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How Metrocomm Became a Cisco Customer

May 25, 2003|Joseph Menn | Times Staff Writer

As Cisco Systems Inc. worked furiously to conquer new markets and keep its revenue growing at stunning rates, its sales-driven culture became increasingly aggressive and freewheeling.

No situation illustrates that transformation as starkly as one that unfolded at American Metrocomm Corp., a regional telephone firm and Internet service provider based in New Orleans.

To an outsider, Metrocomm wouldn't have seemed like a promising catch. It lost $16.5 million on revenue of $11.8 million in 1999 and was in such precarious financial straits that it was interviewing bankruptcy lawyers.

But in 1998, several Cisco executives worked hard to persuade Metrocomm to accept a loan of Cisco gear. Leading the charge were salesmen Kevin Bennett and Vincent Rotondo.

Initially, they were rebuffed. Metrocomm Chief Executive Joe Autem compared Cisco equipment with proven machines from rival gear maker Ascend Communications Inc., now part of Lucent Technologies Inc.

Autem reported to his board that the Cisco equipment wouldn't work properly and that the company should buy Ascend's gear.

But Peter Sahagen, Metrocomm's biggest investor, pressed Autem to make a deal with Cisco anyway. One of the advantages was that the Silicon Valley giant was willing to offer $62.5 million in initial financing for switches and other expenses.

According to a pending lawsuit filed in state court in Louisiana -- in which Metrocomm investors accuse Sahagen, Cisco and others of fraud -- Sahagen badgered Autem in a series of late-night telephone calls, among other tactics.

The calls ended only when Autem resigned, according to the suit, which cites Autem's statements to others. Autem could not be reached for comment. Sahagen's lawyers deny that any harassment occurred.

After Autem quit, Metrocomm decided to go with Cisco. In exchange for arranging the deal, the suit maintains, the Sahagen Consulting Group billed Metrocomm $1.5 million. The cash to make that payment came from Cisco's loan.

Sahagen's attorney, Howard Sinor, said his client's consulting firm earned what it billed. "Any implication that Peter was somehow personally profiting ... from the Cisco deal is not correct," Sinor said.

Sahagen wasn't the only one to reap rewards from the transaction. Bennett and Rotondo, the Cisco salesmen, received $5 million from Metrocomm in secret payments, according to a number of legal findings, including one by a California arbitrator in a related case last year.

The two salesmen recommended that Metrocomm have the Cisco switches modified by Worldwide Web Systems Inc., a software firm in which they each held 20% stakes through companies headed by their wives.

Both of those companies received $2.5 million from Worldwide, again financed by Metrocomm's credit line with Cisco.

Cisco's role at Metrocomm didn't stop there, according to the investors' suit. In their desire to promote the company as a showcase for its telecom equipment, the suit says, Bennett and Rotondo teamed up with two Cisco sales and financing executives and helped recruit telecom entrepreneur Michael Henry to become Metrocomm's new CEO. Cisco staffers also helped the company sell more stock, the suit contends.

Still unclear is how rigorously Cisco's original financing arrangements were reviewed by executives above the salesmen's level. "If you want my opinion," Bennett said in a deposition, "it wasn't sufficient."

Cisco describes the ill-advised financing as part of a larger strategy to develop telecommunications customers. The gear maker says that Bennett and Rotondo took advantage of the situation and that it terminated both men when their conduct came to light.

"This is not about Cisco's actions or processes," Cisco said in a statement. "It is about two former employees who, among other things, violated company policy."

Bennett and Rotondo, who have lost a number of legal battles with Cisco, didn't return calls seeking comment. But in one filing, Bennett asserted that "Cisco had implicitly waived" any prohibition on its employees "having close relationships with its partners and its suppliers." The reason, he claimed: "Because it was so widespread from Cisco at the top."

In fact, Cisco allows certain side investments only if they are approved by a supervisor -- a step, the company said, that Bennett and Rotondo failed to take. Cisco acknowledged, for instance, that Bennett's boss received discounted shares in Henry's former firm after she helped it win Cisco financing.

Metrocomm's ties to Cisco frayed after Henry took over as CEO in the summer of 1999 and discovered that Metrocomm "was an insolvent company that had no business being in business," as he put it.

Worse, Henry said, the Cisco gear wasn't working as intended.

After Henry found out that Bennett and Rotondo had stakes in Worldwide, he halted repayments to Cisco and sued the company alleging fraud on Metrocomm's behalf.

Burdened with equipment that it says didn't work, Metrocomm filed for bankruptcy protection, with Cisco as one of its biggest creditors. Eventually, Cisco bought the company's assets, putting an end to the firm's claims against it.

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