& cplSiteName &

Tellium Lawsuits Allege Rigged IPO

Light Reading
News Analysis
Light Reading

Another law firm announced today that it has filed a class action lawsuit against optical switch maker Tellium Inc. (Nasdaq: TELM) on behalf of investors (see Tellium Sued for the Nth Time).

New York City-based Faruqi & Faruqi, LLP today announced that it has filed suit in New Jersey against the company, its executives, and Morgan Stanley Dean Witter & Co., the company’s lead underwriter when it went public in May 2001. The firm is asking for anyone who purchased Tellium stock between May 17, 2001 and February 1, 2002 to join the suit.

This is the fifth class action shareholder lawsuit that has been announced against the company in the past two weeks (see Shareholders Sue Tellium, Tellium Slapped With Class Action, Tellium Sued Some More, and Tellium Sued Yet Again).

While shareholder lawsuits are a dime a dozen these days, the Tellium suits are interesting in that they all paint the same picture of share-price manipulation and raise legitimate issues about the wheeling and dealing behind the company's 2001 IPO.

One major component in this case is motive. All five of the suits allege that executives from Qwest Communications International Inc. (NYSE: Q) received pre-IPO shares in Tellium in exchange for announcing a bogus $300 million contract in September 2000 (see Is Tellium Ready for an IPO?). The plaintiffs assert that Qwest officials -- including Joseph Nacchio, Marc Weisberg, and James Becker, who had received special “friends and family” stock options from Tellium prior to its IPO -- agreed to the contract in order to help the company gain the support it needed to go public. Qwest had never intended to purchase that much of the company’s gear, the suits assert.

According to the Faruqi & Faruqi suit filed today:

    “Defendants knew that the IPO had largely been based on the Qwest agreement supposedly for a minimum of $300 million in Tellium switches. Defendants also knew that was not a real commitment and Qwest did not use or want that many Tellium switches but had permitted the agreement because executives of Qwest received Tellium shares in the IPO.”

The suits claim that the original contract with Qwest was far too aggressive and that Tellium executives -- including Harry Carr, chairman of the board and CEO, Michael Losch, CFO, and Richard Barcus, former president and COO -- were aware of this. Lawyers involved in the case estimate that Qwest would have needed to purchase roughly 200 switches to fulfill the $300 million requirement. Some analysts covering the optical switch market note that those estimates were high.

The suits allege that these executives knew throughout 2001 that Qwest would not generate the revenue it had promised in the contract and that other customer prospects were hurting as well, and yet they continued to provide positive guidance throughout 2001 (see Tellium Confirms Guidance). The contract with Qwest was renegotiated in December of 2001, essentially freeing Qwest from most of its purchase obligation (see Qwest and Tellium Revise Contract).

“I’m sure under some scenarios, they could have been able to justify such a large order over a three-year period,” says Mark Lutkowitz, vice president of optical networking research at Communications Industry Researchers Inc.. “But I think that both parties knew that this was disingenuous, given that the Tellium switch lacked STS-1 grooming.”

Lutkowitz adds that there are fewer places in the network where switches like Tellium's are needed, because they only groom to the OC48 (2.5-Mbit/s) level.

While investors may look back now and say that they were deceived, there were plenty of critics -- including Light Reading's own subscription research service, Optical Oracle, and CIR’s Lutkowitz -- noting doubts about the company early on (see Tellium Bids for $250 Million IPO). Lutkowitz published a research note in the spring of 2001 (before Tellium’s IPO), predicting that the company would be forced to exit the optical switching market within six months to a year, due to a lack of carrier demand.

Also, plenty of investors knew about Qwest’s relationship with Tellium. The information regarding the pre-IPO shares had been disclosed in the company’s S-1 filed with the Securities and Exchange Commission (SEC). One sell-side analyst, who didn’t want to be named in this article, says that when Tellium pitched its IPO to institutional investors, many expressed concern about the potential conflict of interest.

