Light Reading

Bross Rides the ONI Gravy Train

Light Reading
News Analysis
Light Reading
2/21/2002
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While Gary Smith and Hugh Martin, CEOs of Ciena Corp. (Nasdaq: CIEN) and ONI Systems Inc. (Nasdaq: ONIS), were congratulating each other on Monday over the planned merger of their two companies, another man, at another company, may also have been patting himself on the back.

The man is Matthew W. Bross, who appears to have sold the majority of his shares in ONI in just the nick of time.

Matt Bross Bross is not only on the ONI board of directors, he is also a senior VP at Williams Communications Group (NYSE: WCG), a major ONI customer. Until this year, Bross also served as CTO of Williams.

Nearly two years ago, Light Reading revealed Bross's stake in ONI, which he purchased cheap in pre-IPO shares. The stake was so large that it showed up on the company’s S-1 filing with the SEC in March 2000 (see Williams' CTO Profits From His Position ). Now, while Williams faces financial uncertainty (see Williams Winding Down?), and ONI is being swallowed by Ciena in a $900 million all-stock deal (see Ciena and ONI: Wedding of the Year?), Bross is sitting pretty.

Over the last year, he sold more than 1.5 million ONI shares and gave away 20,000 more, all held indirectly (i.e., in a trust, by a spouse, etc.).

According to Securities and Exchange Commission (SEC) records posted on Yahoo (Nasdaq: YHOO), the transactions have brought in nearly $42.6 million. That is an average price of $28.4 per share, far above the $6.20 value of ONI shares in Monday’s Ciena bid, which was a 12 percent premium on Friday’s closing price.

It seems Bross made his moves at the right time. ONI has seen its stock plummet about 85 percent over the last year. Although the company’s stock was up 40 cents (7.22%) Tuesday, as investors reacted to the news of the merger, shares were only trading at $5.94 apiece.

Good judgment aside, Bross's riches and his continued ownership of such large quantities of stock continue to raise eyebrows. “At the very least, there is the appearance of a conflict of interest there," says a Wall Street analyst who asked to remain unnamed. He says it isn’t unusual to issue options to a company, but it is unusual for a CTO, which was what Bross was when the majority of his stake was acquired. (The announcement of Bross's title change at Williams was issued January 8, 2002.) After all, the CTO is the one with the most say as to which vendors the company is going to patronize.

“It might color [Williams’s] judgment on which companies to chose as vendors,” notes Joe Gladue, an analyst with the Chapman Co. He doesn’t, however, believe there is anything inherently unethical about Bross holding such a large stake in ONI.

“Yeah, he has an advantage,” Gladue says, pointing out that since Bross is inside the business, he sees trends before the rest of the world catches a glimpse of them. “But he would have had an advantage even if he held stock in a company that Williams doesn’t do business with.”

It seems the courts agree. A lawsuit filed in October 2000 against Bross and 22 other officers and directors at Williams Communications and parent firm The Williams Companies Inc. (NYSE: WMB) was thrown out by a federal judge in Oklahoma City last November. In the suit, Williams shareholders claimed that Bross and the other officers had breached their fiduciary duties by pocketing nearly $60 million from stock options of partner companies such as ONI (see Shareholders Sue Williams ).

In the case of ONI, the shareholders claimed that Bross, along with Williams president of strategic investments John C. Bumgarten Jr., made more than $40 million from discounted stock that soared after it was offered in public trading.

In his order, Judge Tim Leonard wrote that the shareholders had failed to support their allegations that corporate officers and directors had forsaken their fiscal responsibilities by sanctioning the stock options.

Now, after reaping his $42 million windfall and cleared of the lawsuit, Bross will continue to hold a substantial stake in Ciena, if the deal goes through.

Under the merger deal, each share of ONI common stock will be exchanged for 0.7104 shares of Ciena. Once the deal is completed, Bross’s remaining 192,460 indirectly held ONI shares should translate into about 136,724 Ciena shares. With stock recently trading at about $9, that adds up to more than $1 million.

Most observers agree that the merger between Ciena and ONI is a good move by both companies and the premium paid for ONI stock was not that large. “Chances are that the stock of the combined company will do better than ONI could have done alone,” says Chapman's Gladue.

