Ontario Superior Court Justice Frank Marrocco said he was "not satisfied" that ex-CEO Frank Dunn, ex-CFO Douglas Beatty and ex-controller Michael Gollogly had "deliberately misrepresented" the finances at the now-defunct telecom company in 2002 and 2003.
"Therefore, I find each of them not guilty," he said.
Following the verdict, the three jumped to their feet to hug family members and their lawyers.
The 145-page ruling came a year after one of the largest and most complex corporate criminal trials in Canada began.
Dunn, Beatty and Gollogly each faced two counts of fraud - one count of defrauding the public and one count of defrauding Nortel Networks Corp. It was alleged the men participated in a book-cooking scheme designed to trigger $12.8 million in bonuses and stocks for themselves while they were at the helm of Nortel.
All three pleaded not guilty to the charges. They were fired from the beleaguered firm in 2004.
While Dunn did not address the media outside court, he released a statement saying he was "grateful to have received vindication."
"For a very long time, integrity has been the foundation of Nortel Networks' corporate governance and business practices. The documentary evidence and testimony re-affirmed this core value that I witnessed over my 28 years with the company," he said.
"I am looking forward to turning the page on this chapter of my life."
Outside court, Beatty smiled and replied, "Yes, I am," when asked if he was happy to be moving past the case.
His lawyer, Greg Lafontaine said the ruling vindicated his client.
"We're ecstatic with the result," he said. "It's a great judgment. It's a complete vindication of Mr. Beatty.
"There was no fraud at Nortel. No fraud at Nortel at all."
The Crown did not offer comment.
Sharon Lavine, who represented Gollogly, said the judge made a "clear decision" on the allegations, but added the turmoil of the trial has left a resounding impact on her client.
"It's an immeasurable emotional toll on someone as you can imagine," Lavine said outside court.
At its height, Nortel employed more than 90,000 workers worldwide and was worth nearly $300 billion. During the technology boom in 1999-2000, Nortel was one of Canada's most valuable companies, with its shares peaking at $124.50.
In the years that followed the accounting scandal, the company's shares nosedived to penny-stock status amid falling sales, large debts, and a gamut of legal issues.
In 2009, Nortel filed for bankruptcy in North America and Europe, shedding thousands of jobs.
Since then, it has sold its remaining businesses piecemeal to various buyers for more than US$7.8 billion, one of largest asset sales in Canadian history.
At trial, Crown prosecutors alleged that Dunn, Beatty and Gollogly were complicit in releasing accruals - money set aside to cover future liabilities - onto Nortel's balance sheets during quarters that needed to show the beleaguered telecom company was turning a profit when it wasn't.
The Crown argued that these decisions by the accused, which were kept from the board of directors and the firm's investors, generated return-to-profitability bonuses for themselves even though the company was in the red.
In his judgment, Marrocco said the decision to only release $80 million in excess accruals when it had $189 million so that Nortel could boost numbers during the company's first quarter of 2003 was not out of the ordinary.
This policy did not lead to misrepresenting Nortel's "financial results to the investing public or Nortel's audit committee or Nortel's board of directors," he wrote.
Although the judge found that genuine accrued liabilities were not released when they should have been nor adjusted when they should have been, he was "not satisfied that any or all of the accused understood the extent of the excess accrued liabilities on Nortel's balance sheet."
Furthermore, the amount was immaterial to the finances of such a large company, and even if they were not released the executives would've received their profit bonuses anyway, Marrocco told the court.
At trial, the defence argued there was no evidence that the accused were involved in a conspiracy with countless accredited accountants from Nortel and outside auditors Deloitte & Touche.
Dunn's lawyer also told the court that, as CEO, his client approved the accounting at the telecom equipment maker but should not be held responsible if the figures given to him were inaccurate.
At the time, Dunn was preoccupied with trying to save the company and trusted that the balance sheets were correct when he approved them, argued the defence.
"I also find that the enormous losses suffered by Nortel in these years created a situation in which senior management, Nortel's board of directors and Nortel's auditors were quite reasonably concentrating on doing all things necessary to make sure that Nortel had sufficient cash reserves to survive and continue in business," said Marrocco.
"I am satisfied that non-cash impacting excess accrued liabilities on the balance sheet were not a priority."
The Crown also charged, unsuccessfully, that there was blatant falsification of financial records while the accused were in charge.
It was alleged that a year earlier, Nortel's own accountants were aware of $303 million in cash reserves that were held without a legitimate reason.
The verdict came on the same day that mediation talks on the distribution of nearly $9 billion in assets from the now-bankrupt Nortel were set to begin in Toronto.
The week-long proceedings, headed by Ontario Chief Justice Warren Winkler, are part of an effort to settle the company's creditor claims in Canada, the U.S. and around the world.
About 100 lawyers were expected to attend the talks, including those representing Nortel pensioners, disabled former employees, bond holders, trade creditors and governments.