunned by this announcement, which dramatically reduced the Company's forecas t

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for sales and earnings less than one month after defendants had provided a bullish and market-

calming assessment of its 2001 revenue and earnings prospects .

19. The reaction in the marketplace was swift and punitive . Following the February

15, 2001 press release, Nortel's stock price plunged 34% from its $29 .75 closing price on

February 15, 2001 to trade as low as $19 .00 per share on February 16, 2001 , on enormous

trading volume in excess of 166 million shares, approximately five times the average dail y

volume during that period .

20. The average daily closing price in the 90-day period beginning February 15, 200 1

was $16 .47. Nortel's stock price has never recovered , trading as low as $4 . 98 and closing at

$7 .47 on December 3, 2001 .

21 . Despite the fact that, throughout the Class Period, defendants projected 30-35%

revenue growth in 2001, the significant contraction of the Inte rnet and telecommunications

sectors in the second half of 2000, together with the fact that defendants had cannibalized much

of Nortel's 2001 revenues in order to artificially boost Nortel' s reported financial results for the

third and fourth quarters of 2000, caused the Company's reported revenues in the first thre e

quarters of 2001 to be substantially below what was reported for the same period in 2000 :

Revenues

(Quarterly Perio dEnding March 31)

Revenue s

(Quarterly Perio d

Ending June 30 )

Revenue s

(Quarterly Period

Ending Sept . 30 )

2000 Revenues $6.32 billion $7.82 billion $6.726 billion

2001 Revenues $6 .18 billion $4.61 billion $3.694 billion

% Change -2% -41% -45%

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JURISDICTION AND VENUE

22. The claims alleged herein arise under Sections 10(b) and 20(a) of the Securities

Exchange Act of 1934 (the "Exchange Act"), 15 U.S.C. §§ 78j (b) and 78t(a), and Rule lOb-5, 1 7

C.F.R. § 240 . 10b-5,promulgated thereunder.

23 . This Court has jurisdiction over the subject matter of this action pursuant to

Section 27 of the Exchange Act, 15 U .S .C. § 78aa , and 28 U.S .C . § 1331 .

24. Venue is proper in this District pursuant to Section 27 of the Exchange Act and 28

U.S .C . § 1391 (b) and (c) . The defendants transact business in this Dist rict, and many of the act s

and transactions constituting the violations of law alleged herein, including the dissemination o f

materially false and misleading statements to the investing public, occurred in this District . In

addition, defendants made no objection to the consolidation of this action in this District .

25 . In connection with the acts, transactions and conduct alleged herein, defendants ,

directly and indirectly, used the means and instrumentalities of interstate commerce, includin g

the United States mails and interstate telephone communications and the facilities of nationa l

securities exchanges and markets .

THE PARTIES

Lead Plaintiff

26 . Lead Plaintiff purchased a total of 1,654,200 shares of Nortel common stock o n

the New York Stock Exchange and the Toronto Stock Exchange at art ificially inflated p rices

during the Class Period and has been damaged thereby. Lead Plaintiff, an institutional investor

located at I Adelaide Street , Toronto, Ontari o , M5C 3A7, is a pension trust which is responsible

for the administration and management of a pension plan which provides pension benefits for

employees of the Province of Ontario . The pension fund has more than 70,000 members and

pensioners and has over $10 billion (CDN) under management .

27. A copy of the cert ification of Lead Plaintiff, identifying its transactions in Nortel

Securities during the relevant time, is attached hereto as Exhibit A and is incorporated by

reference herein .

Defendants

28. Defendant No rtel is a Canadian corporation with its executive offices an d

principal place of business located at 8200 Dixie Road, Brampton, Ontario, Canada L6T 5P6 .

Nortel is a leading global supplier of networking solutions and services that support the Internet

and other public and private data, voice, and video networks using wireless and wireline

technologies . The Company's business consists of the design, manufacture, marketing, sale,

financing, installation, servicing, and support of its networking solutions and services. In recent

years, the Company has begun to focus its business on the following areas : Optical Internet,

Wireless Internet, Local Internet, eBusiness, and Personal Internet . During the Class Period,

Nortel's common stock was actively traded on the New York Stock Exchange, an efficient

market, under the symbol "NT ." During that period, Nortel's common stock was also actively

traded on the Toronto Stock Exchange, also an efficient market .

29. Defendant John Andrew Roth ("Roth") was, during the Class Period, Nortel's

Chief Executive Officer ("CEO"), President and a Director of the Company . During the Class

Period, Roth was quoted frequently in the news media, in press releases and in other publicly

disseminated materials .

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30. Defendant Clarence Chandran ("Chandran") was, during the Class Period, th e

Chief Operating Officer ("COO") ofNortel. In early 2001 , Chandran was expected by many at

Nortel to be the logical choice to replace Roth as CEO upon Roth's anticipated resignation late r

that year . In the Spring of 2001, however, Chandran resigned abruptly from Nortel even thoug h

no successor COO had been put in place .

31 . Defendant Frank Dunn ("Dunn") was, during the Class Period, the Chief Financia l

Officer ("CFO") of Nortel . Dunn signed the Company's materially false and misleadin g

quarterly report filed with the Secu rities and Exchange Commission ("SEC") on November 7 ,

2000 (for the period ending September 30, 2000). Dunn is Nortel's current President and Chief

Executive Officer.

32 . Defendants Roth, Chandran and Dunn are collectively referred to herein as the

"Individual Defendants ." During the Class Period, the Individual Defendants, as officers of the

Company, were authorized to speak and spoke on behalf of the Company to investors,

shareholders, analysts and reporters .

33 . The Individual Defendants , as officers of the Company, are controlling persons of

the Company within the meaning of Section 20(a) of the Exchange Act . By reason of thei r

positions with the Company, they were able to and did, directly or indirectly, in whole or i n

material part, control the content of public statements issued by or on behalf of the Company .

They participated in and approved the issuance of such statements made throughout the Clas s

Period, including the materially false and misleading statements and omissions identified herein .

34 . By reason of their positions with the Company, the Individual Defendants ha d

access to internal Company documents, reports and other information, including the adverse ,

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non-public information concerning the Company's sales, services, financial condition, an d

prospects, and attended management and/or board of directors meetings . As a result of the

foregoing, they were responsible for the truthfulness and accuracy of the Company's publi c

statements described herein and knew or recklessly disregarded the falsity thereof .

35. Nortel, and the Individual Defendants, as officers of a publicly-held company, had

a duty to and failed promptly to disseminate truthful and accurate information with respect t o

Nortel and to promptly correct any public statements issued by or on behalf of the Company

which had become false and misleading .

36 . Each of the defendants knew that the misleading statements and omissions

complained of herein would adversely affect the integrity of the market for the Company's stoc k

and options and would cause the price of those securities to become artificially inflated or

distorted. Each of the defendants acted knowingly or in such a manner as to constitute a frau d

and deceit upon Lead Plaintiff and the other members of the Class .

37. Defendants are liable, jointly and severally, as direct participants in and co-

conspirators of, the wrongs complained of herein .

CLASS ACTION ALLEGATION S

38 . Lead Plaintiff brings this action as a class action pursuant to Federal Rule of Civi l

Procedure 23(a) and (b)(3) . The Class is defined as all persons and entities who, during the

period October 24, 2000 and continuing through and including February 15, 2001 (the "Clas s

Period"), purchased Nortel common stock or call options or sold Nortel put options (collectively ,

"Nortel Securities"), and who suffered damages thereby (the "Class"), including, but not limited

to, those persons who traded in Nortel Securities on the New York Stock Exchange and/or the

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Toronto Stock Exchange . Excluded from the Class are the defendants, members of the

Individual Defendants' families, any entity in which any defendant has a controlling interest or i s

a parent or subsidiary of or is controlled by the Company, and the officers , directors, affiliates ,

legal representatives, heirs, predecessors, successors or assigns of any of the defendants .

39. The members of the Class are so numerous that joinder of all members i s

impracticable . While the exact number of Class members is unknown to Lead Plaintiff at thi s

time and can be ascertained only through appropriate discovery, Lead Plaintiff believes there are,

at a minimum, thousands of members of the Class who purchased Nortel common stock durin g

the Class Period. As of September 30, 2000, the Company had 3,006,967,918 shares o f

common stock outstanding .

40. Common questions of law and. fact exist as to all members of the Class an d

predominate over any questions affecting solely individual members of the Class . Among the

questions of law and fact common to the Class are :

(a) whether the federal securities laws were violated by defendants' acts asalleged herein ;

(b) whether Nortel issued false and misleading statements during the ClassPeriod;

(c) whether the Individual Defendants caused Nortel to issue false andmisleading statements during the Class Period ;

(d) whether defendants acted knowingly or recklessly in issuing false and

misleading statements ;

(e) whether the market prices of Nortel common stock and options during theClass Period were artificially inflated or distorted because of defendants' conductcomplained of herein ; and

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(f) whether the members of the Class have sustained damages and, if so, whatis the proper measure of damages .

41 . Lead Plaintiffs claims are typical of the claims of the members of the Class as

Lead Plaintiff and other members of the Class sustained damages arising out of defendants '

wrongful conduct in violation of the federal securities laws as alleged herein . Lead Plaintiff, in

transacting in Nortel Securities during the relevant time period, relied upon the integrity of

publicly available information on Nortel . Attached hereto as Exhibit B are verification letters

from Lead Plaintiffs investment advisors indicating that Lead Plaintiffs trades in Nortel

Securities were based on publicly available information and were otherwise typical .

42. Lead Plaintiff has and will fairly and adequately protect the interests of the

members of the Class . Lead Plaintiff is ready, willing and able to serve as a representative of the

Class in this litigation, including providing testimony at deposition and/or trial if necessary, an d

has taken significant steps demonstrating this commitment . Lead Plaintiff has executed a

certification (attached as Exhibit A hereto) and declaration (attached as Exhibit C hereto)

expressing its interest and credentials in participating as a class representative in this action an d

Lead Plaintiffs Board of Trustees passed a resolution authorizing Lead Plaintiff to take the role

and responsibility of Lead Plaintiff and class representative . In addition, Lead Plaintiff has

retained qualified counsel to represent all members of the Class in this action . Lead Plaintiff has

no interests antagonistic to or in conflict with those of the Class .

43 . A class action is superior to other available methods for the fair and efficient

adjudication of the controversy since joinder of all members of the Class is impracticable .

Furthermore, because the damages suffered by the individual Class members may be relativel y

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small, the expense and burden of individual litigation make it impracticable for the Clas s

members individually to redress the wrongs done to them. There will be no difficulty in th e

management of this action as a class action .

BACKGROUND ALLEGATION S

The Rise And Fall Of TheInternet and Telecommunications Sectors

44. From 1999 through early 2000, the Internet and telecommunications sectors

became very hot . Many Internet-related companies that were developing leading-edge product s

were able to attract significant investment capital and not long after launch an initial publi c

offering ("IPO") . These IPOs added many more millions of dollars to the corporate coffers that

the companies might spend on Internet- and other telecommunications-related products such a s

those sold by Norte], Cisco and Lucent . Accordingly, from 1999 through at least early 2000, the

United States economy experienced substantial and rapid growth in the Internet an d

telecommunications sectors .

45 . Starting in early- to mid-2000, the Internet sector contracted significantly, thereby

severely constricting continued access to capital and demand for products to maintain and furthe r

develop what had been a rapidly expanding and growing Internet and telecommunication s

infrastructure. It did not take long for Nortel and other companies operating in th e

telecommunications sector to determine that the Internet growth engine was severely strained an d

that most companies involved in this sector would likely be materially and negatively impacte d

by the dramatic contraction and slowdown in growth . Accordingly, even large "blue chip "

companies like Cisco and Lucent, direct competitors of Nortel, were forced to admit that the y

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were being materially and adversely affected by the dramatic decline in the Internet sector, an d

the prices of Cisco and Lucent shares were substantially reduced starting in mid-2000 .

Nortel's Strategy To Acquire Companies WithLeading-Edge Products Depended Upon Maintaining

Its Highly-Priced Shares To Purchase Other Companie s

46. No later than in 1999, Nortel embarked upon an acquisition strategy that wa s

highly dependent upon maintaining a high and increasing stock price in order to make its shares

attractive as currency to purchase other companies . In order to compete in the highly

competitive telecommunications industry, instead of developing its own technology internally ,

defendants made a business decision long before the start of the Class Period to further Nortel' s

technological advancement by acquiring other communications, Internet and Internet-related

companies that were in the process of researching and developing new technologies an d

products . Prior to and during the Class Period (October 24, 2000 through February 15, 2001), i n

a span of just fifteen months, Nortel acquired the following companies, issuing the followin g

amounts of Nortel stock :

Company Acquired Closing Date No. Shares Issued/ Stock Purchas e

No. Stock Options Price at Price

Closing

Periphonics Corporation 11/12/99 16.8 million shares $36.281 $481 million

1 .9 million options

Dimension Enterprises, 1/24/00 $37 million cash, plus $50.00 $52 million

Inc . other consideration

Qtera Corporation 1/28/00 56.4 million shares $45 .9375 $3.004 billion

10.4 million options (1 . 9

warrants )

Clarify Inc . 3/16/00 63 .4 million shares $59 .875 $2.114 billion17 .6 million option s

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Company Acquired Closing Date No. Shares Issued/ Stock Purchas e

No. Stock Options Price at Price

Closing

Promatory 3/23/00 13 .9 million shares $68.625 $771 million

Communications, Inc . 1 .3 million options

Photonic Technologies, 5/12/00 $32 million (cash) $51 .6875 $32 millionInc .

Xros, Inc . 6/2/00 52 .9 million shares $60.0625 $3 .227 billion2.1 million options

CoreTek, Inc . 6/23/00 14 .5 million shares $65 .875 $1 .203 billion3 .4 million options

Architel Systems 7/1/00 6.0 million shares $68.2344 $472 million

Corporations 0.8 million options

EPiCON. Inc . 9/5/00 4.3 million shares $80 .75 $284 million1 .3 million options

Alteon WebSystems, Inc . 10/5/00 81 .9 million shares $66 .75 $8.054 billion29.0 million options

Sonoma Systems 10/19/00 4 .8 million shares $65 .625 $462 million1 .3 million option s

980 NPLC Business 2/13/01 65.7 million shares $29.75 $2.818 billion(JDS Uniphase (two days $500 million in deferre d

Subsidiary) before end of consideration paid byClass Period) 1 :2/31/03 in commo n

shares

47 . As noted above, the vast majority of acquisitions were consummated through th e

issuance of Nortel common stock (only one, Photonic, did not include Nortel shares ) and, in

conjunction with the Company's stock price increasing, the acquisitions became more frequent .

Thus, it was crucial for defendants to continue to meet or beat forecasted levels of revenues i n

order to maintain Nortel's stock price at a high level, providing defendants with a readily

available currency to continue Nortel's acquisition spree . On January 26, 2000, David Olive o f

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the National Post commented on Nortel's acquisition spree, including its $9 .1 billion acquisitio n

of Bay Networks in 1998:

Counting the Bay takeover, Mr. Roth has spent $14 . 1 billion (allfigures in U .S. dollars) over the past 17 months to acquire seven ofthe hottest companies in convergence -- the most aggressivetakeover campaign ever by a Canadian company . As the marketbegan to take notice of the pionee ring technologies Mr. Roth wasaccumulating , Nortel stock shot into the stratosphere , giving Mr.Roth the cash to pay for more takeovers . [Emphasis added . ]

48 . By the start of the Class Period (October 24, 2000), the market for th e

technologies and products of these acquired companies had already been contracting for severa l

months, thereby reducing the anticipated revenues from each of the acquired companies and ,

consequently, reducing the overall value of those entities .