What’s more, other companies had already been exposed for their “friends and family” IPO deals prior to the Tellium IPO, heightening awareness throughout the investor community to the potential abuses. For example: Matt Bross, former CTO of Williams Communications (now called WilTel Communications Group Inc. [OTC: WTELV]), was slammed by the press for his stake in startups like ONI Systems (see Williams' CTO Profits From His Position ).

There is also the argument that the telecom industry changed drastically from the time the deal was announced until it was revised in December 2001, and that Tellium executives had no idea that Qwest would not purchase what they had promised. Qwest had announced a large reduction in spending just a few weeks prior to Tellium’s announcement that the deal had been modified (see What's Behind Qwest's Numbers?). Other carriers were also announcing similar capital spending reductions.

“Contract wins are meaningless,” says Lutkowitz. “Things can change drastically over a three- or five-year period. I think part of Tellium’s problem is that the market just went away. There will be a need for what they offer someday, but not right now.”

A Qwest spokesperson declined to comment on this story, and Tellium officials did not return phone calls.

Tellium is just one of many telecom companies getting sued by shareholders for supposedly deceiving investors. Shareholders are also filing suit against Avici Systems Inc. (Nasdaq: AVCI; Frankfurt: BVC7), BellSouth Corp. (NYSE: BLS), Broadwing Inc. (NYSE: BRW), Cable & Wireless (NYSE: CWP), JDS Uniphase Corp. (Nasdaq: JDSU; Toronto: JDU), Tellabs Inc. (Nasdaq: TLAB; Frankfurt: BTLA), and XO Communications Inc. (OTC: XOXO). Sell-side financial analysts are also taking the heat. Former Salomon Smith Barney telecom analyst Jack Grubman is facing several suits in connection with his research on service providers like Global Crossing Holdings Ltd., Level 3 Communications Inc. (Nasdaq: LVLT), and WorldCom Inc. (OTC: WCOEQ).

For more on this issue, see these stories:

  • C&W Slapped With Suit
  • Shareholders Sue Broadwing
  • Shareholders Sue BellSouth
  • XO Communications Faces Lawsuit
  • Avici Hit With Shareholder Suit
  • Shareholders Sue Tellabs
  • JDSU Sued (Again)
  • Grubman Gets Some New Suits

  • — Marguerite Reardon, Senior Editor, Light Reading

    Editor's Note: Light Reading is not affiliated with Oracle Corporation.
    (5)  | 
    Comment  | 
    Print  | 
    Newest First  |  Oldest First  |  Threaded View        ADD A COMMENT
    User Rank: Light Beer
    12/5/2012 | 12:56:24 AM
    re: Tellium Lawsuits Allege Rigged IPO
    Well, having been at Bellcore when the folks went to start Tellium, there's a lot I could say about this company that had such an illustrious beginning, and that has had some of the industries' absolute best folks. (And I still put Krishna Bala and the other CTO-group folks in that category...)

    But anyway, the critical issue here is...

    "But I think that both parties knew that this was disingenuous, given that the Tellium switch lacked STS-1 grooming."

    This is not necessarily true. STS-1-level grooming is a 'relic' of the circuit-switched era. If Qwest can show that they truly intended to build out a large "IP over Optical" network, then it could easily be argued that Qwest did intend to buy lot of the Tellium switches.

    Don't get me wrong...it's not like I don't believe there's all sorts of dirt on this relationship. Why these stock deals to carrier CEOs was ever allowed or legal I can't imagine...perhaps we believed the old lie about "letting the market sort out all the problems"...?

    But the Tellium switch was created precisely to sit in networks where circuit switching was on the way out. It was a good, focused pure-play that could have done well in another universe. I sincerely hope that it can survive in some form or another, and maintain the technical- and thought-leadership it has maintained until today.
    User Rank: Light Beer
    12/5/2012 | 12:56:13 AM
    re: Tellium Lawsuits Allege Rigged IPO
    The interesting thing is that none of the mentioned, or not mentioned for that matter, execs are currently still at Qwest. Not to metion that of the technical people at Qwest have spent the last two plus years trying to figure out where to put the Tellium switches into their network. They didn't need them then and they don't need them now. The idea of a planned IP based network has never been there. I do understand that the contract has been renegotiated. But that is the case with all of Qwest's vendors.

