Hedge Fund Sues Verizon Over Failed Merger

August 5, 2003 (PLANSPONSOR.com) - Stark Investments LP has filed a lawsuit against Verizon Communications Inc. accusing the company of intentionally reneging on a merger agreement with Northpoint Communications Group Inc., thus costing the fund more than $25 million in investment losses.

The lawsuit, filed by the general partner for the hedge fund – Staro Asset Management LLC – contends that by failing to honor the merger agreement, Verizon forced Northpoint to file for bankruptcy two months after the proposed union in January 2001.   This in turn cost the hedge fund due to NorthPoint securities that Stark purchased containing a “change in control” feature, according to a Milwaukee Journal Sentinel report.

This “change in control” feature obligated any company acquiring a majority interest in NorthPoint to offer to buy the notes back at 101% 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 claims 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.   As evidence, the suit says within days of signing the merger agreement 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 a NorthPoint news release saying the deal was still “on track” in November 2000, 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.

Earlier Case

Claiming it did nothing wrong, Verizon points to an earlier suit – Faulkner v. Verizon – that made many of the same allegations against Verizon and was dismissed by a federal court in Manhattan in September 2001. In that case, US District Judge William Connor said the shareholders had not sufficiently shown motive or recklessness on the part of Verizon.

However, the $2.4-billion hedge fund also has access to documents neither the plaintiffs nor the judge in the Faulkner case had, lawyers for the fund say. Stark obtained the documents from a lawsuit NorthPoint filed against Verizon in which Verizon settled for $175 million, after the Faulkner case was dismissed.