49. The overall value of and expected revenues from the acquired companies wa s

further negatively impacted by the fact that the acquired products were not as fully developed as

Nortel had expected and/or the engineers of the acquired companies depa rted after the

acquisition, leaving Nortel with partially developed products and without the engineering know-

how to complete the products . For example, according to No rtel's Form I 0-Q for the quarterly

period ended March 31, 2000, at the time Nortel's acquisition of Qtera was completed in January

2000, defendants purportedly estimated that the project was "56% complete" and that produc t

revenues would begin "by the end of 2000." In the months following the Qtera acquisition ,

significant and protracted problems with the development of the technology supporting tha t

project caused material delays in its completion . The Company ultimately was forced to write

down billions of dollars in goodwill associated with the Qtera acquisition and certain other

acquisitions .

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50. Important deals were lost as a result of complications and material delays with the

development of the acquired products . For example , Scott Gibbs, Vice President -- Emerging

Business Solutions, who reported indirectly to defendant Chandran, previously had forecas t

closing a $50 million call center relationship management deal with Verizon in September or

October 2000 . Nortel lost that contract to Siebel, a competitor, because it could not develop the

"thin client software" as part of the package (a feature which allows the user to remotely access a

program on a laptop computer) . Nortel lost that contract because it would be unable to produc e

this technology until mid-2002 .

51 . In the second quarter of 2000, an "emerging business" sales group was formed a t

Nortel to focus on improving the sales of new products and technology from recent acquisitions .

The group of approximately 20 salespeople was headed by Scott Gibbs . Former Nortel

salespersons who worked in the Company's "emerging business" group recall that they found it

virtually impossible to sell the new products acquired as a result of the acquisitions of

Periphonics, Alteon WebSystems, Architel Systems, and Clarify, because they were completel y

unfamiliar with the new technology, had received no education or training about the ne w

technology and were told by management to "'visit the website" to learn about the new product s

they were supposed to sell . One former member of that sales group said that she had "almost n o

interaction " with former employees of Clarify, despite the fact the she was being asked to sel l

newly acquired Clarify products .

52. Throughout 2000, Nortel also faced significant difficulties integrating newl y

acquired companies into Nortel's business . A former Nortel employee who was responsible fo r

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integrating documentation and training functions for companies that were acquired by Nortel

during 2000 described the Company' s integration policies as "100 roadmaps to disaster. "

53 . Nevertheless, in an April 26, 2000 interview with David Faber of CNBC's

Squawk Box, defendant Roth dismissed the notion that the Company's acquisitions strategy wa s

too aggressive :

David Faber: Do you worry that you might bite off more than youcan chew? Kyros, as I understand, won't start testing until thissummer, and these deals have added up to $6 .5 billion, just Kyrosand Qtera, there's-the Architel Systems all stock deal at $395million, is it just perhaps too much too quickly ?

John Roth : I don't think so . We have gradually increased our pace .We did a number -- 1997 we started with a couple . In 1998 weramped it up, last year we had even more . This rate now, this pacehas been a peak for us. But they are smaller units and they arefairly easy to digest .

54. As discussed more fully below-, however, Nortel's continued aggressive

acquisition campaign in the face of a deteriorating U . S . economy led to the ultimate (and belated )

write-down of $12 .4 billion in goodwill associated with certain of the acquisitions .

Nortel Extends Vendor Financing To UncreditworthyCustomers In An Effort To Boost Reported Sales Revenues

55. Prior to and during the Class Period , Nortel was attempting to sell to the hottest

part of the "New Economy" -- the Internet Service Providers ("ISPs") and also to smaller "loca l

exchange " telecommunications companies, or CLECs. While these companies offered enormou s

growth opportunities, they suffered a problem common to start-ups -- lack of capital . Attempting

to take advantage of this dearth of capital, Nortel directly and/or indirectly extended hundreds o f

millions of dollars in trade financing ("vendor financing") to dozens of customers and

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prospective customers to provide them with the financing necessary to purchase Nortel products .

Nortel's vendor-financing deals were typically consummated, directly or indirectly, throug h

Northern Telecom Financial Corporation . Without the extension of credit and/or infusions of

cash from Nortel, these companies would not have had the funds sufficient to make the purchase s

of Nortel products that they did, and, in many cases, were so cash-poor that they were on th e

verge of insolvency at the time they purchased Nortel products .

56. In addition to providing financing for the purchase of its product, Nortel also

made huge unsecured "working capital" loans to these companies (often equal up to 30% of th e

product purchase loans) to provide them with funding to finance their ongoing busines s

operations, even though these customers were unable to create or present credible business plans .

These unsecured loans carried an extremely high risk of loss for Nortel and were not adequatel y

reserved for during the Class Period .

57. Defendants knew at the time that Nortel's products were shipped to many of thes e

vendor-financed customers that the customers were using as much as 100% borrowed funds t o

pay for the products , that the customers posed an extremely high credit risk, and that the credi t

would likely never be repaid in full or even in substantial part . Moreover, because Nortel loane d

funds in excess of the amounts required to purchase the equipment, Nortel frequently was pai d

back with funds loaned for working capital purposes . As the economy weakened throughout the

Class Period, defendants' vendor-financing activities became even riskier, because , as their

customers' businesses suffered, there was an increased likelihood that those customers would b e

unable to repay the loans in full or even in substantial part .

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58 . Nevertheless, defendants continued to extend heavy vendor financing to known

high credit risks so that Nortel could book revenues from the product sales while failing t o

disclose these risks to the investing public . In fact, according to former Nortel employees, since

defendants' primary, goal was to increase Nortel's reported revenues so that the Company coul d

meet sales projections for each quarter, defendants: (i) purposefully sought to consummate

financing deals with financially weakened customers so that defendants could dictate whic h

products, and what quantities of those products, the customers would purchase ; (ii) purposefully

failed to perform the necessary due diligence to determine how creditworthy the customers were ;

and (iii) in certain instances, extended significantly more in vendor financing than the customer

had requested to lure the customer away from Nortel's competitors , such as Cisco , Lucent and

Ciena .

59. According to a former Nortel Sales Engineer, in the third and fourth quarters o f

2000, a local exchange carrier customer of Nortel, experiencing the kinds of problems describe d

above, was extended approximately $25 million more in financing than was requested in order t o

"woo" that customer away from contracting with Ciena . The former Nortel employee further

recalled that Nortel began shipping products to that customer in October 2000, even though th e

deal would not be finalized until after January 2001 . Moreover, as more specifically alleged

below, Nortel improperly booked revenues and paid commissions to its sales staff when the

product was shipped to the vendor-financed customer .

60. According to public sources , by the end of 2000, Nortel had extended more than

$1 billion in vendor financing to dozens of companies including, among others :

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Company Business Financin g

Leap Wireless Wireless Comm . $525 million

Impsat Satellite (Latin Amer .) $297 million

Savvis ISP $235 million

Viatel Broadband Provider $150 million

Nettel Local Access $100 million

Illinois PCS Wireless Comm. $48 million

TriVergent Local Access $45 million

Eschelon Telecom Local access $45 million

Universal Broadband ISP $37 million

Telergy Bandwith Wholesaler $25 million

61 . By October 24, 2000, the start of the Class Period, many of Nortel's vendor-

financed customers were already beginning to default on payments and/or face insolvency . For

example, on September 28, 2000, Nettel Corporation, a Nortel customer to which approximatel y

$100 million in vendor-financing had been extended , filed a voluntary petition under Chapter 1 1

with the United States Bankruptcy Court for the District of Columbia . At the time of the

Petition, Nortel was owed in excess of $73 million by Nettel . On October 23, 2000 the case was

converted to a Chapter 7 proceeding . Other vendor-financed Nortel customers also ultimately

filed for bankruptcy protection, including Viatel and Telergy .

62. In an October 25, 2000 issue of the Financial Times, shortly after Nortel's $15 0

million vendor-financing deal with Viatel, an analyst raising questions as to the solvency o f

Viatel, even after the $150 million in financing with Nortel, was quoted as follows : "[Viatel] has

a net debt of about $1 .3 [billion] and a quarterly cash burn rate of $341 [million] . Set against

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these figures, $150 [million] is pretty insignificant [to avoid a precarious financial condition] . "

As reported by Bloomberg on September 7, 2001, after the end of the Class Period , defendant

Roth admitted, "[a] lot of my customers are in Chapter 11 (bankruptcy proceedings) or worse . "

63 . That Nortel's upper management had actual knowledge of or recklessly

disregarded the financial fragility of the Company's vendor-financed customers throughout th e

Class Period is based on the following : (i) as noted above, certain of those customers wer e

already obviously insolvent ; (ii) defendants actively sought out financially desperate companies ;

and (iii) according to a former senior business manager at the Company, Nortel management

maintained a list of "flagged" vendor-financed customers that were on the verge of insolvency .

64. While defendants were consummating risky vendor financing deals in an effo rt to

boost reported "revenues" throughout the Class Period, they repeatedly and falsely reassured th e

market that they were extending such financing to "blue chip" companies and that the risk s

involved were minimal . For example, in a November 30, 2000 interview with CNBC's Maria

Bartiromo and David Faber, at a time when hundreds of millions of dollars in risky credit alread y

had been extended, defendant Roth falsely reassured investors with regard to the credit ris k

associated with Nortel's escalating vendor financing activities :

David Faber : Mr. Roth, another concern in your arena for bigplayers like your own is vendor financing. How active are you ingetting vendor financing? Are you concerned at all about havingextend[ed] credit to some emerging telecom players that may notbe able to pay you back with buying [your] equipment?

John Roth : No . We have got some really blue chip people wefinance . . . We are not concerned at all . [Emphasis added . ]

-26-

65. As discussed more fully below, through Nortel' s vendor-financed sales ,

defendants, in violation of generally accepted accounting principles and the federal securitie s

laws, were able to materially misstate the Company's financial results each quarter reporte d

during the Class Period (i.e ., the third and fourth quarters of 2000) by, among other things : (i )

recording revenues on the sale of products in situations where Nortel had extended credit o n

100% of the purchase price to customers whom defendants knew (or recklessly disregarded )

were not creditworthy and would likely never pay for the products ; (ii) failing adequately to

reserve for vendor financing loans Nortel had made to uncreditworthy customers who m

defendants knew (or recklessly disregarded) likely would be unable to pay for their purchases in

whole or in substantial part ; (iii) when extending vendor-financing to a customer to purchas e

Nortel products, requiring the buyer to purchase, through a distributor or other intermediary ,

significant additional products the buyer did not need and did not want and where the risk of

return was apparent and material ; and (iv) when reclaiming possession of Nortel products after

vendor-financed customers defaulted on credit payments, failing to take a charge against earning s

to account for the fact that the value of the products had diminished substantially below cos t

because they were used and, in certain cases, were rendered obsolete by new technology .

-27-

SUBSTANTIVE ALLEGATION S

Defendants ' Materially False AndMisleading Statements During the Class Perio d

Defendants Report Third Quarter 2000 Financial Results,Characterize The Third Quarter As "Strong Growth" andProvide Aggressive Guidance for Year-End 2000 and 2001

66. The Class Period commences on October 24, 2000. On that date, defendants, as a

group, issued a press release reporting Nortel's financial results for the quarterly period ending

September 30, 2000. The Company reported third quarter revenues of $7 .31 billion, up 42%

from the same period in 1999 . The Company also reported net earnings from operations of $574

million, or $0 .18 per share on a diluted basis, compared to $3 14 million, or $0 .11 per share on a

diluted basis, for the same period in 1999, "art increase in earnings per share of operations of 64

percent ." In the press release, defendant Roth commented positively on the reported financial

results stating, in pertinent part :

We are extremely pleased with the strong growth in the quarterwhich reflected our continued strength and leadership in the keygrowth areas of Optical Internet, Wireless Internet, Local Internetand eBusiness Solutions . . . Carriers and providers around theworld continued the drive to provide a broad range of wireless,internet and eBusiness services to their customers . Leading thegrowth again this quarter, revenues for our Optical InternetSolutions grew nearly 90% in the quarter compared to the sameperiod last year . [Emphasis added . ]

67 . With respect to defendants ' stated expectations for growth in revenues and EP S

for year-end 2000, the press release stated :

Based on the momentum we have experienced during the first ninemonths and the strong order backlog, we continue to expect thatourpercentage growth in 2000 over 1999 will be in the low 40's .Consistent with our overall expectations for the year is an

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expectation that Optical Internet solutions revenues will exceedUS$10 billion . We now expect however, that our percentagegrowth in EPS from operations in 2000 compared with 1999 willalso be in the low 40's, up from our previously stated expectationwhich was in the high 30's. [Emphasis added . ]

68. The October 24, 2000 statements also included aggressive guidance with respect

to the Company's growth prospects for 2001 :

Looking forward to 2001 , we expect the overall market to grow inexcess of20 percent . Given our strong market position andindustry leading network solutions, we expect to continue to growsignificantly faster than the market, with anticipated growth inrevenues and EPS from operations in the 30 to 35 percent range .[Emphasis added . ]

69. Also on October 24, 2000, defendants held a conference call with securitie s

analysts to review the Company's reported third quarter 2000 financial results . During the call,

defendants reiterated the financial results reported in the October 24, 2000 press release an d

answered specific questions concerning the Company's reported results and financial

performance.

70. As discussed in detail below, by engaging in "earnings management" through a

variety of accounting improprieties, defendants were able to repo rt significant growth in revenues

and earnings for the 2000 third quarter , despite the fact that the demand for Nortel's products ha d

declined substantially during that period as a result of a contraction of the Internet an d

telecommunications sectors . Had defendants not engaged in these accounting manipulations ,

Nortel's revenues and earnings would have been materially lower than what was reported . Thus ,

defendants' fraudulent activities acted to cushion the impact of the significant negative marke t

changes Nortel had experienced .

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71 . Despite a substantial $7 .3 billion in reported sales and an impressive 42% in

reported revenue growth for the third quarter of 2000, Nortel's third quarter financial results wer e

below analysts' expectations . For example, as reported by analyst P . Sagawa of Sanford C .

Bernstein & Co., Inc. on October 25, 2000, Nortel's sales of $7.3 billion were $600 million

below expectations .

72. Thus, in addition to concealing the negative market conditions by materially

misstating the Company's third quarter financial results through the accounting manipulation s

described below, on the October 24, 2000 conference call with analysts, Nortel listed tw o

specific reasons for the revenue shortfall : a shortage of personnel to install and test its fiber-optic

products ; and a delay in orders from customers who opted to draw down inventories of

equipment they had already purchased .

73 . Based on the financial information and positive statements reported by defendants

in the October 24, 2000 press release and conference call, analysts maintained their buy

recommendations on Nortel . For example, on October 25, 2000, Josephthal analyst L . M. Harri s

seized on the reported third quarter results and defendants' positive guidance for year-end 2000 i n

maintaining his "buy" rating on No rtel :

We are retaining our Buy rating . Nortel's quarterly revenues roseby 42% year over year, and earnings per share grew by 64% .

Nortel's optical systems sales are now projected to grow by 20%from the June to the December quarter . For the year in total,optical systems sales are expected to grow by 125% to 135% from1999, and therefore exceed $10 billion . In August and September,Nortel's management had expressed the hope in press interview s

-30-

that Nortel's optical systems sales could approach $12 billion in2000 .

