Business and Finance - GST Revisited

Posted 10/2000

Business and Finance

GST Revisited
A SECOND LOOK AT BANKRUPTCY AND LAWSUITS REVEALS THERE'S MORE TO THE STORY
By Paula Bernier

On Aug. 25, the assets of GST Telecommunications Inc. (www.gstcorp.com), which filed bankruptcy in May, were auctioned off, with Time Warner Telecom Inc. (www.twtelecom.com) agreeing to purchase substantially all of those assets for $690 million. The deal is expected to close by the end of the year. So it would seem that an unpleasant chapter for GST is coming to a close. In fact, that's not the case. The debates--and lawsuits--continue over what transpired at GST over the past several years leading to up its demise.

The lawsuits are many. There are those that GST filed against former board members, executives and counsel in multiple courts charging them with a variety of wrongdoings. There are the countersuits. And then there are the class action suits that shareholders filed against the lot of them. But all that could add up to nothing but a lot of aggravation to those involved and pocket lining for lawyers since the only judge who has reviewed GST's allegations threw them out for lack of evidence, while the remaining cases have been stayed by the bankruptcy judge pending his decision on the Chapter 11 filing.

While it remains to be seen whether any of this litigation will come to anything, it continues to be at least a nuisance to those who have left the company, including John Warta, a former chairman, board member, CEO and president at GST, who was ousted from the company just over two years ago. Warta recently started up and now is a consultant and board member for telecom wholesaler PF.Net (www.pf.net). He also has founded a venture capital firm called NextNet Ventures. Although Warta left GST in June of 1998, his unpleasant entanglement with the company continues. Former GST board members and officers Stephen Irwin, Robert Hanson and Clifford Sander find themselves in a similar situation, as does Gordon Blankstein, a director and founding shareholder of GST. (The other men were not interviewed for this article.)

Warta says neither he nor any of the other former board members and executives of GST that GST sued ever lost in court to GST or paid GST a penny as a result of those suits.

"I do believe that's an accurate statement," said Tom Malone, who has been acting CEO of GST Telecommunications since late January, in an Aug. 24 interview with xchange.

Finance 'Dance Partners'

According to Warta, he had been running GST for about four and a half years as chairman and CEO when in the spring of 1998 he oversaw another round of financing to raise capital for the company. Warta; Joe Basile, then president and COO; and Irwin, then GST vice chairman and corporate counsel, set out to accomplish that using Morgan Stanley Dean Witter & Co. (www.ms.com) and Bear Stearns & Co. Inc. (www.bearstearns.com). Warta says GST's board had approved the plan. But, he says, GST's new board member Joe Fogg, who headed a Morgan Stanley-managed fund called Princes Gate that provided $50 million in equity to GST in early 1997, became "enraged" when he learned that Bear Stearns was brought in to colead and comanage the deal. (xchange requested an interview with Fogg, but GST instead set up the interview with Malone.) Warta, who says Morgan Stanley had a lock on GST financing from December 1995 through spring 1998, believes that was the event that led to his ouster from GST 30 days after the funding was completed that May.

But, according to Malone, "the board of directors had a difference of opinion [with Warta about] the direction the company should go. They decided that disagreement was not something that could be bridged." In response to Warta's comment about the Bear Stearns situation, Malone said, "I would be surprised if it was just one incident."

According to Warta, Fogg, around the same time, brought on the board a bunch of "white shoes guys" who knew nothing about running an entrepreneurial business and, as a result, easily gave control to Fogg.

"If you think back over two years ago, the company was relatively successful," says Warta. "It had a share price of $17 a share when I left. It had over $400 million in capital. From the moment Basile [who became CEO] joined, there was significant increase in [employee] turnover. We went from about 5 to 10 percent to 40 to 45 percent turnover at the company per year. In any situation like that, it's very difficult to control processes and systems. Since Basile joined, they tried to implement two or three different billing and provisioning systems. The board failed to manage Basile and failed to manage the fundamental processes. They got embroiled in all this litigation."

Malone said the real problems at GST stemmed from the fact that it was involved in too many lines of business, including selling conduit, fiber-optic sales, the long-distance business, Internet and the local exchange. "The weight of those businesses was too much for our back office, and [we] simply could not support it all," Malone said, adding he's not sure if management was adept at all those businesses.