Bross did not show up for a scheduled interview yesterday to answer queries on this story.

Another shareholder likely to have made money during ONI's heyday is Robertson Stephens managing director Paul Johnson, an analyst who still covers the company and whose original stake in ONI had much in common with Bross's (see Analyst Owns $9M in ONI Systems Stock ). Namely, it consisted of pre-IPO shares and was so large -- more than 100,000 shares -- that it made it into an ONI S-1 form.

At the time, Johnson said that he planned to hold onto his ONI shares as a long-term investment, and that he would not sell any shares even if he was set to downgrade the stock, because, he said, “that would be unethical.” However, last March, Johnson's name appeared in an ONI SEC form for the proposed sale of 54,996 shares in the company at an estimated value of $1.4 million, or more than $25.5 per share.

Johnson was unavailable for comment, but Courtney Weber, a spokeswoman for Robertson Stephens, points out that the SEC document doesn’t indicate that the shares were actually sold. She says that Johnson wouldn’t know if his shares in ONI had been sold, since he had placed them in a blind trust about a year and a half ago.

“Robertson analysts are not allowed to hold shares in companies they cover,” Weber says. “That is company policy.”

She says that analysts who hold stock in a company they are scheduled to cover, have the option of selling or of placing the shares in a blind trust. Johnson chose the latter.

“Once [Paul] put the shares in the trust,” she says, “we don’t know what happens to them, and Paul wouldn’t know. This assures objectivity.”

Still, some observers remain skeptical. “I don’t understand what that means,” one analyst, who asked to remain anonymous, says about the blind trust. “He still knows that he has stock in ONI, right?”

— Eugénie Larson, Reporter, Light Reading
http://www.lightreading.com

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Ramona_ThePest
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Ramona_ThePest,
User Rank: Light Beer
12/4/2012 | 10:54:45 PM
re: Bross Rides the ONI Gravy Train
While the SEC, FBI and other groups are investigating Enron, Global Crossing and other illegal schemes, why the Heck are they ignoring alot of the other players with similar schemes to artifically pump the markets and their own accounts?

I remember ONI's quarterly calls - Paul Johnson would always ask a sugar-coated question to Hugh. Robie Stephens research in general was always unduly influenced.

The authorities need to tear up the entire chain of deception - not just the CTO's who gave pre-IPO companies large contracts, but bankers and analysts who also had their hands in the cookie jar and made totally unobjective calls for their companies, investors and the markets at large.

Not sure if Paul Johnson will ever see this posting from his satellite-conected handheld on his private jet heading to St Martin, but he knows EXACTLY what he has done.
iptwister
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iptwister,
User Rank: Light Beer
12/4/2012 | 10:54:43 PM
re: Bross Rides the ONI Gravy Train
Laissez Faire.

Paul Johnson has been nothing but up front and honest about all of his dealings, and anyone who has worked with him or contempleted him objectively knows this.

Sometimes a cigar is really a cigar.

The reason people like PJ invest in these stocks is because they believe in them. They do so in clear view of SEC/investors.

To allege that PJ linked analyst ratings for personal gain is malicious.

It's not true, and knowing him, I refuse to believe your mean-spirited allegations.

Blaming analysts for the general markets inability to invest wisely is immature and short sighted.
Ramona_ThePest
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Ramona_ThePest,
User Rank: Light Beer
12/4/2012 | 10:54:43 PM
re: Bross Rides the ONI Gravy Train
An abolustely heroic picture you paint. God - the guy reminds me of a monk - principled, honest, took a vow of poverty...

I really hope it's a matter of time before the same principles that are applied in D.C. with politicians and the extent of their business dealings with their constituents, etc. - are applied to guys in banking who play all sides of the game to maximize their winnings to the downside of other investors.

I cry in absolute sympathy for Paul that, amidst the broken fortunes of 100's of 1,000's of employees in optical networking who fell prey to the bubble that he and others fueled, that "Paul Johnson has been nothing but up front and honest" - interesting you make that claim and then later claim you don't know him. In any event, sounds like he really got the shortest end of the stick in this downturn, somberly walking away from the bubble with 10's of millions of dollars. Must suck...

May the agencies come after YOU once they have brought him to justice!