74 . Also maintaining a "buy" recommendation for Nortel, analyst W . Piecyk of

Painewebber Inc . accepted defendants' explanation for the high -- yet below some analysts '

expected -- sales , as reported on October 25, 2000 :

We do not consider this slowdown a long-term trend as customerinventory levels and product lead times should return to normal inthe next quarter . We expect optical to post nearly 120% growth in

2000 and 80% in 2001 .

75. On or about November 7, 2000, defendants filed a quarterly report on Form 10- Q

for the quarterly period ending September 30, 2000, reiterating the financial results detaile d

above and representing that the financial results were prepared in conformity with GAAP, an d

that they fairly presented the Company's financial position . The Form 10-Q, signed by defendant

Dunn, also represented that, "[iln the opinion of management, all adjustments necessary to effec t

a fair statement of the results for the periods presented have been made and all such adjustment s

are of a normal and recurring nature . "

76. The statements set forth at ¶¶ 66-69, 72 above were knowingly or recklessly fals e

and misleading when made because they misrepresented and/or omitted the following adverse

facts which then existed and the disclosure of which was necessary to make the statements mad e

not materially misleading :

(a) the Internet and telecommunications markets contracted significantlyduring the third quarter of 2000, causing Nortel to experience a substantial declinein the demand for its products :;

(b) the Company did not experience "strong growth" and "strong orderbacklog" in the third quarter, but rather experienced a material decline in thedemand for its products ;

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(c) Nortel had suffered a steady deterioration of sales and revenues in itsEnterprise Solutions Group, which historically has accounted for a significantportion of the Company's business ;

(d) defendants had received notice from several major Nortel customers thatorders would continue to decline throughout the fourth quarter and into 2001 ;

(e) defendants had been warned by several customers in Nortel's HighPerformance Optical Group that fourth quarter orders would be materiallyreduced;

(f) pursuant to Item 303 of Regulation S-K, 17 C . F.R. § 229 . 303, defendantshad an affirmative duty to report ( in the Management 's Discussion and Analysisof Financial Condition and Results of Operations section of Nortel's 2000 thirdquarter Form 10-Q) these adverse trends which were reasonably likely to effectNortel's sales, revenues or earnings ;

(g) defendants concealed these negative market conditions by engaging incertain accounting improprieties which acted to materially misstate the Company'sthird quarter results, as discussed in detail below ;

(h) as discussed below, the financial results reported for the third quarter of2000 were materially misstated and presented in violation of GAAP ;

(i) it was only as a result of these GAAP violations, which mate rially

cushioned the revenue and earnings miss , that Norte] was able to repo rtsubstantial growth for the third quarter 2000; and

(j) the third quarter revenue shortfall was the result of negative marketconditions and a decline in the demand for Nortel's products ; it was not caused bya "shortage of personnel" to install and test products, or a "delay" in orders, asdefendants represented .

77 . In addition, defendants' statements in the October 24, 2000 press release regarding

expected growth in revenues and earnings for 2000 ("in the low 40's") and 2001 ("in the 30 t o

35% range") were materially false and misleading when made, and were made without a

reasonable basis, because :

(a) defendants knew or recklessly disregarded that, because of a continuingcontracting market for Internet and telecommunications products, Nortel' s

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customers would continue to reduce their orders for Nortel products throughoutthe fourth quarter of 2000 and into 2001 ;

(b) defendants had been informed by major customers p rior to the close of the2000 third quarter that their orders in the fourth qua rter and throughout 2001would be significantly reduced ;

(c) the Company had not experienced "continued strong growth" becauseNortel's reported "growth" for the third quarter 2000 was materially inflated as aresult of the accounting improprieties alleged above ;

(d) defendants failed to disclose that such fou rth quarter 2000 results

(revenues of $8 .5 to $8 .8 billion and EPS of $0.26) could be met only ifdefendants were to engage in the GAAP violations discussed below, which

included the "pulling forward" of significant revenues from 2001 and future years;

(e) given the change in market conditions and representations from majorcustomers that orders in 2001 would be substantially reduced, defendants did notactually expect the overall market to grow "in excess of 20 percent" in 2001 ;

(f) defendants' guidance for 2001 (30-35% revenue growth) would be nearlyimpossible to achieve in light of the contracting Internet and telecommunicationssectors and the fact that defendants planned to improperly sacrifice a substantialportion of Nortel's 2001 revenues by pulling those revenues into 2000 ; and

(g) defendants' purported caution that the results predicted "may" differmaterially from actual results was wholly inadequate because defendants failed toidentify important and specific, factors which could cause such results to differ,including instead a boilerplate list of generic risks .

78 . Thus, to the extent that defendants' statements in the October 24, 2000 pres s

releases regarding expected growth in revenues and earnings for 2000 and 2001 are deemed to b e

forward-looking, they are not protected by the safe harbor provision of the Private Securitie s

Litigation Reform Act ("PSLRA"), because :

(a) such statements were material to investors ;

(b) defendants had actual knowledge that such statements were false because,in light of the then-existing market conditions, the projected results for 2000 couldbe achieved only if defendants were to engage in the accounting improprietie s

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discussed below, and the projected results for 2001 would be nearly impossible toachieve; and

(c) such statements were not accompanied by "meaningful cautionarylanguage . "

79. In addition, defendants ' oral statements on the October 24, 2000 conference call

regarding expected growth in revenues and earnings for 2000 and 2001 are not protected by th e

safe harbor provision of the PSLRA because :

(a) such statements were material to investors ;

(b) such statements were not identified as forward looking ;

(c) such statements were not accompanied by a caution that actual resultscould differ materially from those projected ;

(d) defendants failed to identify a readily available written documentcontaining information about factors which could cause actual results to differmaterially from those projected ; and

(e) defendants had actual knowledge that such statements were false because,in light of the then-existing market conditions, the projected results for 2000 couldbe achieved only if defendants were to engage in the accounting improprietiesdiscussed below, and the projected results for 2001 would be nearly impossible toachieve .

80. Throughout the third quarter, Nortel and the Individual Defendants wer e

repeatedly advised by sales representatives and managers that the sale of Nortel's products wa s

slowing down and contracting . According to a former manager in Nortel's Enterprise Solution s

Group, which accounts for a significant portion of Nortel's overall business, there was a "stead y

deterioration" in the group' s sales and revenues from July 2000 forward .

81 . According to a former Nortel Field Sales Representative, in August 2000 ,

executives at FairPoint, a Nortel "major account," informed the Field Sales Representative, wh o

-34-

obtained approval from defendant Chandran on deals with FairPoint, that its business was

deteriorating and that purchases in 2001 would be significantly less than in 2000 . The former

Field Sales Representative submitted to management by the end of the third quarter 2000 a 2001

forecast for the FairPoint account, which was revised downward substantially in light o f

FairPoint's weakened condition .

82 . Throughout the Class Period, Verizon was one of Nortel' s largest customers,

particularly in the area of fiber-optics . According to a former high-level Nortel executive on the

Verizon account, in September 2000, those Nortel senior executives responsible for the Verizon

account, including John Neville, Vice President of Team Verizon, met to discuss sales revenues

for the remainder of the year . At that meeting, Neville, who reported indirectly to defendan t

Chandran, demanded of those present that $1 .1 billion in Verizon Network Services Sales b e

recorded for the year 2000. At the September 2000 meeting, Neville was informed by senior

sales personnel that, given the then-existing market conditions, $1 .1 billion in revenues would

not be possible without improperly "pulling forward" and recording hundreds of millions of

dollars in revenues from 2001 through 2003 . According to former Nortel employees, "pullin g

forward" is the practice of recording and reporting revenues from the anticipated sales o f

products in later quarters into an earlier quarter .

83 . After consulting with people in Nortel' s finance department, Neville instructed

those present , including No rtel Vice Presidents , to pull forward into the third and fou rth quarters

of 2000 whatever amounts of revenues would be necessary to record $1 .1 billion in 2000

revenues. In addition, senior executives on the Verizon account informed management at th e

September meeting that there would be a "major shortfall" in 2001 as a result of the massive pul l

-35-

forward of revenues into 2000 . Moreover, prior to the close of the third quarter, Nortel senior

management had been informed by other major clients , including WorldCom and AT&T, that

orders in 2001 would be significantly reduced .

84 . According to a former Nortel director of corporate communications, also in

September 2000, Michael Fichtner, Vice President of Global Sales for Nortel 's High Performance

Optical Group, was warned by several of his customers that the "cash crunch" these customer s

were feeling as a result of the softening of the telecommunications industry would cause them to

continue to reduce orders for Nortel products throughout the fourth quarter . Based upo n

conversations with his customers in September 2000, Fichtner submitted to defendant Chandra n

his group's fourth quarter 2000 sales forecasts, which were significantly below what wa s

previously expected . According to the former Nortel director of corporate communications ,

Chandran thereafter demanded that Fichtner do whatever was necessary to "develop bigge r

numbers . "

85 . In addition , by October 2000, WorldCom, another major Nortel client , drastically

scaled back the majority of its business with Nortel as a result of excess inventories . A former

Site Team Leader on the WorldCom account recalled that "installation of WorldCom's Nortel

equipment came to a grinding halt" and new WorldCom projects were "failing to materialize . "

The former Nortel employee further recalled visiting WorldCom's California warehouses in the

third quarter of 2000 and observing "tremendous quantities" of Nortel product . Nortel

management was regularly provided with Equipment Inventory Reports for WorldCom and othe r

major Nortel customers.

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Nortel's Third Quarter 2000 Reported Financial Results WereMaterially Misstated In Violation of GAAP and SEC Reporting Rules

86. The financial results reported in the October 24, 2000 press release an d

conference call and in the Company's third quarter 2000 Form 10-Q were materially misstated .

Indeed, in order to conceal and temper the impact of the negative market changes on Nortel' s

business , defendants engaged in a variety of practices which caused Nortel's financial results for

the third quarter to be materially enhanced and misstated in violation of Generally Accepted

Accounting Principles ("GAAP") and SEC repo rting rules . Thus, the Company 's financial

statements were not prepared in conformity with GAAP, as the Form 10-Q portrayed .

87. GAAP are those principles recognized by the accounting profession as th e

conventions, rules and procedures necessary to define accepted accounting practices at a

part icular time . SEC Regulation S-X (17 C .F.R. § 210 . 4-01(a)(1)) states that financia l

statements filed with the SEC which are not prepared in compliance with GAAP are presumed to

be misleading and inaccurate, despite footnote or other disclosure . Regulation S-X requires that

interim financial statements must also comply with GAAP, with the exception that interim

financial statements need not include disclosures which would be duplicative of disclosure s

accompanying annu al financial statements . 17 C .F.R. § 210.10-01(a) .

Improper Revenue Recognitio n

88. In the third quarter of 2000, defendants materially inflated the Company' s

reported revenues, earnings and earnings per share by improperly recording and reportin g

revenues on shipments of products when Nortel extended credit on 100% of the sales price of the

product to the vendor-financed customers whom defendants knew to be uncreditworthy an d

-37-

unable to pay for the product . This practice, which also artificially inflated the Company's book-

to-bill ratio for the 2000 third quarter, violated GAAP in a number of respects .

89 . GAAP , as desc ribed by FASB Statement of Concepts ("Concepts") No. 5 ,

provides that the recognition of revenue should occur only where two fundamental conditions ar e

satisfied : the revenue has been earned ; and the amount is collectible . Concepts Statement No . 5 ,

$183-84. Moreover, Concepts Statement No . 5 generally provides that revenues should not be

recognized until they are : (i) realized or realizable; and (ii) earned . Concepts Statement No . 5 ,

¶ 83 . These conditions for revenue recognition ordinarily are met when assets or services ar e

exchanged for cash or claims to cash, and when the entity has substantially performed the

obligations which entitle it to the benefits represented by the revenue . Concepts Statement No .

5, ¶ 83 . GAAP also provides that profit is deemed to be realized when the collection of the sales

price is reasonably assured. Accounting Principles Board ("APB") Opinion No. 10, ¶ 12 .

90. Similarly, the SEC's Staff Accounting Bulletin ("SAB") No. 101, which sets fort h

the SEC Staffs views in applying GAAP to revenue recognition in financial statements, imposes

the same prerequisites to the recognition of revenues as does Concepts No . 5. According to

Nortel's Form 10-K for the fiscal year ended December 31, 2000, Nortel "adopted the

recommendations of Staff Accounting Bulletin 101 . . . effective January 1, 2000 . "

91 . In addition, because many of the networking systems sold to vendor-finance d

customers included a software component , those transactions were subject to the AICPA's

Statement of Position ("SOP") 97-2 (Software Revenue Recognition) . SOP 97-2 permits th e

recognition of revenues from the sale of software products only if the following criteria are met :

(i) persuasive evidence of an arrangement exists ; (ii) delivery has occurred ; (iii) the vendor's fee

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is fixed or determinable; and (iv) collectibility is probable . SOP 97-2, ¶ 8 (emphasis added) .

SOP 97-2 further provides that "any extended payment terms in a software licensing agreemen t

may indicate that the fee is not fixed and determinable ." SOP 97-2, ¶ 28 (emphasis in original) ;

see also SOP 97-2, ¶¶ 27, 29-30 .

92. As noted herein, in the 2000 third quarter, Nortel improperly recorded an d

reported hundreds of millions, if not billions, of dollars in revenues on sales to vendor-finance d

customers despite the fact that those customers were purchasing products based upon Nortel' s

extension of credit on virtually 100% of the purchase price and they likely would be financiall y

unable to pay Nortel in full or in substantial part for the products . Thus, the revenues from thos e

sales were not fixed and determinable and were known to be materially uncollectible, i .e.

collectibility was not probable .

93 . In engaging in these practices , defendants also caused Nortel to violate the

Company's own internal revenue recognition policies , which , according to Nortel's Form 10-K

for the fiscal year ended December 31, 2000, required that collection be "reasonably assured "

prior to recognition :

Revenues are recognized . . . upon shipment and when allsignificant contractual obligations have been satisfied andcollection is reasonably assured. Software revenues are generallyrecognized when delivered in accordance with all terms andconditions of the customer contracts, upon acceptance by thecustomer, and when collection is reasonably assured. [Emphasisadded. ]

94. In connection with making certain vendor-financed loans, defendants als o

improperly required customers to purchase significant quantities of additional product th e

customers informed Nortel they neither needed nor wanted, thereby materially inflating current

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period orders and increasing the risk of material returns . Thus, the revenue reported was no t

indicative of the true demand for Nortel's products du ring that quarter. This practice, which also

artificially inflated the Company's book-to-bill ratio in the 2000 third quarter, violated the

following fundamental accounting principles, among others :

(a) the principle that financial reporting should provide information that i s

useful to present and potential investors and creditors and other users in making rational

investment, credit and similar decisions (FASB Concept No . 1, ¶ 34);

(b) the principle that financial reporting should provide information about an

enterprise's financial performance during a period (FASB Concept No . 1, ¶ 42) ; and

(c) the principle that financial reporting should be reliable in that it represent s

what it purports to represent (FASB Concept No . 1, ¶¶ 58-59) .

