By the time Theodor Olson walked into a Washington courtroom on a cloudy morning in March, it would have taken close to a miracle to save his client, NextWave Telecom, from ruin.
Founded by a former top executive at Qualcomm, Allen Salmasi, and financed by a group of veterans of the defunct investment banking firm Drexel Burnham Lambert and a coterie of hedge funds, NextWave had been stuck in bankruptcy since 1998; the District of Columbia US Circuit Court of Appeals was its last hope.
PHOTO: NY TIMES
The company had incurred the wrath of regulators, faced a formidable lobbying campaign by the wireless telephone industry and suffered two devastating setbacks in the 2nd US Circuit Court of Appeals, in New York. Unable to pay its debts, it had been stripped of its most vital asset, radio spectrum licenses it won in two auctions five years ago. Over the company's protests, they were resold in January, in the largest government auction ever, to some of the nation's most powerful telecommunications companies.
But three weeks ago, Olson won his biggest appeal since the Supreme Court agreed with his argument that George W. Bush was entitled to become president. Ruling that the government had confiscated NextWave's licenses improperly, the appellate court in Washington sent regulators and the rest of the industry reeling. The company says it is now poised to return from the brink with some prized assets -- the licenses that it won with bids of US$4.74 billion in 1996 but that were valued at this year's auction at nearly US$16 billion.
Regulators and rivals
Regulators and rivals still stand in the way, though, as do some federal policy makers, who fear that NextWave's victory could blow a hole in the budget that would force Congress and the White House to violate their pledge not to dip into Medicare and Social Security. The company must also find new backers on Wall Street, no small task at a time when telecommunications investors are suffering large losses.
The outcome of the tortured battle involving NextWave, the rest of the industry and the regulators is impossible to call. Already, it has prompted charges and countercharges of greed and duplicity and limitless finger-pointing. And it shows the consequences of mixing the worlds of government and finance, a combination that resulted from a well-intentioned attempt by Congress and regulators to award cellular licenses to small entrepreneurs.
With that policy, the government essentially socialized the financial risks and privatized potential gains. When NextWave could not, as it had planned, raise more money by going public -- because the financial markets had grown wary -- it could not pay the Treasury. The government, in turn, reclaimed the licenses and tried to reissue them to better-financed companies. Now that policy appears in tatters.
Consumers pay
And despite bitter differences, all sides agree that the main victims have been consumers. Clamoring for better cell phone service as the airwaves have become more crowded, they increasingly find calls dropped or not completed, a problem that could have been greatly alleviated years ago had the licenses at stake here been put to use by now.
Salmasi, 47, the central figure at NextWave, is an Iranian emigre and a former NASA engineer who with his family once owned nearly half of Qualcomm. Hailed by his Wall Street backers as a visionary and pilloried by rivals and regulators as a reckless speculator, he has come to embody both the promises and perils of entrepreneurship in one of the economy's hottest sectors.
After helping Qualcomm develop a powerful code for cell phone transmissions, Salmasi started NextWave in 1995 to fulfill his vision of a nationwide network that would sell airwave space to wireless carriers.
Through his salesmanship and an unusual federal program meant to encourage small entrepreneurs to enter telecommunications, NextWave attracted hundreds of millions of dollars in financing. Ultimately, it pledged to buy 63 licenses for US$4.74 billion, paying just 10 percent up front, with the government financing the remainder.
Salmasi then began what has turned into a five-year battle with the Federal Communications Commission. Waging a bare-knuckles lobbying and legal campaign, he and his allies on Wall Street, many of whom have held on for more than five years, have spent millions of dollars to counter what they contend is an attempt by regulators and larger wireless companies to restrict competition by confiscating their licenses.
NextWave's moves included an audacious effort to use the bankruptcy proceeding to blunt the FCC's authority, as well as personal pleas by executives and investors to President Bill Clinton to intervene on the company's behalf.
So rancorous are the relations between NextWave and the FCC that some current and former government officials say they have been told that the company hired private investigators to delve into their lives, an accusation that Salmasi denies.
The bitterness over the appeals court decision was palpable, and could be felt in the unusual statement issued by William Kennard, who stepped down as FCC chairman earlier this year. One of the strongest critics of the company, Kennard called for a litigation cease-fire in light of the appeals court decision, but added, "The tragedy here is that by welshing on its promise to pay the US government, NextWave could walk away with billions."
NextWave's executives and investors bristled at that. "In the United States, trying to settle your debt through the bankruptcy process does not make you a welsher," said Douglas Teitelbaum, one of NextWave's largest investors and a managing principal of Bay Harbour Management, an investment firm specializing in distressed securities.
Holy grail
The licenses at issue have become the holy grail of the information age. Seeking to expand to new domestic markets, wireless companies want to roll out the promising technology that they say lets consumers browse the Internet and retrieve e-mail at high speeds from cell phones or hand-held computers.
But the carriers came up against Salmasi's vision, which was financed by a group of speculative investors. The Drexel veterans in the investor group had gone this route before. In the 1980s, they had bankrolled entrepreneurs like Ted Turner in the entertainment industry and Craig McCaw, the cellular telephone innovator.
Bankers at the Canadian Imperial Bank of Commerce, known as CIBC, where several Drexel veterans worked, teamed up with ING Barings to raise around US$370 million for NextWave in 1996.
