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Fraud Case Hangs Over Fore Fat Cats

Light Reading
News Analysis
Light Reading
11/22/2001

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
http://www.lightreading.com
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temporary
temporary
12/4/2012 | 11:04:32 PM
re: Fraud Case Hangs Over Fore Fat Cats
I have to agree with Smokey here. I remember the debate about ATM, and wasn't convinced that ATM could do anything better than a good IP router with DIFFSERV. I assumed that ATM would eventually dissappear as the ATM switches were depreciated.

Now I hear this story! Exactly, my only conclusion: Why anyone would want to own shares of Marconi if the executes were as stupid as they seem. Maybe we just need some basic intelligence tests for executives, possibly such testing could be part of the SEC annual auditing requirements.

Reminds me of Kevin Kennedy at Cisco.
SiO2
SiO2
12/4/2012 | 11:04:31 PM
re: Fraud Case Hangs Over Fore Fat Cats
temporary writes:

> I have to agree with Smokey here.
> I remember the debate about ATM,
> and wasn't convinced that ATM could
> do anything better than a good IP
> router with DIFFSERV. I assumed that
> ATM would eventually dissappear as
> the ATM switches were depreciated.
>
> Now I hear this story! Exactly, my
> only conclusion: Why anyone would
> want to own shares of Marconi if
> the executes were as stupid as they
> seem. Maybe we just need some basic
> intelligence tests for executives,
> possibly such testing could be part
> of the SEC annual auditing requirements.

hmmm. one my submit as a candidate to
your IQ test anyone that would postulate
that the service provided by ATM are
equivalent to those provided by IP/DiffServ.

SiO2




DarkWriting
DarkWriting
12/4/2012 | 11:04:29 PM
re: Fraud Case Hangs Over Fore Fat Cats
As the saying goes:

Put a guy with money together with a guy with experience and the guy with experience will wind up with the money and the guy with the money will wind up with the experience.
broadbandboy
broadbandboy
12/4/2012 | 11:04:20 PM
re: Fraud Case Hangs Over Fore Fat Cats
ATMwasDEADpreY2K writes: "Anybody with a realistic pulse on telecom knew that ATM was in the decline at the time of the Marconi purchase of FORE."

That may be true for LAN, but anybody with a pulse today knows ATM is far from dead in WAN. Perhaps some people never heard of DSL and frame relay. Those two things generate lots of revenue and run over ATM. ATM is also in a lot of wireless base stations.

The problem for Marconi is Fore was dominant in LAN, but only niche player in WAN.

BBboy
HarveyMudd
HarveyMudd
12/4/2012 | 7:32:09 PM
re: Fraud Case Hangs Over Fore Fat Cats
Sitting on a different continent, Marconi had no idea about the serious deception that the management of Fore Systems had hatched. Even here in the continental US, the deceptions are very prevelent Many serious deceptions and robbing of companies occur when:

-- high level executives are leaving the company. They really clean the company very well. This has happened at Lucent, for example.

-- VCs take the company public

-- granting stock options and account exceptions

-- When the companies are acquired

-- Invariably false information on almost all items is provided by the company that is being acquired

-- False information is provided on the technology, product and sales figures

There is a big racket of corrupt American Executives and VCs who are very focused on cheating. They do to each other within the boundaries of the United States. When it comes to an offshore company such as Marconi, the deceptions are astronomical.

Marconi, with all its wealth robbed by the former executives of Fore Systems would probably never recover.

The US Federal Courts and SEC are too week to prosecute the individuals.

AS a first step, the assets of the individuals involved in the scam should be frozen. The former management team of Fore Systems should be tried vigorously. If the jurisdiction permits, UK may be a better venue.

A lot of us had known about weaknesses in the Fore products, it is not clear to me as to why Marconi would not know about the product weaknesses and sales trends.

I must reassert, these intercontinental bandits should be prosecuted fiercely. They must be stripped of their illegally acquired wealth.

This should serve as a lesson to those who are with Vcs and buying and selling of companies.





katch 22
katch 22
12/4/2012 | 7:32:06 PM
re: Fraud Case Hangs Over Fore Fat Cats
So what is the biggest bust up/scandal in the telecom sector?

Is it

1) Lucent's acq. of Chromatis?
2) Marconi's cash purchase of Fore?
3) Cisco's acq of Monterrey?
4) Bankruptcy of 36networks?
5) Nortel's acq of Xros?

Plus, of the three major vendors, whose CEO has the lowest IQ? (that's a tough one)

How about some more investigative journalism?

networking_legend
networking_legend
12/4/2012 | 7:32:04 PM
re: Fraud Case Hangs Over Fore Fat Cats
So what is the biggest bust up/scandal in the telecom sector?

Is it

1) Lucent's acq. of Chromatis?
2) Marconi's cash purchase of Fore?
3) Cisco's acq of Monterrey?
4) Bankruptcy of 36networks?
5) Nortel's acq of Xros?


(1), (3), (5) have to be up there. Don't Know enough about (2). (4) Was no surprise.

Add the Lucent-Ascend and the Lucent-Nexabit aquisitions, and I'll say you've got a decent list.
sdarch
sdarch
12/4/2012 | 7:32:03 PM
re: Fraud Case Hangs Over Fore Fat Cats

Plus, of the three major vendors, whose CEO has the lowest IQ?

==> None of the CEOs are idiot
from the business point of view.
After any M&A deal is closed,
CEOs and other top exec's of
BOTH sides get huge kickback
from the banker, either on-the-
table (Fore's execs) or under
the table (Marconi's execs) in
this case.
This is the rule of the game.
In this game, money rules.
Optics Mgmt
Optics Mgmt
12/4/2012 | 7:31:53 PM
re: Fraud Case Hangs Over Fore Fat Cats
Having been at one of the startups that FORE acquired and benefitted a little out of the Marconi acquistion I can say that the execs at FORE did grant themselves the stock before the aquisition with knowledge of the Marconi board.

They gave themselves many stock options before the acquistion and that is for sure. I was very disappointed when I tried to give one of my employees 2000 shares after a year of hard work I found out I couldn't. He received 500 shares while the execs made out. They should have spread the wealth out but they chose not to.

FORE bad success of acquiring companies is known by the ones who were acquired, take Alantec and Berkeley Networks as examples. FORE's attitude was they didn't care what these companies said if they were not from Pittsburgh. (I had to add that comment, since I tried many times)

Companies are supposed to do a thing called "Due Diligence" before they buy a company. They talk to customers and make many visits to the company they are courting.

Marconi screwed up, they didn't do their job right performing the due diligence and allowing the top execs at FORE to get such handsome pieces of stock.

People always want to put the blame on someone else when they screw up so they sue them or whine about it. The blame should be on the board of Marconi for not doing their job, if someone wants to put blame.

I do not agree that we should hold the execs at FORE to blame but we should hold the execs at Marconi and the board at Marconi to blame for the excessive stock grants. Again they knew about it and had the option to stop it.
dbostan
dbostan
12/4/2012 | 7:31:52 PM
re: Fraud Case Hangs Over Fore Fat Cats
As one of the ex FORE employee I must say that it would, probably, be very difficult to find more unethical managers than those from FORE.
And many of them were also completely unqualified for the positions they enjoyed.
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