95 . As a further GAAP violation , in accounting for inventories with respect to

reclaimed Nortel products from vendor-financed customers who had defaulted on their credi t

agreements with Nortel, defendants improperly failed to take a charge against earnings t o

account for the fact that the market value of such products had deteriorated substantially belo w

cost because, among other things, the products were used, prices had changed and, in some cases,

the products had been rendered obsolete by new technology. Accounting Research Bulleti n

("ARB") No . 43 provides , in pe rt inent part :

A departure from the cost basis of pricing the inventory is requiredwhen the utility of the goods is no longer as great as its cost .Where there is evidence that the utility of goods, in their disposalin the ordinary course of business, will be less than cost, whetherdue to physical deterioration, obsolescence, changes in price levels,or other causes, the difference should be recognized as a loss of thecurrent period. This is generally accomplished by stating such

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goods at a lower level commonly designated as market . ARB 43,Chapt . 4, Statement 5 . [Emphasis in original . ]

96. Thus, defendants materially inflated Nortel's reported earnings for the third

quarter of 2000 by failing to take a charge against earn ings to reflect the fact that the value of the

products re-acquired by Nortel from vendor-financed customers had diminished to a level belo w

cost, and, in some cases , were nearly worthless .

97. As yet another GAAP violation, defendants pulled forward hundreds of millions ,

if not billions, of dollars in revenues from future quarters into the third and fourth quarters o f

2000 . In so doing, defendants violated FASB Concept No. 1 because they improperly inflated

reported revenues for each of those particular quarters and thus the Company's financial reportin g

for those quarters did not reliably represent what they purported to represent . FASB Concep t

No. 1, ¶¶ 33, 41, 58-59 . In addition , defendants' practice of pulling forward revenues violate d

SOP 97-2 because, as in the $800 million Verizon contract discussed above, defendants recorded

and reported revenues on software components of contracts which contained multiple elements ,

in the absence of vendor specific objective evidence as to the price of the software component ,

and thus the fee was not "fixed and determinable ." In addition, such practices also violated SOP

97-2 and other GAAP provisions because , in certain instances, revenues were booked prior t o

delivery .

98. As and for a further violation of GAAP in the 2000 third quarter, defendants

improperly recognized revenues on the basis of "letters of intent" to purchase product, in lieu o f

formal purchase orders . This practice violated FASB Concept No . 5, because the revenue was

recognized before it was "earned" and because there was insufficient evidence that an

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"arrangement" existed . This practice also violated SAB No . 101 (which the Company adopte d

effective January 1, 2000 ), because , prior to the fraud alleged herein, it was Nortel's customary

business practice to require a formal purchase order prior to the recognition of revenues from a

sale . SAB No. 101, § 2 (Persuasive Evidence of an Arrangement) . In addition , defendants'

practice of recognizing revenues on the basis of letters of intent violated FASB Concept No . 1 ,

¶ 42, because it was used to pull sales into the current quarter, thereby inflating that quarter' s

reported revenues .

99. A former Nortel employee recalled that, in certain instances, this "risky practice "

of booking revenues based upon letters of intent resulted in actual purchase orders not bein g

submitted and the deals later collapsing, after the quarter ended . The former Nortel employee

was present at a pre-Class Period conversation which included Nortel Sales Director Carr y

O'Brien, during which William Conner, President of Nortel' s eBusiness Solutions, made

statements indicating that he approved of the use of this practice and other practices to pul l

revenues from future quarters into the current quarter .

100. As yet another GAAP violation, because certain products were in short supply

during the third quarter, Nortel shipped interim or substitute products and booked revenue a s

though the final products had been shipped . The substitute products were either used o r

demonstration products . This practice, which former Nortel employees consistently refer to a s

"selling futures ," violated GAAP because the revenue had not been earned as delivery had not

yet occurred . FASB Concept No . 5, ¶ 84 .

101 . In the third quarter of 2000, defendants also improperly recognized revenues o n

the sales of products to new customers prior to the expiration of the date by which thos e

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customers were permitted to return the product . The Financial Accounting Board Statement o f

Financial Accounting Standards ("SFAS") No . 48 precludes the recognition of revenues on th e

sale of a product before the right of return has expired, unless the "amount of future returns can

be reasonably estimated " and certain other conditions are satisfied . In particular, SFAS No. 48

provides that the following factors may impair the ability to make a reasonable estimate : (i) the

susceptibility of the product to significant external factors, such as technological obsolescence or

changes in demand; and (ii) absence of historical experience with similar types of sales (i .e ., new

customers) .

102 . Defendants improperly recognized revenue, in violation of SFAS No . 48, because

they were unable to reasonably estimate the amount of future returns since these were new Norte l

customers, with no history of Nortel purchases upon which to base an estimate, and the Norte l

products being sold to these new customers were susceptible to technological obsolescence . In

addition, Nortel's return policies were extremely liberal and went well beyond the customary

short-term right-of-return . One former Nortel employee recalled that the Company routinel y

allowed customers to return product for just about "any reason" for a period of 90 days . With

respect to products including a software component, defendants' conduct also violated SOP No .

97-2, ¶ 31, which provides that "[sales arrangements] cancelable by customers are neither fixed

nor determinable until the cancellation privileges lapse . "

Failure To Account For Uncollectible Receivables

103 . The third quarter 2000 repo rted financial results were also materially false and

misleading because they failed to account for uncollectible receivables, thereby materially

inflating the Company's reported assets and artificially bolstering its balance sheet . In the

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second, third and fourth quarters of 2000, defendants caused Nortel to report hundreds o f

millions, if not billions, of dollars in accounts receivables as valuable and collectible assets of th e

Company :

Reporting Period ReportedAccounts

Receivables

ReserveProvision for

" Uncollectibles"

Total Reporte dAssets

% of Tota lReported

Asset s

June 30 , 2000 $6 . 939 billion $406 million $34.035 billion 20%

September 30, 2000 $7.337 billion $400 million $33 .903 billion 22%

December 31, 2000 $8 .198 billion $400 million $42 .180 billion 19%

104. As demonstrated by the chart above, Nortel reported in excess of $7 billion i n

accounts receivables at the end of the third quarter of 2000, representing 20% of the Company's

total reported assets . At least as of October 24, 2000, the date of the Company's third quarter

2000 earnings release, however, defendants knew or recklessly disregarded, for the reasons se t

forth above, that at least a significant portion of the Company's reported receivables whic h

existed as a result of the vendor financing practices particularized above were grossly delinquent ,

delayed and/or at serious risk of noncollectibility and that the Company's reserves wer e

correspondingly inadequate .

105. For example, as alleged above, in September 2000, Nettel Corporation, a Norte l

customer to which approximately $ 100 million in vendor-financing had been extended, filed a

voluntary petition with the United States Bankruptcy Court for the District of Columbia . As of

the Petition date, Nortel was owed in excess of $73 million by Nettel . By the close of the thir d

quarter 2000, several other vendor-financed Nortel customers were also on the verge o f

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insolvency and, according to a former Nortel Senior Business Manager, Nortel management

maintained a list which "flagged" those customers .

106. As discussed above , in addition to extending hundreds of millions of dollars t o

uncreditworthy customers to enable them to purchase Nortel products, Nortel extended massive

"working capital" loans to these same customers to provide them with funds to finance thei r

ongoing business operations . These loans carries substantial risk because they were unsecured

and the companies to which the loans were extended were experiencing a decline in thei r

businesses as a result of significant negative market conditions .

107. As stated by several former Nortel employees , it was "common knowledge" at the

corporate level that the Company had been carrying an inordinate level of known uncollectibl e

receivables created as a result of the Company's sustained and deliberate practice of lendin g

substantial funds to uncreditworthy customers in order to boost reported sales of Nortel products .

It was further commonly understood within the Company that these receivables, which th e

Company reflected as a valuable asset on its balance sheet during the Class Period, were greatl y

overvalued .

108. Despite these facts, the Company's financial statements for the third quarter o f

2000 failed to reflect this risk of noncollectibility through reserves or charges against income as

required by GAAP . Instead, the Company's reported financial results for the third qua rter

included a mere $400 million "provision for uncollectibles ." This provision, which represented a

mere 5% of Nortel's accounts receivables for each reporting period, was grossly inadequate as i t

did not reflect the true level of uncollectible receivables on the Company's books .

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109. Indeed, while Nortel's reported accounts receivables increased from $6 .939 billio n

at June 30 , 2000 to $7 .337 billion at September 30, 2000 in the face of worsening indust ry

conditions, its reserve for uncollectible accounts actually decreased from $406 million to $400

million during that same period and remained at that level in the fourth quarter, despit e

worsening industry conditions .

110. It was not until the third quarter of 2001, after the end of the Class Period, tha t

defendants began to adjust significantly the Company's provision for uncollectible receivables .

As stated in Nortel's Form 10-Q for the quarterly period ended September 30, 2001, filed

November 6, 2001, the Company increased provisions relating to various customer receivable s

and financings to approximately $1.067 billion . Indeed, although the Company's reported

receivables decreased during the nine months ended September 30, 2001 by approximately $ 4

billion, the Company increased its provisions for uncollectibles by several hundreds of millions

of dollars to in excess of $1 billion . Thus, while sales were decreasing in 2001, defendants were

finally adjusting the Company's provision for uncollectible receivables to account for th e

abundance of bad debt the Company had amassed through risky vendor-financing activities prio r

to and during the Class Period .

111 . In this regard, defendants caused the Company's financial statements during th e

Class Period to reflect improperly a material overstatement of receivables and earnings and

under-repo rt ing of reserves in contravention of the following GAAP provisions :

(a) SFAS No. 5, ¶ 8, provides that an estimated loss from a loss contingenc y

"shall be accrued by a charge to income" if (i) information available prior to issuance of th e

financial statements indicated that it is probable that an asset had been impaired or a liability ha d

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been incurred at the date of the financial statements; and (ii) the amount of the loss can be

reasonably estimated .

(b) The uncertainty that generally exists regarding the collectibility o f

receivables constitutes a contingency within the meaning of SFAS No . 5, ¶ 1 . Consequently,

estimated bad debt expense must be accrued if it is material, probable, and can be reasonably

estimated . The degree to which receivables are impaired may be estimated on the basis o f

experience, analysis of individual accounts, or reference to appropriate industry averages . The

very process of selling on credit, as defendants did throughout the Class Period, implies that ba d

debt expenses are probable .

(c) The GAAP requirement for the inclusion of a provision for noncollectibl e

receivables applies to interim financial statements , as indicated by APB Opinion No . 28, ¶ 17 ,

Interim Financial Reporting :

The amounts of certain costs and expenses are frequently subjectedto year-end adjustments even though they can be reasonablyapproximated at interim dates . To the extent possible suchadjustments should be estimated and the estimated costs andexpenses assigned to interim periods so that the interim periodsbear a reasonable portion of the anticipated annual amount .Examples of such items include . . . allowance for uncollectibleaccounts . . . [Emphasis added . ]

(d) According to Accounting Research Bulletin 43, Chapter 3, Section A, the

objective of providing for reserves against receivables is to assure that, "[a]ccounts receivable ne t

of allowances for uncollectible accounts . . . are effectively stated at the amount of cash estimated

as realizable ."

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112. Despite knowledge that each of the conditions prompting the need to take a

charge against income were existent prior to the close of the third quarter of 2000, defendants

knowingly or recklessly permitted the Company's balance sheet to reflect $7.337 billion in

accounts receivables as valuable and collectible assets -- and knowingly or recklessly permitte d

the Company's financial statements to fail to reflect the write-down or write-off of these

receivables -- when they were uncollectible in whole or in substantial part .

GAAP Violations Relating to the Impairment of Assets

113 . Nortel's third quarter 2000 reported financial results were also mate rially

overstated because they failed to recognize billions of dollars in impairment losses relating to

goodwill that had been recorded in conjunction with certain of the Company's recent

acquisitions. The overwhelming majority of assets acquired through these acquisitions wer e

identified as long-term in nature, predominantly "goodwill . "

114. GAAP requires that the reported value of long-term assets be assessed for

impairment periodically, and, in particular, whenever certain triggering events occur, including :

(i) a significant decrease in the market value of the asset ; (ii) a significant adverse change in legal

factors or in the business climate that could affect the value of an asset or an adverse action or

assessment by a regulator; and/or (iii) a current period operating or cash flow loss combined wit h

a history of operating or cash flow losses or a projection or forecast that demonstrates continuin g

losses associated with an asset used for the purpose of producing revenue . SFAS No. 121, ¶ 4-5 .

115 . SFAS No. 121 further requires that upon the occurrence of any of the trigge ring

events set forth in the foregoing paragraph, the asset must be reported at the lower of carrying

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amount or "fair value less cost to sell" and an "impairment loss" must be recognized to reflec t

any reduction of earnings .

116. Nortel's third quarter 2000 Form 10-Q reported $12 .45 billion in goodwill as part

of the Company's reported assets . This figure, and thus the Company's total reported assets, was

substantially inflated because defendants failed to recognize impairment losses on a timely basi s

in conformity with GAAP, notwithstanding the existence of trigge ring events as discussed above .

117. After the end of the Class Period, in the Company's Form 10-Q for the quarterl y

period ending March 31, 2001, defendants made reference to SFAS No . 121 and stated that, "[i]n

light of the current business environment, uncertain performance outlook, and adjustment o f

technology market valuations , Nortel Networks is engaged in an evaluation of its long-lived

assets." It was not until August 2001, in the Company's Form 10-Q for the period ending Jun e

30, 2001, that Nortel finally announced that it would be taking a $12 .4 billion write-down of

intangible assets related primarily to the goodwill associated with the Company's acquisitions o f

Alteon Websystems, Inc., Xros, Inc., Qtera Corporation, and 980 NPLC Business :

Nortel Networks recorded a $12,422 [millions] write down ofintangible assets in the three months ended June 30 , 2001, based onthe amount by which the carrying amount of these assets exceededthe fair value . The write down is primarily related to the goodwillassociated with the acquisitions of Alteon, Xros, and Qtera withinNetwork In frastructure and the acquisition of the 980 NPLCBusiness within Photonics Components.

118 . The charges set forth above were not tacen on a timely basis . By the third quarter

of 2000, at the latest , defendants knew or recklessly disregarded that events had occurred whic h

called for the write-downs of billions of dollars in goodwill, including, among other things : (i)

significant negative market changes in the Internet and telecommunications sectors, which had a

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materially negative impact on the demand for the technology and products acquired throug h

Nortel's acquisitions ; and (ii) problems with the development of the technology acquired through

Nortel's acquisitions of, inter alia, Qtera and Xros, which mate rially delayed the completion of

these projects and their ability to contribute to Nortel's consolidated revenues .

On November 1, 2000, Defendants Issue a Follow-Up Press ReleaseReaffirming Their Aggressive Guidance for Year-End 2000 and 200 1

119 . Before the market opened for trading on November 1, 2000, just days after the

Company's third quarter 2000 report, defendants, as a group , issued a press release on PR

Newswire confirming and reiterating their previously announced guidance for 2000 . The pres s

release quoted defendant Roth as follows :

We continue to expect that our percentage growth in revenue andearnings per share from operations in 2000 over 1999 will be inthe low 40's,' said John Roth, president and chief executive officer,Nortel Networks . 'In response to specific requests for guidance onthe fourth quarter of 2000, we expect our revenue and earnings pershare from operations in the f ourth quarter of 2000 will be in therange of US$8.5 billion to US$8.8 billion and US$0.26 per shareon a fully diluted basis, respectively . Overall, we expect continuedstrong growth in Optical Internet, Wireless Internet, Local Internetand eBusiness solutions. We continue to expect our optical Internetrevenues to grow in excess of 125 percent in 2000 over 1999, toexceed US$10 billion.' [Emphasis added . ]

120. In the November 1, 2000 press release, defendants also confirmed thei r

previously-stated aggressive guidance of "$8 .1 to $8 . 8 billion" in revenues for 2001 :

'Looking forward to 2001, we continue to expect the overall marketto grow in excess of 20 percent . Given our strong market positionand leadership in high performance Internet solutions, we continueto expect to grow significantly faster than the market, withanticipated growth in revenues and earnings per share fromoperations in the 30 to 35 percent range,' said Roth . 'For the firstquarter of 2001, consistent with historical profile trends, we expect

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our revenue and earnings per share from operations will be in therange of US$8.1 billion to US$8.3 billion and US$0.16 per shareon a fully diluted basis, respectively.' [Emphasis added ; footnotesomitted . ]

121 . The Company's November 1, 2000 announcement was clear damage control an d

not a full and truthful disclosure of the issues set forth . As reported on the Canadian Press

Newswire that same day, Tina Warren, a spokeswoman for Nortel , attributed the unusual timing

of the announcement (the week after reporting earnings for the third quarter) to the fact that the

Company felt shareholders needed to have this information laid out in light of the stock price

volatility of the prior week :

We wanted to reassure our investors about our strong outlook . .Basically the reason we're doing this is because the market isunsettled, and there's confusion in the marketplace, so we thoughtit was important to give further clarity. [Emphasis added . ]

122 . Defendants' false reassurances achieved their desired effect because analyst s

reacted positively to the November 1, 2000 announcement . For example, following defendants '

November 1, 2000 press release , analysts at Robert W. Baird issued a report in which they

continued to rate Nortel a "strong buy." The analysts based this strong buy recommendation o n

their misguided belief that the Company's growth prospects "remain[ed] very strong" goin g

forward :

In a press release today, Nortel confirmed its guidance for2000 and 2001 .