Suits Circled Global

In any case, in the months that followed Warta's exit, GST filed a variety of lawsuits against Warta, Irwin, Hanson and Sander, as well as Blankstein. It all centered around a Canadian company known initially as Canadian Programming Concepts Ltd., then later as GST Global Telecommunications Inc., and finally as Global Light Telecommunications Inc. (www.gbttelecom.com).

In the 1994-95 time frame, GST was looking to Mexico for new business opportunities, and a Mexican company called Grupo Varo later wanted to partner to develop telecommunication distribution networks in Mexico under an initiative known as the Bestel Project. But Morgan Stanley and Dillon Read, which provided GST funding in 1995, insisted that GST not get involved in such international efforts as a condition of that funding. It wanted GST to spend its money instead on the core domestic business. So Blankstein, who was chairman of GST Telecommunications at the time and who with his brother had taken control of GST Global, proposed that they sell all of the shares they owned in GST Global at their cost--about 19 cents to 20 cents per share--to GST to enable it to act on the opportunity in Mexico, says Warta. The board and independent directors of GST approved that transaction. Prior to that, Warta and several others had already invested with GST in Global.

But there was a disagreement between Blankstein, Global Light and GST over whether Blankstein had agreed to sell GST up to 3 million shares or 3 million to 5 million shares in Global Light. So in October of 1998, Blankstein, in a letter to GST's board, agreed to binding arbitration over the issue. But, according to Warta, Fogg pushed through the board a motion to sue the company now known as Global Light. The board then discovered that not only was GST suing Global Light but it also was suing three current board members, two current employees and three past chairmen of GST (Warta was one of them). That suit included a variety of charges of impropriety, fraud and conspiracy. Specifically, it said Warta and others had improperly and without the knowledge of GST's board purchased shares in Global. That suit was filed in California. But because both GST Telecommunications Inc. and Global Light are Canadian companies, Warta and the others appealed that California was an improper forum for the case, and the judge threw out the case.

Suit Countersuit

Then Global filed a suit against GST in Canada saying it had acknowledged the share number dispute and agreed to binding arbitration, and Global asked the Canadian court to rule on how many shares should be paid. At the same time, Hanson, Irwin, Peter Legault and Warta filed a separate suit in Canada asking the judge for a declaratory ruling that they had bought their Global shares properly and with full knowledge of GST. They also sued Basile, Fogg and directors Robert Ferchat and Roy Megarry for bringing what Warta calls "outrageous" charges against them in California.

Then, in November of 1998, Warta filed suit against GST in Washington state to get the $1 million to $2 million he says was owed him under his employment agreement with GST. The company countersued, making essentially the same charges against Warta as they had made in the California suit.

In early 1999, GST filed a suit in New York against Irwin and his law firm, charging they had misbilled GST and otherwise alleging malpractice that resulted in GST getting less than its fair share for Global. That was the first and only case relating to GST and Global that actually was heard by a judge, albeit in a pretrial hearing. This April, that New York judge indicated GST's lack of evidence to support its claims, and the case--in which the Global/Bestel issue was again center stage--was settled out of court.

In the interim, GST had agreed to take $30 million in cash from Blankstein for the Global deal. But since GST had been claiming up until then that the Bestel deal was worth $300 million, GST shareholders got upset and filed class action suits against the company, which included the current board members and prior board members including Warta, Irwin, Ian Watson (a former GST chairman), Hanson, Legault and Blankstein.

Tactical or Bona Fide?

Then GST filed bankruptcy, and the judge in that case stayed the cases in Canada, Washington state and all the class action suits.

Warta says he believes GST filed bankruptcy not because it was in dire straits financially but rather to protect itself from the litigation and from losing face were it to drop that litigation for lack of evidence.

"That is incorrect," said Malone. "We filed Chapter 11 because we felt our cash couldn't fund us through the end of the year and our debt was so extraordinarily high."

According to Malone, GST had $30 million in cash when it filed for Chapter 11 and the company has $45 million in the bank today. Malone said when GST filed Chapter 11 it had $1.2 billion in debt, which Malone added is likely to be restructured or eliminated due to the bankruptcy filing and sale of assets.

"The ironic thing about GST is that many believe that GST is running better today than it ever has," added Malone. "It took bankruptcy and a new management team to make that happen." The company has eliminated 14 vice president or higher positions and reduced emphasis on certain lines of business, he said. Specifically, he said, GST has stopped most construction projects of fiber-optic cable because returns in those businesses were not as good as returns in the services business, and it has stopped investments in long-distance business.

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