"I was just captivated by Allen," said Leon Wagner, then a top executive at the high-yield bond department at CIBC and now chairman of GoldenTree Asset Management, an investment firm.
Wagner and his colleagues at CIBC attracted a group of speculators to back NextWave. Amazingly, five years later, most of them have stuck with it, and some have even added to their stakes. The investors included Cerberus Capital Management, a New York firm that is one of the largest investors in troubled companies in the US. Another investor was the Loews Corp, the hotel, insurance and tobacco conglomerate controlled by the Tisch family.
In the auction six months ago, the licenses NextWave had won attracted many big bidders. The biggest winner was Verizon Wireless, which bid nearly US$9 billion; other victors included VoiceStream Wireless and business partners of AT&T and Cingular Wireless (the joint venture of SBC Communications and BellSouth). All that stood in the way of getting those licenses was the resolution of the lawsuit filed by Olson.
He was part of a large team of lawyers and lobbyists hired by NextWave and its creditors to counter the even larger team assembled by its rivals. The largest of those was AT&T, which has had a long tradition of influence in Washington.
The company has become the nation's largest corporate political donor in recent years, and its lobbying operations are headed by James Cicconi, a former top aide to the first President Bush. It employs a huge group of inside lobbyists, outside lobbying firms and lawyers. Others opposing NextWave, like Verizon, Cingular, VoiceStream and Nextel Communications, have soaked up much of the remaining legal and lobbying talent in Washington.
Industry lobbyists include a firm run by Anthony Podesta, brother of John Podesta, the former chief of staff for Clinton, and the firm formerly headed by Nicholas Calio, President Bush's top assistant for legislative affairs. A large number of former government officials now work for NextWave's competitors.
Political muscle
NextWave and its allies also flexed political muscle. Their team includes Haley Barbour, a former chairman of the Republican National Committee, and Robert Livingston, the congressman who was elected House speaker but resigned before taking the post when it was revealed that he had had an extramarital affair. The company and its allies, prodigious political fund-raisers, persuaded two Democratic senators, Robert Torricelli of New Jersey and Charles Schumer of New York, to join three House members in filing a brief in the Washington appeal supporting the company.
Its Washington effort has been helped greatly by Teitelbaum. After investing US$20 million in the company over the years, he has spent around US$2 million of his firm's money in legal and lobbying efforts.
Ultimately, the recruit to NextWave's legal team who made the difference was Olson. At the outset, though, he ran into trouble. He was blocked from appearing on the company's behalf at its appeals court argument in Manhattan after two appeals judges suggested that he had been retained to create a conflict of interest that would have prevented a former law partner who had been elevated to the bench from hearing the case. NextWave has denied the suggestion.
Unlimited power
The FCC had successfully argued before the appeals court in Manhattan that under the Telecommunications Act of 1996, it had virtually unlimited power to award and rescind licenses. But Olson argued that under a provision of the bankruptcy code that appeared to be in conflict with that act, the government could not rescind any licenses of a debtor in the midst of Chapter 11 proceedings.
Last month, when the panel unanimously agreed with Olson and issued its order, breathing new life into NextWave and delivering a stunning blow to the FCC, Salmasi said he shrieked for joy.
For Olson's current client, the ruling was decidedly less opportune. He went on to become the US solicitor general, the administration's top lawyer, and his victory now threatens to cut into the federal budget just as the government is being forced to acknowledge a sharp decline in the projected surplus.
For FCC officials and the large wireless companies, the case is not over. They have begun to consider how to retain the licenses.
Reed E. Hundt, the former FCC chairman who oversaw the NextWave auction in 1996, now describes the legal and political battle in Dickensian terms.
"The courts have tied up valuable licenses in litigation that is the telecom equivalent of Jarndyce vs. Jarndyce," he said in a recent interview, referring to the interminably foggy legal fight in the novel "Bleak House," in which the estate is consumed by decades of court wrangling.
Hundt and some current FCC officials blame the courts, saying they have tied up spectrum and caused a delay that could cost the economy many billions of dollars as the licenses lie fallow.
Other critics who blame the regulators point out that two other companies have gone into bankruptcy after winning licenses in 1996.
NextWave's rivals accuse Salmasi and his backers of being spectrum speculators who want only to flip the licenses to some other company, reaping huge profits. To many in Washington, the company is seen not as a telecommunications business but as a lobbying and litigation machine.
Salmasi responds that he is genuine in his commitment to a nationwide wireless company. "Our intentions have always been to build out the network," Salmasi said.
With little time to savor NextWave's recent resurrection, Salmasi is courting Wall Street investors anew to raise more financing. While he says his company is ripe for profitability, the market has turned sour and his timing may again be against him. So far this year, the prices of junk bonds issued by telecommunications companies are down 24 percent, according to an index published by Banc of America Securities. Investors are skittish.
"This happens to be NextWave's cross to bear," Wagner said. "Every time we had the spectrum, it's been impossible to raise financing. And whenever we've been stuck in litigation, the market has been skyrocketing."
Still, Wagner, Salmasi and the rest of the NextWave team believe that they can raise the money. "We've got US$16 billion in collateral," Salmasi said.
Some investors are clearly hopeful. NextWave's privately held shares, which traded as low as US$0.20 in 1998, have risen from US$3 just before the court ruling to US$8.63.
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