    I guess this helps explain why Notebart only wants to deploy equipment from vendors he already has stock in.

    User Rank: Light Beer
    12/5/2012 | 12:56:05 AM
    re: Tellium Lawsuits Allege Rigged IPO
    For all of the next generation Tellium companies with a reduced staff of less than 200, just missing the same IPO type of deal with Qwest, there is a second chance. There are many cities in the world requiring a next generation Golden Gate bridge which is more dense and compact and saves lots of money when economic analysis and creative capital recovery computations are presented. Wagging the dog never looked better. Still need to get the new-bridge (no pun intended) out of the labs however:

    User Rank: Light Beer
    12/5/2012 | 12:56:02 AM
    re: Tellium Lawsuits Allege Rigged IPO
    Read this post and the referenced one. This is what Bobby Max was trying to be but never could!

    Amusing posts, seeds-to-weeds. Kinda rings a bell...
    User Rank: Light Beer
    12/5/2012 | 12:55:27 AM
    re: Tellium Lawsuits Allege Rigged IPO
    The relationship between Nachio of Qwest and Tellium appears to be scandlous. Mr. Nachio should not have accepted Tellium stocks in exchange for his promise to buy Tellium. Any time an RBOC buys a product from a company, it considerably enhances the marketability of its products.

    This is so bizzare that a Grand Jury should investigate Mr. Nachio and Tellium.

    The number of lawsuits against Tellium are rather numerous. This is not very conducive to do business with other companies.
    From The Founder
    NFV's promises of automation and virtualization are intriguing, but what really excites service providers is the massive amount of money they could save.
    Flash Poll
    Live Streaming Video
    Charting the CSP's Future
    Six different communications service providers join to debate their visions of the future CSP, following a landmark presentation from AT&T on its massive virtualization efforts and a look back on where the telecom industry has been and where it's going from two industry veterans.
    Women in Comms Introduction Videos
    VMWare VP Brings Women Up With Her

    8|16|17   |   6:49   |   (1) comment

    It's an art and a science to make mentorship, inclusive leadership, diversity and promotion of high-potential women work, says Honore' LaBourdette, vice president of Global Market Development at VMWare.
    LRTV Documentaries
    5G Spectrum Wars – The Recap

    8|15|17   |   2:22   |   (0) comments

    Service provider 3 has filed a lawsuit against Ofcom over 5G spectrum auction in the UK.
    LRTV Custom TV
    Say What? Facebook Unleashes AI Anarchy – The Recap

    8|7|17   |     |   (0) comments

    A recap of the week's talking points on Light Reading's sister site, telecoms.com. Facebook AI programmers had a bit of a brain-fade as they allowed one of its AI applications to invent its ...
    Women in Comms Introduction Videos
    Fujitsu's Women Band Together to Help Girls Do STEM

    8|2|17   |   9:35   |   (1) comment

    Supporting women both inside and outside of Fujitsu is a top priority of the telecom vendor. Yanbing Li, Fujitsu Network Communication's director of System Software Development & Delivery, shares why it's important, but why there's still a long road ahead.
    LRTV Custom TV
    If You're Not First, You're Last – The Recap

    7|31|17   |   08:18   |   (1) comment

    In case you missed it, Amazon's 1% stock increase helped Jeff Bezos dethrone Bill Gates as the richest man in the world. Also, Taiwanese electronics manufacturer
    Women in Comms Introduction Videos
    AT&T's Tech President Preps Workforce for the Future

    7|26|17   |   5:47   |   (10) comments

    AT&T is focused on the software-defined network of the future and is reskilling its workforce to get ready too, according to AT&T's President of Technology Development Melissa Arnoldi.
    Women in Comms Introduction Videos
    Cisco: Mentoring Critical to Attract & Retain Women