For 2000, Nortel expects revenue and earnings growth to bein the low 40% range .

We believe our estimates for Q4 and for 2001 are in linewith management's projections . For Q4 00, we areprojecting revenue of $8 .9 billion . . . and cash EPS o f

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$0.26. For 2001, we are projecting revenues of $40 .1billion, or up 32%, while expecting cash earnings of $1 .00per share, a year-over-year increase of 35 .8%.

We maintain our Strong Buy rating on No rtel and believethe company 's growth prospects remain very strong going

forward. We view Nortel as a core holding in the opticalnetworking and telecom-equipment infrastructure market .[Emphasis added . ]

123 . Defendants' statements in the November 1, 2000 press release were knowingly o r

recklessly false and misleading when made, and were made without a reasonable basis, because

they misrepresented and/or omitted the following adverse facts which then existed and th e

disclosure of which was necessary to make the statements made not materially misleading :

(a) the Internet and telecommunications markets contracted significantlyduring the third quarter of 2000, causing Nortel to experience a substantial declinein the demand for its products;

(b) Nortel had suffered a steady deterioration of sales and revenues in itsEnterprise Solutions Group, which historically has accounted for a significantportion of the Company's business ;

(c) defendants knew or recklessly disregarded that, because of a continuingcontracting market for Internet and telecommunications products, Nortel'scustomers would continue to reduce their orders for Nortel products throughoutthe fourth quarter of 2000 and into 2001 ;

(d) defendants had been informed by major customers prior to the close of the2000 third quarter that their orders in the fourth quarter and throughout 2001would be significantly reduced ;

(e) the Company had not experienced "continued strong growth" becauseNortel's reported "growth" for the third quarter 2000 was materially inflated as aresult of the accounting improprieties alleged above ;

(f) defendants failed to disclose that such fourth quarter 2000 results(revenues of $8 .5 to $8.8 billion and EPS of $0 .26) could be met only ifdefendants were to engage in the GAAP violations discussed below, whichincluded the "pulling forward " of significant revenues from 2001 and future years ;

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(g) given the change in market conditions and representations from majorcustomers that orders in 2001 would be substantially reduced, defendants did notactually expect the overall market to grow "in excess of 20 percent" in 2001 ;

(h) defendants' guidance for 2001 (30-35% revenue growth) would be nearlyimpossible to achieve in light of the contracting Internet and telecommunicationssectors and the fact that defendants planned to improperly sacrifice a substantialportion of Nortel's 2001 revenues by pulling those revenues into 2000 ; and

(i) defendants' purported caution that the results predicted "may" differmaterially from actual results was wholly inadequate because defendants failed toidentify important and specific factors which could cause such results to differ,including instead a boilerplate list of generic risks .

124. Thus, to the extent that defendants' statements in the November 1, 2000 pres s

releases regarding expected growth in revenues and earnings for 2000 and 2001 are deemed to be

forward-looking, they are not protected by the safe harbor provision of the PSLRA because :

(a) such statements were material to investors ;

(b) defendants had actual knowledge that such statements were false because,in light of the then-existing market conditions, the projected results for 2000 couldbe achieved only if defendants were to engage in the accounting improprietiesdiscussed above, and the projected results for 2001 would be nearly impossible toachieve; and

(c) such statements were not accompanied by "meaningful cautionarylanguage . "

At Nortel's November 21, 2000 Annual Investor Conference,

Defendants Roth, Dunn and Chandran Continue To Project

30-35% Growth in 2001 and Falsely Describe The Deman d

For Nortel's Fiber-Optic Products as "Inevitable and Unstoppable "

125 . On November 21, 2000 in Boston , Nortel held its annual conference for investors

and analysts, at which defendants Roth and Dunn quelled rumors about lost customers an d

inventory build-ups and re-affirmed that the Company would meet its aggressive growth target s

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for 2000 and 2001 . As reported in a Bloomberg news release after the three hour conferenc e

before a crowd of hundreds :

Boston, Nov. 21 (Bloomberg) -- Nortel Networks defended its2001 profit and sales forecasts, encouraging investors who fearedthe biggest maker of fiber-optic equipment was being to ooptimistic about demand for its products. 'They gave us reassuringappraisal that the state of the market ftom their perspective is veryhealthy,' John Simpson, a portfolio manager at OeschleInternational Advisors LLC, said in an interview at Nortel'sinvestor conference in Boston . 'The investment community was

pretty skeptical . '

Responding to investors who challenged his forecasts, ChiefExecutive John Roth reiterated that No rtel expects its sales andprofit from operations, excluding costs for acquisitions, to rise 30percent to 35 percent next year , faster than industry average wide

growth of more than 20 percent .

'The engines that are underpinning Nortel are in good shape andmoving along at a good clip' he told a packed room of investorsand financial analysts. 'We're very bullish.' [Emphasis added . ]

126. In addition, at the investor conference, defendant Dunn , Nortel's CFO, reiterating

the Company's earlier forecast, told investors that revenues for the first quarter of 2001 would b e

between $8 .1 billion and $8 .3 billion. Defendant Chandran, Nortel's COO, described the demand

for fiber-optics as " inevitable and unstoppable," predicting 40 percent growth in the optical

networking market .

127. Analysts reacted positively to defendants' statements at the November 21, 2000

investor conference . For example, on November 22, 2000, Bear Steams analysts W . Uzdelewicz

and M. Gargano retained their "attractive" rating for Nortel, describing the conference a s

"upbeat" and noting that the Company is expected to meet fourth quarter 2000 targets :

-54-

Nortel hosted an Investor Conference yesterday in Boston . Asexpected, management was upbeat and reiterated guidance for thefourth quarter and 2001 . We believe the company could achieveQ400 targets and will exceed the optical networking revenue bogeyof $10 billion for the year . [Emphasis added . ]

128 . Also on November 22, 2000, analyst Jane Dragone of C .E. Unterberg, Towbin

reiterated her buy rating on Nortel, stating :

Management confirms guidanceYesterday, NT hosted an investor meeting that was upbeat asmanagement reaffirmed their i'op and bottom line guidance forQ400, Q101 and for 2001 . . . Management confirmed guidance of$0.26 for Q400 and 40% plus sequential growth in opticalrevenues, exiting 2000 at revenues of $10 billion plus for opticalrevenues. [Emphasis added . ]

129 . Defendants' statements at the November 21, 2000, investor conference wer e

materially false and misleading at the time they were made, and were made without a reasonabl e

basis, for the reasons set forth at ¶¶ 76-118 above and because they misrepresented and/o r

omitted the following adverse facts which then existed and the disclosure of which was necessary

to make the statements made not materially misleading :

(a) the state of the market was not "very healthy" because the Company wasindeed experiencing a substantial slowdown in the demand for its products,including fiber-optics ;

(b) defendants were masking these negative market changes through a host ofGAAP violations, as discussed at 1186-118 above ;

(c) the demand for fiber-optics was not "inevitable and unstoppable" asdefendant Chandran represented, but rather had begun to wane substantially in theprior quarter ;

(d) defendants knew that, in light of significant market changes, Nortel'scustomers would continue to reduce their orders for Nortel products throughoutthe fourth quarter of 2000 and into 2001 ;

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(e) defendants had been informed by major customers prior to the close of thethird quarter that their orders in the fourth quarter 2000 and throughout 2001would be significantly reduced;

(f) defendants' guidance for 2001 (30-35% growth) would be nearlyimpossible to achieve in light of the market changes and the fact that defendantsplanned to improperly sacrifice a substantial portion of Nortel's 2001 revenues bypulling those revenues into 2000 ; and

(g) defendants failed to identify such statements as forward-looking and toidentify important and specific factors which would cause defendants' predictedresults to differ materially from actual results .

130. Defendants' statements at the November 21, 2000 investor conference are not

protected by the safe harbor provision of the PSLRA because :

(a) such statements were material to investors;

(b) such statements were not identified as forward looking ;

(c) such statements were not accompanied by a caution that actual resultscould differ materially from those projected ;

(d) defendants failed to identify a readily available written documentcontaining information about factors which could cause actual results to differmaterially from those projected ; and

(e) defendants had actual knowledge that such statements were false because,in light of the then-existing market conditions, the projected results for 2000 couldbe achieved only if defendants were to engage in the accounting improprietiesdiscussed below, and the projected results for 2001 would be nearly impossible toachieve .

In Interviews With CNBC and CNN on November 30, 2000 , DefendantRoth Denies Vendor Financing Concerns and A Slowing of New Orders

131 . As noted above, in a November 30, 2000, interview with CNBC' s Maria

Bartiromo and David Faber, defendant Roth falsely reassured investors with regard to the credi t

risk associated with Nortel 's escalating vendor financing activities :

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David Faber : Mr. Roth, another concern in your arena for bigplayers like your own is vendor financing . How active are you ingetting vendor financing? Are you concerned at all about havingextend[ed] credit to some emerging telecom players that may notbe able to pay you back with buying [your] equipment?

John Roth : No. We have got some really blue chip people we

finance . . . We are not concerned at all. [Emphasis added . ]

132 . In that same interview, Roth falsely touted the Company's growth prospects ,

stating, "[w]e are going to grow 40 percent this year and because we are gaining share wit h

tremendous velocity, we could see about 30 or 35 percent growth next year as well ." (Emphasis

added.) When asked by Bartiromo "when . . . the slowdown in telecom spending will lessen, "

Roth denied that any such slowdown existed :

The slowdown, as you call it, really isn't quite that way . This yearwhat we saw was a lot of money being spent in the first half, notthe second half. But the telephone companies spend their moneyover a year period and I think the market got misled by the fact thatmost of the money was being spent in the first half of the year .

133 . Similarly , in an inte rview with CNN Financial Network's Muriel Siebert also on

November 30, 2000, defendant Roth continued to falsely assure investors about the Company' s

sales prospects :

Siebert : Do you see slow-up in new orders, or indications oforders ?

Roth: No. Our book-to-bill continues to be positive . Theconstruction plans of moving ahead towards IP networks is wheremoney is going. And we are the company that has that portfolio .A lot of our competitors don't have that position . As so we'recontinuing to take share at an increasing rate .

134 . Defendant Roth' s statements in the November 30, 2000, interviews with CNBC

and CNN Financial Network were materially false and misleading when made , and were mad e

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without a reasonable basis, for the reasons stated at ¶¶55-65, 76-118 and because the y

misrepresented and/or omitted the following adverse facts which then existed and the disclosur e

of which was necessary to make the statements made not materially misleading :

(a) Nortel had, in fact, extended hundreds of millions of dollars in vendorfinancing to customers defendants knew or recklessly disregarded to beuncreditworthy ;

(b) the Company was indeed experiencing a substantial decrease in neworders;

(c) Nortel's book-to-bill ratio was being manipulated by the accountingimproprieties described at 1186-118 above ;

(d) defendants knew or recklessly disregarded that, in light of significantmarket changes, Nortel's customers would continue to reduce their orders forNortel products throughout the fourth quarter of 2000 and into 2001 ;

(e) defendants had been informed by major customers prior to the close of the2000 third qua rter that their orders in the fourth quarter and throughout 2001would be significantly reduced ;

(f) defendants failed to disclose that "40 percent" growth in 2000 could beachieved only if defendants were to engage in the GAAP violations discussedabove ;

(g) "30 to 35 percent growth" in 2001 would be nearly impossible to achievein light of the market changes and the fact that defendants planned to improperlysacrifice a substantial portion of Nortel's 2001 revenues by pulling those revenuesinto 2000 ; and

(h) defendants failed to identify such statements as forward-looking andidentify important and specific factors which would cause defendants' predictedresults to differ materially from actual results .

135 . In addition, Roth's statements in the November 30, 2000 interviews are no t

protected by the safe harbor provision of the PSLRA because :

(a) such statements were material to investors ;

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(b) such statements were not identified as forward looking ;

(c) such statements were not accompanied by a caution that actual resultscould differ materially from those projected ;

(d) defendants failed to identify a readily available written documentcontaining information about factors which could cause actual results to differmaterially from those projected; and

(e) defendants had actual knowledge that such statements were false because,in light of the then-existing market conditions, the projected results for 2000 couldbe achieved only if defendants were to engage in the accounting improprietiesdiscussed below, and the projected results for 2001 would be nearly impossible toachieve .

In a December 14, 2000 Press Release, Defendants

Falsely Claim That Revenue Growth Is Still ExpectedTo Be At 40% for 2000 and 30-35% for 200 1

136 . On the morning of December 14, 2000, defendants, as a group, issued anothe r

press release on PR Newswire that was virtually identical to the November 1, 2000 statement,

again confirming their previously stated guidance for 2000 and 2001 . Specifically, quoting

defendant Roth, the release stated that "percentage growth in revenue and earnings per share

from operations in 2000 over 1999 will be in the low 40's ." Defendant Roth was also quoted as

saying that,"[a]s we enter the last two weeks of the quarter and the year, we remain very

confident in our previously stated guidance ." In addition , the press release touted expecte d

fourth quarter 2000 revenues of $8 .5 to $8 .8 billion and continued strong growth in Optical

Internet, Wireless Internet, Local Internet and eBusiness solutions .

137 . With respect to the Company's glowing prospects for 2001, the December 14 ,

2000 press release stated :

'Looking forward to 2001, we continue to expect the overall marketto grow in excess of 20 percent . Given our strong market position

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and leadership in high performance Inte rnet solutions , we continueto expect to grow significantly faster than the market, withanticipated growth in revenues and earnings per share from

operations in the 30 to 35 percent range ,' said Roth . 'For the firstquarter of 2001, consistent with historicalprofile trends, we expect

our revenue and earnings per sharefrom operations will be in the

range of US$8.1 billion to US$8. 3 billion and US$0.16 per share

on k fully diluted basis, respectively.' [Emphasis added ; footnotes

omitted . ]

138. Analyst reaction to the December 14, 2000 press release was positive. On

December 14, 2000, analyst Ted Moreau of Robert W . Baird again reiterated his "strong buy "

recommendation for Nortel because the Company "confirmed its expected performance for th e

fourth quarter of 2000, all of 2000, the first quarter of 2001 and all of 2001 . "

139 . Similarly, also on December 14, 2000, analyst T . Luke of Lehman Brothers, Inc .

issued a report on Nortel, which was based on and repeated information provided by defendant s

in the press release :

This morning following recent pressure on the shares NortelNetworks (NT $39, 2-outperform) issued a release reconfirmingtheir comfort with existing guidance of $8 .5 to $8 .8 billion in sales(our estimate is $8 .1 B) and $0.26 in EPS in 4Q00 (our consensusest is $0.26) with $8 .1 to $8 .3 B in sales and EPS of $0 .16 in1Q01 .

