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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

stuartb 12/4/2012 | 11:21:54 PM
re: SEC Digging Deeper at Redback it's that plain and simple. The SEC should be all over Vinod too, my guess is he masterminded this Qwest-Redback deal (and similar ones w/other startups).
atmguy 12/4/2012 | 11:21:53 PM
re: SEC Digging Deeper at Redback >>The SEC should be all over Vinod too

They might use Arnold to get the bigger fish (Vindo) too! At least, I hope so.
optical 12/4/2012 | 11:21:44 PM
re: SEC Digging Deeper at Redback Some QWEST Executives are dirty in all this also. It's no secret that an ex-SVP of QWEST was openly telling start ups that visited him that for "x' amount of shares he could guarantee a place in his lab and a seed order ($6 to $12M) to get them started. I'm sure there's still some of the Sierra (Redback) gear that was part of their seed order still sitting in a warehouse at QWEST somewhere. This ex- QWEST SVP is now living in a big fancy house and driving a big fancy car in the Plano, Texas area due to his start up stock options / bribes.. While at the same time, the Dallas area has countless, honest hard working telecom folks who were put out of their job for no fault of their own.

I just wish they would finally go after all what I consider crooks, so we can return this industry back to it's greatness This whole Greed mess sickens me!
capolite 12/4/2012 | 11:21:44 PM
re: SEC Digging Deeper at Redback What they should bring to light is all the stock that went to Qwest executives from start-ups and what impact that had on decisions at a regulated monopoly.
Arnold got hired on DeNuccios watch. Why doesn't someone look into the Cisco-Qwest connection? At one point Qwest was Cisco's largest customer.
BobbyMax 12/4/2012 | 11:21:43 PM
re: SEC Digging Deeper at Redback Qwest went out of its way to buy Redback's product and Redback obliged the Qwest executives by offering them stocks much below the market price of the stock. This arrangement was facilitated by "Dr." Vinod Khosla. He also offered to Qwest executives shares of other start-ups under his control. Khosla did all this because he wanted Reback stock prices of go up so that he can make a killing. The SEC should not compromise the investigation.

The former VP of Qwest, Arnold, should not have been offered a position at Redback. All these things took place because of reciprocal deals between Khosla, Redback,and Qwest. In fact Qwest executives were so busy with start-ups that they lost of sense of their responsibily.

The Qwest Board should also be investigated for not attending to companies business.
telebud 12/4/2012 | 11:21:38 PM
re: SEC Digging Deeper at Redback "This ex- QWEST SVP is now living in a big fancy house and driving a big fancy car in the Plano, Texas area due to his start up stock options / bribes.."
I've been to Plano and Richardson,Texas
You need a big house and a big car in Plano :)
I was also offered big stock options to go
work for a Start up Company but didn't think
they would make it and they didn't.
That's a risk you choose to take or not.
If I took that money would that make me greedy and evil?
What about people like DNC Chairman Terry McAuliffe,he Made $18,000,000 off Golbal Crossing
and he still has a job.
I still don't see Enron guys and Worldcon guys
in jail yet they did much bigger crimes.
The only ones the SEC got was ADELPHIA small
potatoes or po*ta*toes if you wish.
Not to mention Martha.

BobbyMax 12/4/2012 | 11:21:36 PM
re: SEC Digging Deeper at Redback Both the SEC and Justice Department cannot be trusted to do any thing that is for the benefit of the masses. With every passing day, thousands and thousands of crooks are getting rich. What surprises that the corruption at Qwest was so rampant, yet the government has not been able to take any action after two years.

The matter involving investor Khosla, Redback, and Qwest is very complex and shows the corruption that has existed over two years. There appears to be no relief in sight. Almost 90% of the 401K accounts have been lost, yet the government did not take any meaningful action.
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