Fraud Case Hangs Over Fore Fat Cats
Marconi PLC (Nasdaq/London: MONI) wrote down some $4.5 billion in goodwill last week (see Marconi Loss Tops £5B). The write down represents the entire amount that Marconi paid for Fore Systems, the ATM technology company it bought back in April 1999.
The write-off is astounding given how much Marconi gave up getting Fore at the time. The $35 a share that Marconi, then called GEC, paid in cash for Fore Systems, was a 42.9 percent premium over the closing price of Fore's stock on April 23, 1999. Shortly after Marconi paid that high price for Fore, its top executives left the company.
Acquiring Fore was supposed to give Marconi a strong position in ATM equipment, but this failed to materialize. One year after the deal, Marconi only had 12 percent of the market for core ATM switches according to Infonetics Research Inc. (see ATM Core Switches: Is Lucent Losing?). And even before Marconi bought Fore, it was beginning to look as though ATM had had its day in carrier networks.
Adding insult to injury is the fact that Fore's top executives profited so handsomely from selling Fore. While Marconi employees have had to cope with their company's widespread layoffs and restructuring for the past few months, the Fore executives who left the company more than a year ago appeared to have gotten away scot-free.
That helps explain why several London newspapers have raked up a class action lawsuit filed by Fore shareholders in the U.S. District Court of Pennsylvania in 1999. The suit alleges that Marconi, Fore and 13 of Fore's directors and senior executives violated anti-fraud provisions in the U.S. Securities Exchange Act in failing to disclose information about the creation of a different class of shares with options that Fore's directors awarded themselves at the time of the merger. The suit also alleges that the defendants violated SEC rules in agreeing to cash out the options, which effectively allowed executives to quit the company soon after the merger with large sums of money.
Marconi says the defendants deny "all allegations of wrongdoing." Both sides are in "the late stages of general discovery" of evidence, but no date has been set for the trial, Marconi adds.
Fore Systems' final filings with the U.S. Securities and Exchange Commission show that Fore's top executives took in several million dollars as payment for stock options and share bonuses when Fore was bought.
Thomas Gill, Fore's CEO, was given a salary of $500,000 and he got a $15.4 million cash payout for his unvested stock options, according to SEC filings. Upon his resignation, Gill also got a cash payment of "two times his base compensation" if he left the company within two years, whether he quit or was terminated.
Bruce Haney, Fore's CFO, was given a salary of $275,000, and a payout of about $4.8 million for his unvested stock options, the filings state. Haney's next job as CFO at iGate Capital Corp. got him $25,000 a month between October 2000 and March 2001, with a $225,000 severance payout, according to a report in the Pittsburgh Post-Gazette that cited SEC filings.
The old Fore SEC filings further state that "(Fore SVP Robert) Musslewhite, (engineering boss Kevin) Nigh, (SVP J. Niel) Viljoen, (SVP Donal) Byrne, and (SVP Ronald) McKenzie would receive approximately $5.8 million, $6.5 million, $6.0 million, $6.5 million and $3.5 million, respectively, with respect to unvested stock options as of May 31, 1999."
In the end, the turmoil of Marconi's recent losses and layoffs stand in stark contrast to the millions it rewarded Fore's executives with before the acquisition had even shown promise. The goodwill write-down demonstrates that Marconi's shareholders now are paying for its sins of several months ago.
Table 1: FORE's Executives: Where Are They Now?
|Name||Role at FORE Systems||Last Seen|
|Thomas J. Gill||President and CEO||Cofounder, G4 Partners (May 2000)|
|Donal M. Byrne||SVP, Corporate Marketing||Chairman, Corvil Networks; former marketing boss at FirstMark Communications|
|Michael I. Green||SVP, Corporate Sales||Partner at G4 Partners; former President of Field Operations at Loudcloud, Inc.|
|Bruce E. Haney||SVP and CFO||CFO at iGate Capital Corp. (March 2000 to March 2001)|
|Ronald E. McKenzie||SVP & GM, Volume Products Business Unit||Managing Director, Whitecap Venture Partners|
|Robert C. Musslewhite||SVP, Corporate Development||President and CEO, Media.net Communications from May 2000 to ??|
|Kevin E. Nigh||SVP, Worldwide Engineering||Partner, G4 Partners|
|Robert D. Sansom||SVP, Chief Technology Officer, Cofounder||Partner, G4 Partners|
|J. Niel Viljoen||SVP and GM, Service Provider Business Unit||Last served as Marconi's CTO|
|Sources: SEC filings, Light Reading, Pittsburgh Post-Gazette, and Guardian Newspapers, Ltd.|
- Phil Harvey, Senior Editor, Light Reading