For FY01 NT reiterated guidance of 30-35% revenue and EPSgrowth .

We are retaining our rating of 2 outperform, 2001 EPS estimate of$0.99, and price target of $55 .

140. Following the December 14, 2000 morning announcement reaffirming earnings

guidance, Nortel's stock rose $2 .31, or 6.4%, to close at $38 .75, up from $36 .44 the previous day .

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The announcement marked the third time Nortel had reaffirmed its forecast for 2000 and 200 1

since reporting the weaker-than-expected third quarter results in October 2000 .

141 . The statements in the December 14, 2000 press release were materially false an d

misleading when made, and were made without a reasonable basis, for the reasons stated abov e

and because they misrepresented and/or omitted the following adverse facts which then existe d

and the disclosure of which was necessary to make the statements made not materiall y

misleading :

(a) defendants had experienced a material decline in the demand for theCompany's products throughout the fourth quarter, not "continued strong growth"as represented;

(b) defendants were slashing prices to below-cost levels and resorting to otherdesperate year-end measures in an effort to move product ;

(c) defendants knew or recklessly disregarded that, in light of significantmarket changes, Nortel's customers would continue to reduce their orders forNortel products throughout 2001 ;

(d) defendants had been informed by major customers prior to the close of thethird quarter and throughout the fourth quarter that their orders in 2001 would besignificantly reduced;

(e) defendants failed to disclose that such fou rth quarter 2000 results ($8 .5 to$8 .8 billion in revenues) could be met only if defendants were to engage in theGAAP violations discussed above ;

(f) defendants ' guidance for 2001 (revenue growth "in the 30 to 35 percentrange" ) would be nearly impossible to achieve in light of the market changes andthe fact that defendants planned to improperly sacrifice a substantial portion ofNortel's 2001 revenues by pulling those revenues into 2000 ; and

(g) defendants' purported caution that the results predicted "may" differmaterially from actual results was wholly inadequate because defendants failed toidentify important and specific factors which would cause such results to differ,but rather simply included a boilerplate list of generic risks .

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142. To the extent that any of defendants' statements in the December 14, 2000 press

release are deemed to be forward-looking, they are not protected by the safe harbor provision of

the PSLRA for the reasons stated at ¶¶ 77-78 above.

143 . Indeed, by mid-December 2000, defendants were engaged in a desperate year-en d

scramble to boost reported revenues in a market in which orders were continuing to decline .

According to a former high- level engineer at Nortel, "every" budget submitted by Nortel 's optica l

systems customers during the last three months of 2000 was "at least 20% less" than the annua l

budgets submitted the prior year, including those budgets submitted by AT&T and WorldCom .

The former Nortel employee estimated that, prior to 2001, AT&T and WorldCom's combine d

optical purchases alone totaled between $8 billion and $10 billion . He further recalled that it wa s

common knowledge at Nortel upon receipt of those budgets that 2001 sales were headed for a

"serious decline . "

144. Shortly prior to the December 14, 2000 announcement , negotiations were being

finalized on a deal with Verizon which were intended to, and would result in, a massive pul l

forward of revenues into the fourth quarter of 2000 . The year 2000 total sales target for th e

Verizon Network Services account was $600 million . As alleged above, however, John Neville ,

Vice President of Team Verizon, revised that target upward to $1 .1 billion in late September

2000, just three months before year end, and instructed No rtel personnel to pull forward revenue s

from future quarters to meet that goal . Those efforts took place from October through Decembe r

2000 . A former Nortel Vice President responsible for the Verizon account recalled that the $1 . 1

billion goal was met by piecing together an $800 million year-end contract . However, the former

Nortel employee estimated that, of the $800 million in revenues, approximately $200 million

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were pulled forward from 2001 and approximately $300 million were pulled in from as far out a s

2002 and 2003 .

145 . On or about December 14, 2000, Nortel senior executives on the Verizon account

met in New York to discuss and set revenue goals for 2001 . Present at that meeting were, among

others, John Neville, Jim Collier, Jeffrey Haidinger, Scott Gibbs, all from sales , and Brian

Trnkus, from Nortel's finance department. Despite the fact that the 2000 sales target for th e

Verizon Network Services account at that time was $600 million and the Company was about t o

report over $1 billion in 2000 sales for that account, John Neville set the 2001 sales goal at just

$300 million, a drop of more than 70% from $1 .1 billion . A former Nortel employee present a t

the meeting said that, after Neville's suggestion of $300 million for 2001, a "shouting match"

ensued because Nortel sales personnel knew that they would be unable to meet even a $300

million goal in 2001, given the negative market conditions and the massive pull forward o f

revenue that had been orchestrated in order to meet the Company's aggressive fourth quarter an d

year-end 2000 earnings guidance . Moreover, it was suggested at that meeting that $100 million,

less than 10% of the $1 .1 billion in reported sales for 2000, would have been a more realisti c

target for 2001 .

146. In addition, sales of Nortel's broadband products had decreased throughout th e

fourth quarter and had halted to a standstill by mid-December . According to a former Nortel

Senior Business manager, by the end of the 2000 fourth quarter, Nortel's broadband customer s

stopped placing new orders completely and when those customers were contacted by Nortel

salespersons, the customers invariably stated that their warehouses were full of Nortel' s

broadband products that they were unable to use and/or resell . He recalled that, at the end of

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2000, large carriers , including Pacific Bell, "lost interest " in pursuing the development of DS L

customer base, turning their focus instead to cable modem products .

147. Defendants had actual knowledge of or recklessly disregarded that the substantial

decrease in orders for broadband products in the fourth quarter would have a materially negativ e

impact on year 2001 sales because , according to former Nortel salespersons, broadband

customers typically ordered months in advance in order to take advantage of various discounts .

148. In November and December 2000, defendants were forced to dump substantia l

quantities of optical hardware and other products at unprecedented discounts in a desperate year-

end measure to report revenues . For example, on the Verizon account, in order to move optical

hardware (mostly Nortel's popular OC-12 and OC-48), prices were dropped 50% just to move

inventory and record $45 million in sales to Verizon alone . Former Nortel employees referred to

the unprecedented year-end event as a desperate "fire sale," explaining that a typical year-en d

reduction on the equipment, if any, would be 10%, not 50% . It was discussed and understood at

Nortel that the price reductions would necessarily have a devastating impact on 2001 revenue s

because the Company would be unable to raise the prices on those products back to normal

levels . Similarly, in the fourth quarter of 2000, Nortel sold products to FairPoint at reductions s o

steep that Nortel lost money on the deal . "Fire sales" occurred with other substantial No rtel

customers, including Sprint and WorldCom.

149. Throughout December 2000, order managers were directed to ask customers to

accelerate payments to Nortel on partially completed projects, even though payments were no t

yet due, and were forced to attend frequent, and sometimes daily, meetings to report on th e

progress of the year-end "scramble for revenue . "

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Nortel's January 10-11, 2001 Statements RegardingEmployee Recruitment and Growth of Workforce in 200 1

150. On January 10, 2001 , defendants , as a group , issued a web release on Nortel' s

website, in which they represented that the Company "expects to continue to recruit aggressivel y

in 2001 to meet customers needs and drive leadership in high-growth markets while keepin g

[the] overall number of employees flat through reskilling, retirement and normal attrition . "

Similarly, on January 11, 2001, defendants issued a news release indicating that the Company

expects the size of its workforce to remain unchanged in 2001 .

151 . The statements in the releases issued on January 10 and 11 , 2001 were materially

false and misleading when made, and were made without a reasonable basis, for the reason s

stated at ¶¶ 76-118, 143-149 above and because they misrepresented and/or omitted th e

following adverse facts which then existed and the disclosure of which was necessary to make

the statements made not materially misleading :

(a) defendants knew or recklessly disregarded that, as a result of changingmarket conditions and their negative impact on Nortel's businesses, the Companywas planning to materially reduce its workforce in 2001 and those efforts hadalready been substantially implemented; and

(b) defendants failed to identify such statements as forward-looking andidentify important and specific factors which would cause defendants' predictedresults to differ materially from actual results .

On January 18, 2000, Nortel Reports "Strong" Fourth Quarterand Year-End 2000 Financial Results, Trumpets "ContinuingStrong Market Demand" and Reaffirms Aggressive Guidance for 200 1

152. On January 18, 2001, after the close of trading, at 4 :09 p.m., defendants, as a

group, issued a press release over the Business Wire in which they falsely reported record results

for the year 2000, crowned by purportedly strong results for the fourth quarter . With respect t o

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the fourth quarter, defendants repo rted that "[r]evenues increased 34 percent to US$ 8.82 billion"

and that "[n]et earnings from operations . . . were US$825 million, or US$0 .26 per share on a

diluted basis , compared to US$607 million , or US$0.21 per share on a diluted basis, for the same

period in 1999, an increase in earnings per share from operations of 24 percent ." In addition ,

defendant Roth was quoted as saying, "[w]e are extremely pleased with our fourth quarter results ,

especially the strong growth in Optical Internet, Wireless Internet, and Core IP Networking . "

(Emphasis added . )

153 . With respect to the full-year 2000, defendants reported that revenues increase d

42% to $30 . 28 billion, and that net earnings from operations were $2 .31 billion, or $0.74 per

share on a diluted basis, compared to $1 .43 billion, or $0 .52 per share on a diluted basis, for

1999, an increase in earnings per share from operations of 42% . Defendant Roth was quoted :

"[o]verall, the fourth quarter capped a year of exceptional growth, which was in line with our

expectations ." (Emphasis added . )

154 . After reviewing Nortel's purportedly exceptional performance for 2000, the press

release quoted defendants Roth and Dunn as they touted the Company's prospects and financia l

guidance for 2001 . Despite the materially negative conditions existing at the time, Roth stated ,

"[w]e see continuing strong market demand in our target industry segments. " (Emphasis added).

Dunn added :

[W]e are projecting growth in revenues and ea rnings per sharefrom operations in 2001 over 2000 of 30 percent. For the firstquarter of 2001 , we expect revenues of US$8.1 billion andearnings per share from operations of US$0.16 on a diluted basis.Our views for the qua rter and the year are within the ranges wepreviously communicated . [Emphasis added . ]

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155 . As reported in the Dallas Morning News on January 19, 2001 , in response t o

questions about how a slowing U .S. economy would affect Nortel, defendant Roth said that :

"There is a bear market out there . . . [p]eople are talking about more bad news than i s

appropriate . Our business is really well-centered in areas of high growth ." Roth continued ,

"[a]ny kind of slowdown is going to hu rt our competition more th an it will hurt us . "

156 . Analysts covering Nortel were clearly misled by the material ly misstated financia l

results for the fourth quarter 2000 and positive guidance for 2001, as reported by defendants on

January 18, 2001 . For example, in maintaining an "outperform" rating on Nortel, on January 19,

2001, Morgan Stanley, Dean Witter analyst A . Shah wrote:

Revenue of $8 .8 billion came in above our estimate by $0 .2 billion,

reflecting strong growth in Optical, Wirelesss and Switching . . .Nortel's book-to-bill ratio of I in the quarter indicates thecompany did not pull orders forward to meet guidance .Management also reported it did not see any unusual pricingpressure in the quarter, contrary to the apparent expectations ofsome market participants . Service Provider and Carrier Networksrevenue jumped 39% y/y to $7 .3 billion in the quarter andEnterprise Networks increased 16% to $1 .5 billion. [emphasis

added . ]

157. Similarly, on January 19, 2001, Merrill Lynch analyst T . B. Astle repeate d

Nortel's reported financials results and maintained a "buy" recommendation on Nortel, stating :

Nortel delivered on its promises . The company reportedQ4 00 results as expected . We are reiterating our Buy/Buyrating .

Revenue for the quarter grew 34% and came in at $8 .82

billion ; a bit better than our $8 . 6 billion estimate . Full year

revenue came in at $30 . 3 billion, up 42% . As expected,optical revenue was $ 10.1 billion for the year and up over120% .

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158 . Also on January 19, 2001, analyst Stephen Koffler of First Union Securities Inc .

maintained his "strong buy" recommendation on Nortel, noting management 's representation s

that customer inventories were back to "normal" levels :

Management believes that its customers' inventories have returnedto normal levels . In last quarter's conference call, the companystated that it missed the Street's optical revenue estimate due to acustomer buildup of inventory that was based on fear ofcomponent shortages . . . NT's management confirmed that thistemporary inventory buildup is a non-issue going forward .

159. On January 19, 2000, the day following the earnings announcement , Nortel' s

stock price soared in what the press referred to as a "relief rally," closing at $40 .00, up 9% fro m

$36 .68 the previous day . Reuters reported in a news story filed at 5 :12 p.m. :

Investors breathed a sigh of relief and sent shares of NortelNetworks Corp . (NYSE: NT) more than 10 percent higher onFriday after the company, the world's No . 1 supplier of fiber-optictelecom system equipment, posted reassuring fourth-quarterresults .

Nortel, which said its results for 2001 would come in at the lowend of its previous forecasts, calmed a market that had beenbracing for the worst . And the relief spread to other stocks in theoptical components sector, which piggybacked on Nortel's surge .

Many analysts had feared Nortel would pull back further on itsforecast, which had been perceived by some as overly rosy amid aweaker economy and a spending slowdown by telephon ecompanies .

Nortel said late on Thursday it expects revenues and operatingearnings to grow 30 percent in 2001, at the bottom end of itsprevious forecast of 30-35 percent growth .

160. Similarly, on January 19, 2001, The Wall Street Journal reiterated the Company' s

aggressive guidance for 2001 :

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The communications-equipment comp any said it expects 2001growth of 30% for revenue and operating earnings per share, at thelow end of earlier forecasts that put growth in the range of 30% to35% . . . Mr. Roth [Nortel 's Chief Executive] insisted that therevised growth forecast doesn 't amount to reduced guidance, as itis within the range previously given . . .

The 'results were 'a Rolaids quarter,' as investors took relief thatNortel's earnings and forecasts are substantially on track, given theslowing in economic growth, said Jim Kedersha, an analyst withAdams, Harkness & Hill in Boston. [Emphasis added . ]

161 . The statements made by defendants on January 18 and 19 , 2000 , were materially

false and misleading when made for the reasons stated at ¶¶ 76-118, 143-149 and because the y

misrepresented and/or omitted the following adverse facts which then existed and the disclosur e

of which was necessary to make the statements made not materially misleading :

(a) Defendants' representations that No rtel experienced " strong growth" in thefourth quarter and "exceptional growth" in full-year 2000 , were materially falseand misleading because the Company had, in fact, experienced a significantdecline in the demand for its products as a result of negative market changes i nthe third and fourth qua rters . The repo rted "growth " was predicated upon thirdand fourth quarter 2000 revenues that were materially inflated by the numerousGAAP violations detailed herein .

(b) As discussed below , the financial results repo rted for the fou rth quarterand full year-end 2000 were materially misstated and presented in violation ofGAAP ;

(c) It was only as a result of these GAAP violations that Nortel was able toreport financial results for the fourth quarter and year-end 2000 consistent withdefendants' previously-stated guidance .

