Winstar Judgment Hits Lucent for $244M

In a decision hearkening back to the days of vendor financing, Lucent Technologies Inc. (NYSE: LU) was ordered yesterday to pay $244 million to settle a 2001 case filed by the trustee of former carrier Winstar Communications.

The ruling was handed down by judge Joel B. Rosenthal in U.S. bankruptcy court in Wilmington, Del. The trial, in which Lucent was accused of breach of contract, had ended in June. (See Lucent Could Pay $244M.)

Lucent plans to appeal the decision. For now, the company is estimating the judgment will result in a $300 million charge to its first-quarter earnings.

"The unfavorable ruling against Lucent in the case filed by Winstar’s trustee comes as a surprise. Lucent had not booked a reserve, which suggests they too were surprised," wrote analyst Simon Leopold of Morgan Keegan & Company Inc. in a note issued this morning.

The $300 million charge won't hurt Lucent's cash reserves, which total roughly $5 billion. But it could bounce Lucent out of the black. Leopold still expects pro forma profits of 4 cents for Lucent's first quarter, which ends Dec. 31, but by generally accepted accounting principles, where lawsuit payments count, he expects Lucent to report losses of 2 cents per share.

Back in the day, Winstar combined some of the most glamorous elements of the telecom bubble: overexuberant investors, LMDS technology, Jack Grubman, and Lucent's vendor financing. (See Wireless Wonders, Winstar Secures Another $1.02 Billion, Winstar Investors Sue Grubman, and Salomon Slammed in Settlement.)

There's a bit of irony to all this. Lucent helped pay for Winstar's rise, eventually making possible the lawsuit whereby Lucent is now giving... more money.

Winstar, a startup carrier, had signed a deal in 2000 to purchase up to $2 billion in equipment from Lucent -- with Lucent providing some financing to make the sales happen.

In the end, Winstar became a screaming fireball (not in a good way). As it filed for Chapter 11 protection in April 2001, Winstar sued Lucent for $10 billion, alleging Lucent had failed to pay $90 million due to Winstar in March 2001. (See Winstar Sues, Lucent Scoffs.)

At the time, Lucent recited the usual line that the suit was without merit. The company also claimed Winstar had failed to pay a $75 million debt owed to Lucent.

Deals such as the Lucent-Winstar financing were commonplace during the dotcom bubble circa 1999. Equipment vendors anxious to prove the worth of complex next-generation systems would sell them to carriers while giving the carriers loans to pay for the equipment. And Lucent was hardly alone in the practice. Alcatel (NYSE: ALA; Paris: CGEP:PA), Cisco Systems Inc. (Nasdaq: CSCO), and Nortel Networks Ltd. each had a hand in the vendor financing trend. (See Vendor Financing.)

In Winstar's case, it's possible Lucent added even more favors. After an investigation of Lucent's accounting practices, the Securities and Exchange Commission (SEC) last year accused Lucent employees of adding some credits to a software deal, post-dating the credits to separate them from the sale. (See SEC Details Lucent Fraud Charges.)

The Winstar story isn't quite over. In December 2004, Lucent sued IDT Corp. (NYSE: IDT), which bought Winstar's assets from bankruptcy in December 2001 and announced the shutdown of Winstar's network in May 2004. As explained in IDT's 10-K filing with the SEC, Lucent is claiming IDT or an "alter ego" is operating some of Winstar's Lucent 5ESS switches without a software license. The suit asks for $51 million in damages, plus punitive damages. IDT filed a countersuit in March 2005.

— Craig Matsumoto, Senior Editor, Light Reading

mrbhagav 12/5/2012 | 2:48:31 AM
re: Winstar Judgment Hits Lucent for $244M
Did Lucent violate SLA terms with Winstar, or did the equipment provided under the vendor financing fail to meet performance criteria?

If the answers to both questions are NO, then this lawsuit appears to be completely baseless.

It is absolutely stunning that the last nail has not been driven into the Winstar coffin yet, of a company that is widely regarded as exemplifying bubble era profligacy, poor business planning, greed and ultimate fiscal irresponsibility.

I suppose one of the admirable traits the former shareholders/founders possess is persistence...the hallmark of true entrepreneurs. If your business model does not yield returns, a couple of good lawsuits will, right?!

materialgirl 12/5/2012 | 2:48:18 AM
re: Winstar Judgment Hits Lucent for $244M "and LU was not alone in this practice",

perhaps not, but they clearly lied the most, much to the harm of investors. They had such giant contingent liabilities attached to their sales, along with that $250M bogus software license, that they could "book" on-target quarters far after their real business fell off. That is why the stock fell 90%. McGinn is a real creep. They probably attached all sorts of back-door promises to those Winstar deals, allowing for this suit.
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