Aug. 4–The general partner for Stark Investments LP has filed a lawsuit against Verizon Communications Inc. that accuses the telecommunications giant of deliberately failing to honor the provisionsof a merger agreement and fraudulently forcing out of business the company it nearly acquired.
Stark lost more than $25 million as a result of the failed merger between Verizon and NorthPoint Communications Group Inc., according to the lawsuit filed July 25 in federal court in Milwaukee.
NorthPoint went bankrupt in January 2001, two months after the deal fell through.
“Verizon and its management determined that Verizon could destroy NorthPoint’s business by reneging on the merger and then usurping the DSL business opportunities at NorthPoint,” the suit alleges.
The lawsuit was filed by Staro Asset Management LLC, the general partner for St. Francis-based Stark. Stark is a multi-strategy hedge fund management company with about $2.4 billion of assets under management, making it one of the biggest hedge fund managers in the country in terms of asset size.
“The suit is without merit,” said Bob Varettoni, a Verizon spokesman. “Similar claims by NorthPoint investors already have been rejected by courts in New York and California.”
The NorthPoint securities that Stark purchased contained a “change in control” feature that obligated any company acquiring a majority interest in NorthPoint to offer to buy the notes back at 101 percent of face value. The bonds could potentially have increased in value even more when they became Verizon bonds because Verizon had a better credit rating than NorthPoint, the lawsuit says.
Stark bought $30.9 million of NorthPoint 12.875 percent senior notes from August through October 2000, at between 95 percent and 100 percent of their face value.
A lawsuit known as Faulkner vs. Verizon that made many of the same allegations against Verizon as Stark was dismissed by a federal court in Manhattan in September 2001. Judge William C. Connor said the shareholders hadn’t sufficiently shown motive or recklessness on the part of Verizon, and hadn’t proved that Verizon merely got cold feet prior to NorthPoint’s Nov. 14 earnings restatement.
The court also said it could not see any benefits Verizon would have realized by deceiving NorthPoint’s investors into believing the merger was expected to proceed.
That case has no bearing on Stark’s complaint, said Daniel J. McNally, Stark’s associate general counsel.
Stark also has access to documents neither the plaintiffs nor the judge in the Faulkner case had, McNally said. Stark obtained the documents from a lawsuit NorthPoint filed against Verizon in which Verizon settled for $175 million, after the Faulkner case was dismissed.
Stark says in its lawsuit that Verizon caused NorthPoint’s demise by nixing the deal, and used trade secret information NorthPoint had provided after the merger was announced to try to scoop up its customers.
Within days of signing the merger agreement, the lawsuit says, Verizon executives circulated internal documents suggesting Verizon could wait a few months to let NorthPoint run out of cash and then renegotiate a merger with better terms.
When Verizon approved in November 2000 a NorthPoint news release saying the deal was still “on track,” Verizon already had prepared internal memos recommending the merger should be renegotiated or terminated, the lawsuit alleges.
Verizon later sent a notice to NorthPoint and distributed a news release saying it intended to terminate the merger. Verizon said it had a right to terminate the deal after NorthPoint modified its third-quarter 2000 losses.
Stark contends the losses were allowed under the terms of the merger agreement.
Verizon “led NorthPoint (and its bondholders) so far down the primrose path that NorthPoint could not recover from a Verizon pullout in time to partner with a Verizon competitor,” Stark’s lawsuit alleges.
Verizon was formed from the merger of Bell Atlantic Corp. and GTE Corp. in 2000. NorthPoint was founded in 1997 and became one of the fastest-growing DSL service providers in the United States.
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