>>> Laissez Faire.

Paul Johnson has been nothing but up front and honest about all of his dealings, and anyone who has worked with him or contempleted him objectively knows this.

Sometimes a cigar is really a cigar.

The reason people like PJ invest in these stocks is because they believe in them. They do so in clear view of SEC/investors.

To allege that PJ linked analyst ratings for personal gain is malicious.

It's not true, and knowing him, I refuse to believe your mean-spirited allegations.

Blaming analysts for the general markets inability to invest wisely is immature and short sighted.
knave
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knave,
User Rank: Light Beer
12/4/2012 | 10:54:43 PM
re: Bross Rides the ONI Gravy Train

..probably not. Neither will Matt, especially when the court hearings were held in Tulsa.
knave
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knave,
User Rank: Light Beer
12/4/2012 | 10:54:43 PM
re: Bross Rides the ONI Gravy Train

..probably not. Neither will Matt, especially when the court hearings were held in Tulsa.
jackmeoff
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jackmeoff,
User Rank: Light Beer
12/4/2012 | 10:54:41 PM
re: Bross Rides the ONI Gravy Train
Scumbags like this are helping to undermine the credibility of the companies they for and more importantly our industry as a whole. With CTOs with major influence in purchasing decisions enriching themselves (and/or their family), it's no wonder the average investor would avoid investing money in the telecommunications sector.

Didn't the Enron crash teach us that when you allow senior managers take advantage of their positions for their own personal gain, it destroys the faith sharholders and business partners and employees have in that company.
sntwk
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sntwk,
User Rank: Light Beer
12/4/2012 | 10:54:41 PM
re: Bross Rides the ONI Gravy Train
PJ is over simplistic and not reliable given his track record. He has the following on his mindshare list:
RBAK, EXTR,ONIS,SCMR, SONS, CIEN,NT, AVNX, EMLX, QLGC,JNIC,CMTN,PDYN,JNPR.
He had Strong Buy/Buy recommendations on any number of the above stocks at prices that are astronomical to what each of the above are today.

That means his analysis is based on too much on his own personal view of how network is going to evolve, how enterprise networking needs are going to shift and technologies enterprises will use. His statements should not be used by any individual investor with guarantees that once he used to reprsent. Just treat him as ordinay poor guy how doesn't know anything about networking business.
csco
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csco,
User Rank: Light Beer
12/4/2012 | 10:54:40 PM
re: Bross Rides the ONI Gravy Train
In my humble opinion to think that these folks
are naive and over-simplistic is itself
a naive over-simplification.
Seldon
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Seldon,
User Rank: Light Beer
12/4/2012 | 10:54:40 PM
re: Bross Rides the ONI Gravy Train
what about employee greed? you joined the company too rite? You invested too right? Nobody asks you to belive an analyst? Is everybody such a moron to put so much money in a stock just because an analyst says so?

Puhleaze. Grow up. Everybody is to blame.
Ramona_ThePest
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Ramona_ThePest,
User Rank: Light Beer
12/4/2012 | 10:54:39 PM
re: Bross Rides the ONI Gravy Train
Ummm, what?

When employee greed ends up in the creation of solid companies, that's a good thing. When the company fails, that's too bad...why are employees to blame, again?

Ohhhhh - you're referring to Matt Bross - a Williams employee who lined up vendors that he had equity stakes in, got them approved for deployment and - WOW what a surprise, lined his pockets with tens of millions once they IPO'ed. And Paul Johnson was on the same team on another part of the field contributing to this victory based on avarice, misrepresentation and disregard for fair play.

Yes - I totally agree, certain employees should be incarcerated. You almost had me thinking that ethical employees who get paid a salary and options are in the same cess-pit...

Let's face it, it's whether you can get away with it. CSFB and other groups got into trouble becuase their malfeasance attratced too much attention, but Paul Johnson probably won't. If he doesn't get punished, well congratulations Paul, you've fleeced thousands of investors for your own gain, and have a great supporter in Seldon!


>>> what about employee greed? you joined the company too rite? You invested too right? Nobody asks you to belive an analyst? Is everybody such a moron to put so much money in a stock just because an analyst says so?

Puhleaze. Grow up. Everybody is to blame.
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