    7|19|17   |   6:40   |   (1) comment

    Liz Centoni, senior vice president and general manager of Cisco's Computing System Product Group, shares why mentoring in all its forms is important for women and what Cisco is doing that's made a difference for women in tech.
    LRTV Custom TV
    Gigabit LTE With Snapdragon 835

    7|12|17   |     |   (1) comment

    At an event in Wembley stadium, EE used its live network to demonstrate gigabit LTE using a Sony Xperia XZ Premium smartphone with a Qualcomm Snapdragon 835 chip.
    LRTV Custom TV
    Implementing Machine Intelligence With Guavus

    7|12|17   |     |   (0) comments

    Guavus unites big data and machine intelligence, enabling many of the the largest service providers in the world to save money and drive measureable revenue. Learn how applying Machine Intelligence substantially reduces operational costs and in many cases can eliminate subscriber impact, meaning a better subscriber experience and higher NPS.
    LRTV Custom TV
    Unlocking Customer Experience Insights With Machine Intelligence

    7|12|17   |     |   (0) comments

    When used to analyze operational data and to drive operational decisions, machine intelligence reduces the number of tasks which require human intervention. Guavus invested in Machine Intelligence early. Learn about the difference between Machine Learning and Machine Intelligence.
    Women in Comms Introduction Videos
    Verizon VP Talks Network, Career Planning

    7|12|17   |   4:49   |   (0) comments

    Heidi Hemmer, vice president of Technology, Strategy & Planning at Verizon, shares how bold bets and the future of tech define her career.
    Telecom Innovators Video Showcase
    Masergy's NFV Journey

    7|11|17   |     |   (0) comments

    Ray Watson, vice president of global technology at Masergy, discusses the advantages and challenges in entering the still-maturing NFV market for the past three years.
    Upcoming Live Events
    September 28, 2017, Denver, CO
    October 18, 2017, Colorado Convention Center - Denver, CO
    November 1, 2017, The Royal Garden Hotel
    November 1, 2017, The Montcalm Marble Arch
    November 2, 2017, 8 Northumberland Avenue, London, UK
    November 30, 2017, The Westin Times Square
    All Upcoming Live Events
    With the mobile ecosystem becoming increasingly vulnerable to security threats, AdaptiveMobile has laid out some of the key considerations for the wireless community.
    Hot Topics
    Intel CEO Leaves Trump Biz Advisory Board
    Dan Jones, Mobile Editor, 8/15/2017
    Are Cord-Cutting's Days Numbered?
    Alan Breznick, Cable/Video Practice Leader, Light Reading, 8/14/2017
    Analyst Nolle: Fundamental Errors Plague NFV
    Carol Wilson, Editor-at-large, 8/11/2017
    Snapchat Misses Estimates, Eyes Reality Shows
    Aditya Kishore, Practice Leader, Video Transformation, Telco Transformation, 8/11/2017
    ATIS: Connected Car Security an Industry-Wide Issue
    Carol Wilson, Editor-at-large, 8/10/2017
    Like Us on Facebook
    Twitter Feed
    Animals with Phones
    We Know a Tough Day When We See One Click Here
    Live Digital Audio

    Understanding the full experience of women in technology requires starting at the collegiate level (or sooner) and studying the technologies women are involved with, company cultures they're part of and personal experiences of individuals.

    During this WiC radio show, we will talk with Nicole Engelbert, the director of Research & Analysis for Ovum Technology and a 23-year telecom industry veteran, about her experiences and perspectives on women in tech. Engelbert covers infrastructure, applications and industries for Ovum, but she is also involved in the research firm's higher education team and has helped colleges and universities globally leverage technology as a strategy for improving recruitment, retention and graduation performance.

    She will share her unique insight into the collegiate level, where women pursuing engineering and STEM-related degrees is dwindling. Engelbert will also reveal new, original Ovum research on the topics of artificial intelligence, the Internet of Things, security and augmented reality, as well as discuss what each of those technologies might mean for women in our field. As always, we'll also leave plenty of time to answer all your questions live on the air and chat board.