SEC Digging Deeper at Redback

Feds looking more carefully into deals involving Qwest, Redback, and Redback SVP Joel Arnold

October 2, 2003

3 Min Read
SEC Digging Deeper at Redback

The Securities and Exchange Commission (SEC) is checking into Redback Networks Inc.'s (Nasdaq: RBAK) past involvement with Qwest Communications International Inc. (NYSE: Q), Redback acknowledged this week. In a filing with the SEC on Wednesday, Redback said the SEC was looking at "the sale of products by Redback to Qwest, the purchases of certain products and services by Redback from Qwest, and certain equity investments."

Redback senior VP Joel Arnold, who was an executive VP at Qwest until joining Redback in early 2002, is accused by the SEC of helping artificially accelerate Qwest’s recognition of revenue in two transactions, one of which involved reselling telecom equipment. "The SEC is seeking, among other remedies, that Mr. Arnold and four other defendants be permanently barred from serving as an officer or director of any public company," Redback's filing says.Redback notes in the filing that the SEC's civil suit against Arnold might cause some "distraction." In the past, Redback officials declined to comment on the suit, pointing out that it had nothing to do with Redback (see Redback Exec Part of Criminal Probe and Redback's Arnold Included in SEC Suit). In this latest filing, however, Redback says the suit "may affect [Arnold's] ability to serve as an officer of our company."

When contacted by phone, Redback officials declined to comment beyond what's in the filing.

Four former Qwest officials have been indicted this year for helping the carrier falsely recognize more than $33 million in revenues in 2001 (see Qwest Faces Fed's Fist). And at least one government agency has considered barring Qwest from future government business.The filing may raise some eyebrows, as it looks as if the SEC is taking a more particular interest in the Redback/Qwest relationship. Qwest was a big player in Redback's rise as a startup, and the companies had several common ties that predate Arnold's arrival at Redback. In 2000, Redback's sales to Qwest accounted for 15 percent of its annual revenues, or about $42 million. In 2001, Qwest sales accounted for 18 percent of Redback's revenues, or about $40.8 million. For a time, the two companies shared a board member in Kleiner Perkins Caufield & Byers partner Vinod Khosla, who was an investor in Redback. SEC filings and sources say that under Khosla's watch, several of Qwest's startup equipment suppliers gave top Qwest executives chances to buy their stock at dirt cheap prices (see Is Qwest Shunning Startups?).Shortly after Redback began supplying Qwest with equipment, in late 2000, Qwest's Cyber Solutions group announced a five-year, $18 million contract with Redback to help the vendor with enterprise resource planning, customer relationship management, and manufacturing operations.The revelation that the SEC is snooping into Redback's past came buried in the vendor's latest filing, which outlined to shareholders its proposed financial restructuring. Under terms of the plan, Redback needs its shareholders to approve a $467 million debt-for-equity swap that will leave them with only 5 percent of the company. If shareholders don't accept the deal, Redback would likely file for bankruptcy protection (see Redback Investors Flee Restructuring).— Phil Harvey, Senior Editor, Light Reading

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