(d) Defendants knew that "30 percent" growth in revenues and earnings pershare in 2001 would not be possible because, as alleged above, throughout thefourth quarter of 2000, they received budgets from numerous customers indicatingthat their 2001 orders would be substantially below that of 2000. Indeed,Verizon's optical purchases were projected to be less than 10% of the $1 .1 billionreported in 2000, and AT&T, WorldCom and other major customers submittedbudgets for 2001 that were 20% lower than that of 2000. In addition, defendants

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knew or recklessly disregarded that 30% growth in 2001 would not be achievablein light of the fact that, as alleged above, they had already booked billions ofdollars in 2001 revenues by pulling them into the third and fourth quarters of

2000 .

(e) Defendant Roth's statements as quoted in the Dallas Morning News on

January 19, 2001, suggesting that Nortel was somehow immune from a slowdownin the telecommunications industry, were materially false and misleading becauseNortel had, in fact, been feeling the impact of a material slowdown for theprevious two quarters, but had masked the impact of those negative marketchanges on Nortel's business by improperly inflating reported revenues and asset

values, as discussed herein .

(f) Defendants' purported caution that the results predicted "may" differmaterially from actual results was wholly inadequate because defendants failed toidentify important and specific factors which would cause such results to differ,but rather simply included a boilerplate list of generic risks .

162 . To the extent that any of defendants ' statements on January 18 and 19, 2001 ar e

deemed to be forward -looking, they are not protected by the safe harbor provision of the PSLRA

for the reasons stated at IT 77-79 above .

Nortel 's Fourth Quarter and Year-End 2000 Reported Financial Results

Were Materially Misstated in Violation of GAAP and SEC Reporting Rules

163 . As in the 2000 third quarter ( alleged at ¶¶ 86-118 above), in order to conceal the

impact of the significant contraction of the Internet and telecommunications markets on Nortel's

business, defendants engaged in a number of accounting improprieties which caused the

Company's financial results for the fourth quarter and year-end 2000 (as reported by defendants

on January 18 and 19, 2001), to be materially enhanced and misstated in violation of GAAP an d

SEC reporting rules . For example :

(a) Defendants improperly recorded and reported revenues on shipments ofproducts in instances where Nortel had extended credit on 100% of the sales priceof the products to the vendor-financed customer whom defendants knew to beuncreditworthy and unable to pay for the products, in violation of the Company' s

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inte rnal revenue recognition policies as well as in violation of FASB Concepts

No. 5, ¶¶ 83-84, APB Opinion No . 10, ¶ 12, SAB No. 101, SOP 97-2, IT 8, 27-30 ;

(b) In connection with making certain vendor-financed loans , defendants also

improperly required customers to purchase significant quantities of additionalproduct the customer neither needed nor wanted , thereby materially inflating

current period orders and increasing the risk of mate rial retu rns . This practice

violated several fundamental accounting p rinciples , including FASB Concept No .

1, ¶¶ 34, 42, 58-59 ;

(c) Defendants improperly failed to take a charge against earnings in thefourth quarter of 2000 to account for the fact that the value of goods re-acquiredfrom vendor-financed customers upon their default had diminished substantiallybelow cost because such products were used, the prices had changed, and/or theproducts had been rendered obsolete by newer technology . ARB 43, Chapt . 4,

Statement 5 .

(d) Defendants improperly pulled forward hundreds of millions, if notbillions, of dollars in revenues from 2001 and beyond into the fourth quarter of2000, in violation of FASB Concept No . 1 and SOP 97-2. Indeed, as alleged indetail above, at least $500 million was pulled forward on the Verizon account

alone ;

(e) Defendants improperly recognized revenues on the basis of "letters ofintent" to purchase product, in lieu of formal purchase orders, in violation of

FASB Concept No. 5, SAB No. 101, and FASB Concept No. 1, ¶ 42 ;

(f) Defendants improperly booked revenues on the shipment of substituteproducts when certain products were in short supply during the fourth quarter, in

violation of FASB Concept No . 5, ¶ 84 ;

(g) Defendants improperly recognized revenues on the sales of products tonew customers prior to the expiration of the date by which those customers werepermitted to return the product, in violation of SFAS No . 48, and SOP No. 97-2

¶31 ;

(h) Defendants failed to recognize the uncollectibility of a substantial po rtion

of the Company 's receivables, through reserves or charges against income, in

violation ofFASB Statement No. 5, ¶ 3, SFAS No . 5, ¶ 1, 8, APB Opinion No .

28, ¶ 17 and Regulation S-X (17 C .F.R. § 210 . 10-01) ; and

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(i) Defendants failed to recognize billions of dollars in impairment lossesrelating to goodwill that had been recorded in conjunction with certain of theCompany's recent acquisitions, in violation of SFAS No . 121 .

164 . It was only as a result of these accounting improprieties that defendants were able

to seemingly meet their projected results for the fourth quarter and year-end 2000 . Had

defendants not committed the numerous GAAP violations detailed above, however , Nortel' s

fourth quarter and year-end 2000 reported financial results would have fallen far short of

defendants' previous guidance .

THE TRUTH BEGINS TO EMERGE

165 . On February 15, 2001, at 4:03 p .m., just after the close of trading on the New

York Stock Exchange, and only weeks after the Company 's issuance of positive guidance ,

defendants issued a press release over the Business Wire, dramatically lowering the Company' s

guidance for the first quarter and fiscal year 2001 . The press release stated that the Company

was seeing a "faster and more severe economic downturn in the United States" and "longer tha n

expected delays in spending by . . . U.S . customers as they continue to assess the impact of th e

economic and market conditions on their businesses ." Defendants further stated : "We now

expect the U.S . market slowdown to continue well into the fourth quarter of 2001" and "[w]e

now expect growth in revenues and earnings per share from operations in 2001 over 2000 of 15

percent and 10 percent, respectively ." The press release also indicated the Company would be

laying off thousands of employees and that the scale back process already had begun .

166. The market was shocked by this announcement , which dramatically reduced the

Company' s guidance for 2001 growth in revenues and ea rnings per share from 30%, as state d

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less than one month earlier , to just 15% growth in revenues and 10% growth in earnings per

share .

167. The reaction in the marketplace was swift and punitive. Following the February

15, 2001 press release, Nortel's stock price plunged 34% from its $29 .75 closing price o n

February 15, 2001 to trade as low as $19.00 per share on February 16, 2001, on enormous

trading volume in excess of 166 million shares, approximately five times the average dail y

volume during that period. Thus, over $33 billion in market capitalization was quickly wipe d

out .

168 . As reported by Bloomberg, in a conference call with investors following the pres s

release, defendant Roth elaborated on the reasons for the Company's negative announcement :

Chief Executive John Roth said No rtel had to adjust its forecastbecause of a recent change in spending habits of customers inNorth America, where it generates 65 percent of sales . Faced withlimited access to capital, many telecommunications companies nolonger are buying equipment in anticipation of new voice and datatraffic . They're being very judicious in adding capacity to theirnetworks. [Emphasis added . ]

169. Analysts were thoroughly shocked by the announcement, particularly sinc e

defendants had given no indication of any problem when they reported the Company's earning s

just a few weeks earlier. For example, in a 9:55 a.m. report, Bloomberg quoted portfoli o

manager Keith Maher of Ivy Funds as saying, "[t]hat' s a pretty dramatic cut [in the outlook] . I

don't think anybody was expecting this kind of downward guidance ." Similarly, on CBS

Marketwatch .com, Joe Connelly, head of research and trading at Toronto-based fund manage r

Cockfield, Porretti, Cunningham Investment Council , stated : "This is definitely a surprise . . .

[t]hey released earnings just a short time ago and this should have come out then ." (Emphasis

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added.) CBS Marketwatch .com also noted that Nortel gave no indication of any trouble when it

released fourth-quarter earnings a month earlier .

170. Indeed, upon Nortel's February 15, 2001 announcement, analysts across the boar d

downgraded their recommendation on Nortel stock and/or substantially revised downward thei r

revenues and earnings estimates . For example, on February 16, 2001, First Union Securities

analyst Stephen Kofller downgraded Nortel from "strong buy" to "market perform," explaining :

* Nortel pre-announced its QI 2001 results and loweredguidance going forward . The Company reported that

revenue for the quarter will come in at $6 .3 billion versusour estimate of $8 .1 billion . . .

* Key causes of the miss are softness in optical and circuitswitching. The company is saying that US based carriers,in a weak economic environment are spending substantiallyless, and will essentially make do with their infrastructuresin place as much as possible .

171 . Also referencing Nortel's February 15, 2001 bombshell announcement, AB N

AMRO Inc . analyst Kenneth M. Leon downgraded Nortel from "buy" to "hold" and lowered hi s

2001 revenue estimates to $33 .3 billion (10% growth) . Similarly, analyst Charles DiSanza, of

Gerard Klauer Mattison & Co ., downgraded Nortel from "buy" to "neutral" and "sharply "

lowered estimates for earnings per share for the first quarter 2001 and for fiscal year 2001 .

172. On April 19, 2001, after the Class Period , defendants issued a press release

announcing the Company's disappointing first quarter 2001 revenues of just $6 .18 billion ,

compared to $6 .32 billion for the same period in 2000 . Defendants explained that the

significantly lower-than-expected revenues were due to "reduced capital spending by servic e

providers and enterprises resulting from tighter capital markets and a severe slowdown in th e

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U. S . economy." In that release, defendant also announced that the Company would be doubling

the job cuts to 20,000 and that they would not be giving guidance for the next quarter or for year-

end 2001 . All of these trends and factors had been in place when defendants made their falsely

and unrealistically optimistic projections during the Class Period .

173 . Nortel's Form 10-Q for the quarterly period ended June 30, 2001, filed with the

SEC on August 8, 2001, reported only $4 .61 billion in revenues (compared to $7 .82 billion in

revenues for the same quarterly period in 2000) and $13.6 billion in write-downs, contributing to

a $19.4 billion loss . As discussed above, the bulk of that special charge related to a $12 .4 billion

write-down of goodwill associated with certain of Nortel's acquisitions, which was grossly

delayed . Thus, as noted above, rather than the 30-35% revenue growth defendants projected

repeatedly throughout the Class Period, Nortel's second quarter 2001 revenues of $4 .61 billion

were 41% below the reported revenues for the same quarter in 2000 .

174 . On November 6, 2001, the Company filed its Form 10-Q for the quarterly period

ended September 30, 2001, repo rting only $3 .694 billion in revenues, compared to $6.726 billion

for the same period in 2000, and disclosing that nearly 28, 000 jobs had been cut since the

beginning of the year, including du ring the Class Period . Thus, as noted above, rather than the

30-35% revenue growth defendants projected repeatedly throughout the Class Pe riod , Nortel's

third quarter 2001 revenues of $3 .694 billion were a full 45% below the reported revenues for the

same quarter in 2000 . The Company's third quarter 2001 Form 10-Q further reported that in June

2001, the Company's Board of Directors made a decision to discontinue ce rtain access solutions

operations and that the Company was then currently working to "dispose-of' the operation s

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relating to certain of Nortel's acquisitions, including Sonoma Systems and Promator y

Communications, Inc .

175. Nortel's stock price has never recovered from the February 15, 2001 revelation ,

trading as low as $4 . 98 and closing at $7.47 on December 3, 2001 .

ADDITIONAL SCIENTER ALLEGATION S

176. Defendants acted with scienter because they : (i) knew or recklessly disregarde d

that their public documents and statements during the Class Period were materially false and

misleading at the time they were made ; (ii) knew or recklessly disregarded that such statement s

or documents would be issued or disseminated to the investing public ; and (iii) knowingly o r

recklessly participated in the issuance or dissemination of such statements or documents a s

primary violations of the federal securities laws .

177. As alleged herein, in addition to causing the Company to report materially false

financial results for the third and fourth quarters of 2000, each of the Individual Defendants took

additional affirmative steps (e.g., issued mid-quarter press releases, held conference calls with

analysts, etc .), to falsely reassure the market that Nortel's business was not being negatively

impacted by a slowing of the Internet and Telecommunications sectors .

178 . As set forth above, the Individual Defendants , by virtue of their receipt of

information reflecting the truth regarding Nortel, their control over, and/or their associations wit h

the Company which made them privy to confidential proprietary information concerning Nortel ,

were active, direct and culpable participants in the fraudulent scheme alleged herein . These

defendants knew and/or recklessly disregarded the-false and misleading nature of the information

which they caused to be disseminated to the investing public . The ongoing fraudulent schem e

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described herein could not have been perpetrated over the course of the Class Period, as ha s

occurred, without the knowledge and complicity of the personnel at the highest levels of Nortel ,

including the Individual Defendants . For example, among other things :

(a) Senior management who reported to defendant Chandran held meetings inSeptember 2000 to discuss the negative market conditions and to devise a plan topull forward massive revenues from future quarters in order to bolster reportedrevenues in the 2000 third and fourth quarters ;

(b) In September 2000, senior executives on the Verizon account informed

Nortel management that there would be a "major shortfall" of 2001 revenues as a

result of the anticipated pull forward ;

(c) In September 2000, Michael Fichtner, Vice President of Global Sales forNortel's high Performance Group, was informed by several customers that theywould reduce orders in the 2000 fourth quarter and throughout 2001 as a result ofthe contraction of the Internet and telecommunications sectors ;

(d) In September 2000, Fichtner submitted to defendant Chandran his group'sfourth quarter 2000 sales forecasts which were substantially below what waspreviously anticipated -- Fichtner was told by Chandran to do whatever is

necessary to "make bigger numbers" ;

(e) Prior to the close of the 2000 third quarter, a Nortel Field SalesRepresentative submitted to Nortel management a 2001 forecast for the FairPointaccount, which was revised downward significantly ;

(f) By October 2000, WorldCom, a major Norte] customer, drastically scaled

back orders as a result of excess invento ries of Nortel products ;

(g) In the third and fourth quarters of 2000, Nortel senior management,

including the Individual Defendants , oversaw a massive year-end scramble toboost Nortel's reported revenues and earnings which included , in addition to theGAAP violations detailed above , several other desperate measures , such as the

dumping of ce rtain of Nortel's most popular products at unprecendenteddiscounts .

179. Moreover, defendants' scienter is further supported by the fact that the accountin g

violations alleged herein were apparent on their face . Indeed, the accounting principles at issu e

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here (e.g. reserving for uncollectible receivables, taking a write-off for impaired assets, refraining

from recognizing revenues until they are earned and collectible, etc.) are not complex . Thus, al l

defendants knew or recklessly disregarded that Nortel's reported financial results for the third and

fourth quarters of 2000 were mate rially misstated .

180 . In addition to having actual knowledge of or recklessly disregarding the falsity o f

their statements, each of the defendants had the motive and opportunity to engage in th e

fraudulent scheme to inflate the price of Nortel common stock by concealing the true state o f

affairs at the Company . As noted above, using Nortel's artificially inflated stock as currency ,

defendants completed several acquisitions prior to and during the Class Period, including Alteon

Websystems, Inc . ($8 .054 billion) and 980 NPLC ($2 .82 billion) .

181 . Nortel's business plan and strategy were completely dependent upon makin g

acquisitions, as this was how Nortel acquired new technology and products and boosted it s

reported growth rate . Defendants knew that maintaining the stock price at a high level was

absolutely vital to successfully consummate these acquisitions . In fact, according to the

Company's most recently-filed Form 10-Q (filed November 6, 2001), since the February 200 1

collapse of Nortel's stock price, the Company has not made a single acquisition to date .

