The settlement was announced as the SEC filed a lawsuit in U.S. District Court in Manhattan, accusing Nortel Networks Corp. and Nortel Networks Limited of committing revenue fraud and earnings management fraud that allowed it to meet unrealistic earnings guidance it provided Wall Street in 2000, 2002 and 2003.

The telecom equipment maker agreed to provide the SEC with quarterly written reports detailing its progress in implementing a remediation plan and actions to address weaknesses in its internal controls.

The fraud in 2000 enabled Nortel to appear to be "weathering an economic downturn better than its competitors," the SEC said. It added that Nortel was able to make it appear it had stabilized its operations and returned to profitability.

The Toronto-based company said in a statement that the deal was part of a broader effort to turn around its business that has included a settlement with the Ontario Securities Commission and the resolution of shareholder class actions.

"We are pleased that we have reached final resolution in this matter," Nortel President Mike Zafirovski said. "The settlement recognizes the extensive and proactive efforts made by Nortel's Board and senior management to identify and address the accounting and internal control issues and conduct that led to the investigation."

The SEC said Nortel's record keeping became fraudulent as the company responded in September 2000 to a softening of orders amid a general economic downturn that caused it to miss internal projections by hundreds of millions of dollars.

When the company realized revenues for the year would fall short of projections by almost $2 billion, it manipulated its financial books so it could move its revenues and earnings up or down as needed to meet Wall Street's unrealistic expectations, it said.

One of the methods it used to produce more than $1 billion in revenue than should have been allowed was to count inventory that was sitting in its warehouses and other storage locations as revenue even though the products had not yet been delivered, the SEC said.

In February 2001, the company announced it was restructuring to reduce its work force by two-thirds and was lowering its guidance to investors, acknowledging the widespread economic downturn affecting the entire telecommunications industry.

The SEC said Nortel in mid-2002 began another fraudulent scheme, this time to manipulate its reserve funds so that it could reliably meet earnings expectations, create a false return to profitability and pay millions of dollars in bonuses, mainly to its top executives.

When it realized it was going to return to profitability in the fourth quarter of 2002, sooner than it had publicly projected, it quickly established and maintained unnecessary reserves to reduce earnings for the quarter and prevent the early profit, the SEC said.

Then when revenues in 2003 fell short of expectations, the company improperly released sufficient excess reserves to cause it to report a profit anyway and to let it pay substantial bonuses to its employees, the SEC said in its court papers.

An outside auditor caused Nortel to announce it was conducting a "comprehensive review" of its assets and liabilities, resulting in an October 2003 restatement of finances for 2000, 2001 and 2002, the SEC said.

"Nortel's first restatement was a cover-up," the SEC said. It said the supposedly comprehensive review conducted by the company's then-senior executives was "superficial and sharply limited."

The SEC said the company continued to mislead the public by claiming the restatement resulted from accounting errors made during a volatile period when demand for Nortel's products dropped and the company was restructuring.

"Nortel's culture had long been extremely target-driven," the SEC said. "It was understood across the company that either missing or exceeding a financial target reflected a failure to manage the company's business properly."

It added: "In that environment, accounting did not serve to measure Nortel's performance; instead, Nortel's executives and finance managers treated their books as tools to meet the company's financial objectives."

Since April 2004, the company has operated under completely new senior leadership, the SEC said.

Nortel's shares fell 8 cents to close at $16.76 Monday.