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Intuition pays off for those who sold early

One lucky manager read the tea leaves

With files from reporter Karen Howlett

Jacques Chartrand knew there was something wrong when Nortel Networks Corp. suspended its chief financial officer and controller last month, shortly after the company said it would have to restate its financial results a second time.

So wrong, in fact, that the senior vice-president at Natcan Investment Management Inc. immediately sold off the firm's remaining stake in the telecom supplier, a huge chunk of about 40 million shares.

"They would not have put the CFO and controller on a leave of absence for nothing," he said. "[This] was very bad news."

Mr. Chartrand was one of the lucky ones. Numerous other major investment funds got sideswiped yesterday after Nortel fired chief executive officer Frank Dunn, along with the two suspended officials, and revealed the restatement would be broader than initially expected.

That sucked Nortel shares into a dizzying tailspin, as panicked investors wiped nearly 31 per cent off the company's market cap.

"It's disappointing, and it continues to be disappointing that we still are facing these types of issues after so much water has gone under the bridge on all types of issues and scandals," complained Doug Pearce, chief executive officer of the British Columbia Investment Management Corp., which holds about 55 million shares in the company.

"Maybe they're making a very strong statement here -- and I'm not sure -- that they're cleaning house, that there's just no room for any impropriety at all."

Mr. Pearce said that, up to this point, there has not been enough disclosure on the company's problems. While he's not ready to give up on Nortel, he said investors will likely take a wait-and-see approach to the managerial change.

Yesterday's bombshell may have thrown retail investors, but there was a discernible lack of surprise in institutional money management circles. Nortel's history of providing rude surprises to shareholders, coupled with the recent red flags around accounting issues, had prepared some industry watchers for further executive turmoil.

"Our thought process all along was that we thought the gross margins were sort of juiced up -- that they were taking the inventory that they had written off and just using it to lower the [cost of goods sold] line," said Jonathan Shui, an analyst at TD Asset Management Inc., which owned nearly 70 million Nortel shares as of the end of last year. "So it didn't come as too much of a surprise."

Indeed, Nortel's track record over the past decade suggests that all of the blame can't simply be laid at Mr. Dunn's feet, given he is a relative newcomer, said Brian Gibson, senior vice-president of global active equities at Ontario Teachers Pension Plan Board, which owned about 36 million shares at year-end.

Teachers, like many Canadian pension funds and institutional money managers, holds a fairly large portion of Nortel, in part because of the company's significant presence in the Toronto Stock Exchange's benchmark index.

"Nortel has had 10 years of problems and setbacks and poor decision-making," Mr. Gibson said. "The net result of all that is the company is worth less today than it was 10 years ago. That's a pretty discouraging 10-year record."

Some major investors insisted the company still has decent prospects if it can manage to turn things around, and many were clearly reluctant to incur a sizable loss by participating in yesterday's frenzied selloff.

Others on the sidelines went a step further, hailing the hobbled stock-- it closed at $5.26 on the TSX -- as a buying opportunity.

But for Mr. Chartrand, at least, the stock can't drop low enough to entice him to jump in again. "There's no price, for the time being, [where] we would buy it back."

© 2007 The Globe and Mail. All rights reserved.

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