182. Nortel's negotiations for the purchase of 980 NPLC - JDS Uniphase's Zurich ,

Switzerland-based subsidiary and related assets in New York -- occurred in the fourth quarter o f

2000 and in January 2001, a time when Nortel's stock price was artificially inflated as a result of

the fraud alleged herein. By mid-January 2001, the financial news media reported to investors

that the negotiations between Nortel and JDS were at an advanced stage. For example, o n

Janua ry 16 , 2001, CBS Market Watch reported that, "the two firms have outlined an agreement . "

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183 . Nortel' s acquisition of 980 NPLC was critical to the future success of its optical

business . Indeed, when Nortel issued a press release on February 6 , 2001 announcing a

"definitive agreement" for the purchase of the JDS subsidiary, the significant advantages of th e

acquisition to Nortel were immediately noted by various securities analysts . For example, in a

February 6, 2001 Reuters story, Jim Liang, an analyst at WR Hambrecht & Co . was quoted a s

follows :

With Nortel' s vision of spinning out its optical componentbusiness sometime this year , this acquisition of the 980 pump chipbusiness really gives them a key technology that 's missing in theirportfolio . [Emphasis added.]

184. Similarly , a February 6, 2001 C/Net Tech News story repo rted :

No rtel said it is acquiring from JDS a leading manufacturing plantfor laser chips, a technology that is becoming more essential increating fiber-optic networks. Upon completion of the deal, Nortelsaid it expects to continue relationships with existing customers,which, according to JDS , include some of the leaders in opticalcomponent manufacturing . [Emphasis added . ]

185 . Also on February 6, 2001, Morningstar.com reported :

The announcement is favorable for Nortel as well, in our opinion.JDS' Zurich plant makes parts that are both critically importantand very difficult to manufacture . The purchase expands Nortel 'salready substantial internal photonics capabili ty, increases itsfuture bargaining power with suppliers (including JDS) andenhances prospects for a successful spin-off of its opticalcomponent unit to shareholders , most likely this year . [Emphasisadded. ]

186. On February 7, 2001, Bear Stearns analysts Wojtek Uzdelewicz, Michael Gargano

and George Gianarikas repo rted that the acquisition of 980 NPLC had two major benefits to

Nortel : (i) a "strengthening of its product offering," and (ii ) "diversification of its customer base . "

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Also on February 7, 2001, Josephthal analyst Lawrence Harris reported, "Nortel gains a world-

class optical components plant, especially assuring the company access to critical 980 nanometer

pump laser chips . "

187 . The acquisition of 980 NPLC was paid for using billions of dollars worth o f

Nortel's artificially inflated common stock and was completed on February 13, 2001, just two

days before the Company disclosed its true financial condition .

188. Defendants were further motivated to maintain Nortel's stock price at artificially

inflated levels in order to receive favorable ratings from credit agencies prior to a $1 .5 billion

bond offering . On February 8, 2001, Nortel Networks Limited, a wholly-owned subsidiary of th e

Company, completed an offering of $1 .5 billion of 6 .125 percent notes , which mature on

February 15, 2006 . For information relating to the financial condition of Nortel, the Prospectus

issued in conjunction with that offering specifically directed investors to review the Company' s

SEC filings -- including the Company's 2000 third quarter Form 10-Q which , as al leged herein ,

contained materially inflated financial results and other materially false and misleadin g

statements . Had the truth been known, this offering would not have been possible or would no t

have been completed on such favorable terms .

APPLICABILITY OF PRESUMPTION OF RELIANCE :FRAUD-ON-THE MARKET DOCTRINE

189 . Lead Plaintiff will rely, in part, upon the presumption of reliance established b y

the fraud -on-the-market doct rine in that :

a) defendants made public misrepresentations or failed to disclose materialfacts during the Class Period ;

b) the omissions and misrepresentations were material ;

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c) the securities of the Company traded in an open and efficient market ;

d) the misrepresentations and omissions alleged would tend to induce areasonable investor to misjudge the value and prospects of the Company'ssecurities; and

e) Lead Plaintiff and other members of the Class traded in Nortel Securitiesbetween the time the defendants failed to disclose or misrepresentedmaterial facts and the time the true facts were disclosed, withoutknowledge of the omitted or misrepresented facts .

190 . At all relevant times , the market for Nortel common stock and options was a n

efficient market for the following reasons, among others :

a) Nortel common stock met the requirements for listing, and was listed andactively traded, on the New York Stock Exchange and the Toronto StockExchange, both highly efficient markets which, in fact, operate as a singlemarket due to the instantaneous linkage of trading on the exchanges ;

b) As a regulated issuer, Nortel filed periodic reports with the SEC and theCanadian securities regulators ;

c) Nortel stock was widely followed by securities analysts employed bymajor brokerage firms who wrote reports which were distributed to thesales force and customers of their respective firms. These reports werepublicly available and entered the public marketplace ; and

d) Nortel regularly issued press releases which were carried by national and

international newswires . Each of these releases was publicly available and

entered the public marketplace .

191 . Based upon the foregoing, the market for Nortel Securities promptly digeste d

current information with respect to Nortel from all publicly available sources and reflected such

information in Nortel's stock price. Under these circumstances, all purchasers of Nortel commo n

stock and call options (and sellers of Nortel put options) du ring the Class Period suffered similar

injury through their trades in Nortel Securities at artificially inflated or distorted prices and a

presumption of reliance applies .

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NO STATUTORY SAFE HARBOR

192. The statutory safe harbor provided for forward-looking statements under certai n

circumstances does not apply to any of the false statements pleaded in this complaint . Certain of

the specific statements pleaded herein , including, among others , oral statements made in

conference calls with analysts and investors, were not identified as "forward-looking statements "

when made. Nor was it stated with respect to any of the statements forming the basis of thi s

complaint that actual results "could differ materially from those projected ." To the extent there

were any forward-looking statements, there were no meaningful cautionary statement s

identifying important factors that could cause actual results to differ materially from those in th e

purportedly forward-looking statements . Alternatively, to the extent that the statutory safe

harbor does apply to any forward- looking statements pleaded herein , defendants are liable for

those false forward-looking statements because at the time each of those forward-lookin g

statements was made the particular speaker knew that the particular forward-looking statemen t

was false and/or the forward-looking statement was authorized and/or approved by an executiv e

officer of Nortel who knew that those statements were false when made .

193 . To the extent that defendants' written statements regarding the Company's

expected revenues, earnings, earnings per share and growth, are deemed to be forward-lookin g

statements, those statements are actionable for the following reasons :

(a) such statements were material to investors ;

(b) the statements were not accompanied by meaningful cautionary statementsidentifying important factors that could cause actual results to differ materiallyfrom those in the purportedly forward-looking statements . Rather, defendantsmerely advised investors that the Company's results could differ based upongeneral risks and uncertainties . Such statements themselves were materially fals e

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and misleading for failing to disclose the concrete present facts and risks set forthabove; and

(c) at the time the statements were made, they were made by and/or with theapproval of senior Nortel executives, including the Individual Defendants, amongothers, who knew that the particular statements were materially false an dmisleading for the reasons set forth above .

194 . In addition, defendants' oral statements during the Class Period regardin g

expected growth in revenues and earnings for 2000 and 2001 are not protected by the safe harbor

provision of the PSLRA because :

(a) such statements were material to investors ;

(b) such statements were not identified as forward looking;

(c) such statements were not accompanied by a caution that actual resultscould differ materially from those projected ;

(d) defendants failed to identify a readily available written documentcontaining information about factors which could cause actual results to differmaterially from those projected ; and

(e) defendants had actual knowledge that such statements were false because,in light of the then-existing market conditions, the projected results for 2000 couldbe achieved only if defendants were to engage in the accounting improprietiesdiscussed below, and the projected results for 2001 would be nearly impossible toachieve .

CLAIMS FOR RELIEF

COUNT I

(Against All Defendants For Violations OfSection 10(b) And Rule 10b-5 Promulgated Thereunder)

195. Lead Plaintiff repeats and realleges each and every allegation contained in the

foregoing paragraphs as if fully set forth herein .

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196. This Count is asserted against defendants and is based upon Section 10(b) of the

Exchange Act, 15 U . S .C. §78j (b), and Rule IOb-5 promulgated thereunder .

197. During the Class Period, defendants, singly and in concert, directly engaged in a

common plan, scheme, and unlawful course of conduct, pursuant to which they knowingly or

recklessly engaged in acts, transactions, practices and courses of business which operated as a

fraud and deceit upon Lead Plaintiff and the other members of the Class ; made various deceptive

and untrue statements of material facts and omitted to state material facts necessary in order t o

make the statements made , in light of the circumstances under which they were made, no t

misleading ; and employed devices, schemes and artifices to defraud in connection with the

purchase and sale of securities. The purpose and effect of said scheme, plan, and unlawfu l

course of conduct were, among other things, to : (a) conceal the adverse facts concerning the

Company's operations, particularly with respect to its financial condition and prospects ; (b)

artificially inflate or disto rt and maintain the market price of Nortel Securities ; and (c) cause

Lead Plaintiff and the other members of the Class to trade in Nortel Securities at inflated or

distorted prices .

198 . During the Class Period, defendants, pursuant to said plan, scheme, and unlawfu l

course of conduct, knowingly and/or recklessly, participated directly or indirectly in the

preparation and issuance of deceptive and materially false and misleading statements to th e

investing public as identified above .

199. The Individual Defendants, by virtue of their positions at the Company , had actua l

knowledge of the materially false and misleading statements and material omissions allege d

herein and intended thereby to deceive Lead Plaintiff and the other members of the Class, or, in

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the alternative, the Individual Defendants acted with reckless disregard for the truth in that they

failed or refused to ascertain and disclose such facts as would reveal the materially false an d

misleading nature of the statements made, although such facts were readily available to

defendants. Said acts and omissions of defendants were committed knowingly or with reckles s

disregard for the truth and defendants knew or recklessly disregarded that material facts were

being misrepresented or omitted as described above .

200. Throughout the Class Period, Nortel acted through the Individual Defendants,

whom it portrayed and represented to analysts, the financial press , and the public as its valid

representatives. The willfulness, motive, knowledge, and recklessness of the Individua l

Defendants is therefore imputed to Nortel, which is primarily liable for the securities la w

violations of the Individual Defendants while acting in their official capacities as Company

representatives, or, in the alternative, which is liable for the acts of the Individual Defendant s

under the doctrines of agency and respondeat superior.

201 . Additional information showing that the defendants acted knowingly or wit h

reckless disregard for the truth is peculiarly within the defendants' knowledge and control . As the

senior managers and directors of the Company, .the Individual Defendants had knowledge of th e

details of the Company's internal affairs .

202 . The Individual Defendants are liable both directly and indirectly for the wrong s

complained of herein . Because of their positions of control and authority, the Individua l

Defendants were able to and did, directly or indirectly, control the content of the statements o f

the Company. As officers and directors of a publicly-held company, the Individual Defendant s

had a duty to disseminate timely, accurate, and truthful information with respect to th e

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Company's businesses, operations, future financial condition and future prospects . As a result of

the dissemination of the aforementioned false and misleading reports, releases and publi c

statements, the market price of Nortel Securities was artificially inflated or distorted throughou t

the Class Period . In ignorance of the adverse facts concern ing Nortel's business and financial

condition which were concealed by defendants , Lead Plaintiff and the other members of th e

Class traded in Nortel Securities at artificially inflated or distorted prices and relied upon the

price of the stock, the integrity of the market for the stock and/or upon statements disseminated

by defendants, and were damaged thereby .

203 . During the Class Period, Nortel Securities were traded on the New York Stock

Exchange and the Toronto Stock Exchange, both active and efficient markets . Lead Plaintiff and

the other members of the Class, relying on the materially false and misleading statement s

described herein, which the defendants made, issued or caused to be disseminated, or relying

upon the integrity of the market, traded in Nortel Securities at prices artificially inflated or

distorted by defendants' wrongful conduct . Had Lead Plaintiff and the other members of th e

Class known the truth, it would not have traded in Nortel Securities or would not have traded i n

Nortel Securities at the inflated or distorted prices that were paid . At the time of the purchase s

by Lead Plaintiff and the Class, the true value of Nortel stock was substantially lower than the

prices paid by Lead Plaintiff and the other members of the Class . The market price of Nortel's

common stock declined sharply upon public disclosure of the facts alleged in this complaint .

204. By reason of the conduct alleged herein, defendants knowingly or recklessly ,

directly or indirectly, violated Section 10(b) of the Exchange Act and Rule 10-5 promulgate d

thereunder .

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COUNT II

(Violations Of Section 20(a) Of TheExchange Act Against The Individual Defendants )

205. Lead Plaintiff repeats and realleges each and every allegation contained in the

foregoing paragraphs as if fully set forth herein .

206. During the Class Period, the Individual Defendants participated in the operation

and management of the Company, and conducted and participated, directly and indirectly, in the

conduct of Nortel's business affairs . By virtue of Individual Defendants' high-level and senior

positions, they knew the adverse non-public information about Nortel's sales, services, financial

condition, and future prospects, or recklessly disregarded such adverse facts .

207 . As directors and officers of a publicly-owned company , the Individual Defendants

had a duty to disseminate accurate and truthful information with respect to Nortel's financia l

condition and prospects, and to promptly correct any public statements issued by Nortel whic h

had become materially false or misleading .

208. Because of their positions of control and authority as a senior officers an d

directors of Nortel, the Individual Defendants had the power and autho rity, and exercised the

same, to control the contents of the various reports and press releases which Nortel disseminate d

in the marketplace during the Class Period concerning the Company' s sales, services, financial

condition, and future prospects. Throughout the Class Period, the Individual Defendant s

exercised their power and authority to cause Nortel to engage in the wrongful acts complaine d

herein. Therefore, each was a "controlling person " of Nortel within the meaning of Section 20(a)

of the Exchange Act . In their capacities, the Individual Defendants culpably participated in the

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unlawful conduct alleged which artificially inflated or distorted the market price of Norte l

Securities .

209. By reason of the above conduct, the Individual Defendants are liable pursuant t o

Section 20 of the Exchange Act for the violations of Nortel .

WHEREFORE, Lead Plaintiff, on its own behalf and on behalf of the Class, prays

for judgment against defendants as follows :

A. Declaring this action to be a proper class action and certifying Lead

Plaintiff as a class representative under Rule 23 of the Federal Rules of Civil Procedure ;

B. Awarding compensatory damages in favor of Lead Plaintiff and the other

members of the Class against all defendants, jointly and severally, for the damages sustained b y

Lead Plaintiff and the Class as a result of the acts and transactions alleged herein, together with

interest thereon ;

C. Awarding Lead Plaintiff the fees and expenses incurred in this action,

including reasonable allowance of fees for Lead Plaintiffs attorneys and experts, and other costs ;

and

D . Granting such other and further relief as this Court may deem just an d

proper .

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JURY TRIAL DEMAN D

Lead Plaintiff demands a jury trial of all issues so triable .

Dated : January 18, 2002New York, New York

Respectfully submitted,

MILBERG WEISS BERSHADHYNES & LERACH LLP

By :Steven G. ulman (S -2561)Daniel B . Scotti (DS-4139)One Pennsylvania PlazaNew York, New York 10119(212) 594-530 0(212) 868-1229 (Fax)

WECHSLER HARWOOD HALEBIA N& FEFFER LLP

By: 0✓ ~==1~ 'GJohalebian (JH-8005)48 adison Avenu eNew York, New York 10022(212) 935-740 0(212) 935-0858 (Fax)

Plaintiffs ' Co-Lead Counsel

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