First Coffee for 1 May 2006: Securities Fraud Class Action Suit Filed Against GlobeTel Communications

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First Coffee for 1 May 2006: Securities Fraud Class Action Suit Filed Against GlobeTel Communications

By David Sims

The news as of the first coffee this morning, and the music is digging back to the very roots of rock’n’roll, Elvis Presley’s “Mystery Train,” recorded July 11, 1955 at Sun Studios. Say what you want about the fat druggie in white rhinestone jump suits in Vegas, this is one of the most transcendent moments of 20th century music:

Last Friday the law firm of Sarraf Gentile LLP commenced a securities fraud class action lawsuit on behalf of those investors who acquired the securities of GlobeTel Communications Corp. during the period December 30, 2005 to April 11, 2006.

The lawsuit is pending in the United States District Court for the Southern District of Florida and names as defendants GlobeTel and certain of its top ranking executives.

According to the complaint, the defendants issued several statements during the Class Period which touted the consummation of a $600 million deal with a Moscow-based company named LLC Internafta to install wireless networks in Russia’s 30 largest cities. The complaint alleges, however, that the Russian deal, like so many of GlobeTel’s other business ventures, was in reality a sham.

Plaintiffs are represented by the law firm of Sarraf Gentile LLP and Shalov Stone & Bonner LLP, which have extensive experience in the prosecution of class actions on behalf of investors.

Late last year unknown Florida-based operator GlobeTel made an eyebrow-raising, out-of-nowhere announcement of a $600 million Wi-MAX deal in Russia. GlobeTel CEO Tim Huff refused more than one First Coffee interview requests to talk about the deal, which now appears to have collapsed.

GlobeTel stock shot up 75 percent in a single day in late December 2005 after the firm, which describes itself as a “diversified, global telecommunications and financial services company” announced the $600 million “Wi-MAX wireless network” deal for the “30 largest Russian cities,” Motley Fool analyst Seth Jayson reported.

Huff predicted at the time that “Russia will, quickly and at a relatively modest cost, have a wireless infrastructure that will rival any in the industrialized world,” according to Red Herring.

Huff promised GlobeTel would have $150 million of the financing in place by January 31. That deadline came and went, GlobeTel announced that it had extended by 30 days the payment deadline for their Russian partners, LLC Internafta, to pay up.

“This is a highly complex international transaction on which all sides continue to work together in good faith,” Huff pleaded. “There are numerous legal and regulatory issues that must be resolved and those steps require time and specialized expertise.”

But no payments were made. GlobeTel upped the promise to $300 million, but in April, according to Interfax, GlobeTel “postponed the launch of a major project to build a wireless Internet access network in 30 Russian cities from April to May.”

Interfax cites a source close to the company as saying the cause of the delay is that GlobeTel’s Russian partner, Internafta, has not provided the money promised:

“The project to set up DECT high-speed Internet and mobile telecommunications access requires $600 million. The first $150 million tranche should have been received in January 2006. The company announced a delay in payment several times, after which agreement terms were changed. The companies decided to break up the payment into several smaller tranches, but none of these has been made yet.”

Currently no funds have been provided, and seeing as how GlobeTel has made many promises since December, none of which have yet been fulfilled, First Coffee can understand investor frustration.

A couple months ago First Coffee asked a friend with experience in emerging markets about GlobeTel’s claims, and “Nigel” said “funny, all the operators in Russia are getting lots of calls on GlobeTel, and even the authorities are asking us about it.”

The Russian market has lots of potential, but the penetration of broadband is not going to be that spectacular, Nigel thinks, “even amongst us that are enthusiastic over the market potential. We don’t see more than 10 per 100 penetration for broadband subscribers (note subscribers and not users) over the next 6 years on a nationwide basis.”

Still, given that current penetration is less than 1 per 100, that’s big growth. GlobeTel was onto something, at least in theory, since “at this sort of density, DSL and cable are not good economic options. Too much money has to be invested up front. And, in most cases, the existing copper can’t accommodate these technologies so it has to be replaced which adds to the cost.”

“Conversely, wireless is pretty well suited in terms of coverage versus cost. And, with wireless there is better matching of costs and revenues, so its friendly to investors in these sorts of economies,” Nigel said.

At the time GlobeTel seemed focused on both voice and data, which Nigel thinks would greatly expand the addressable market, and would justify a $600 million investment. The hitch, he says, is that “mobile voice requires different licensing, and I am not aware that there are licenses available right now. There is no license available even for mobile WiMAX (802.16e), only fixed wireless.”

One thing First Coffee has heard from people who have worked on emerging economy telecom projects is that they don’t throw big money at these markets without really understanding what they’re getting into. “I sure wish I had $600 million to spend in Russia, but even if I had a quarter of this amount, it would be a challenge to invest it wisely,” Nigel observed.

By the way, according to Nigel, it takes a good nine months in Russia to obtain the spectrum permits and to file the ”radio plans” with the State Spectrum Committee and the Federal Authority for Communications before an operator can begin operation. Just like in the United States, the operator needs to specify to the authorities the base station locations, equipment being used, etc.

“This all takes a lot of time and experience,” Nigel noted, adding that “most of the really interesting spectrum is not even available at this point. That’ll change as more spectrum is “cleaned” and turned over to civil authorities, but Nigel shivered at the prospect: “In any case, I would not want to be doing this for the first time in Russia.”

A GlobeTel investor e-mailed First Coffee shortly after Nigel’s comments in late February and said “I will disclose that my biggest pet peeve with the GlobeTel management right now is their lack of disclosure and secrets. The problem with GlobeTel is that it seems – in pure Tom Clancy style – the operations are ‘black bag’ secrets and shareholders are left in the dark.

“The SEC filings are very clear in the operations to date, but it has not been profitable so there is no credibility. As a shareholder, I would like more than LOI, but I am a patient person looking to score on the long side (and trade some in the short term…) So, we (collective shareholders) are left wondering and hoping that Huff is a man of his word.”

So, dear readers, if you bought the securities of GTE between December 30, 2005 to April 11, 2006, you may, no later than 60 days from Friday, move the court to appoint you as lead plaintiff, a representative party that acts on behalf of other class members.

The court must determine whether the class member’s claim is typical of other class members’ claims, and whether the class member will adequately represent the class. Your ability to share in any recovery is not, however, affected by the decision whether or not to serve as a lead plaintiff.

You may retain Sarraf Gentile LLP, Shalov Stone & Bonner LLP, or other counsel of your choice, to serve as your counsel in this action.

Go ahead and jump on the mystery train, Brucie, it’s comin’ round the bend.

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