Wanted: CEO-Location Technology

The saga of East Bay firm US Wireless raises questions about the role of corporate boards and auditing firms in policing the behavior of executives.

When US Wireless went public in 1996, the company seemed poised for financial success. The San Ramon-based firm was at the forefront of new technology that could pinpoint the location of mobile phones. The federal government had required mobile phone companies to offer caller-location services, and a rush was on to develop the technology. US Wireless had a very good chance of crossing the finishing line first. The company’s system also offered real-time traffic updates, mapping, and directional assistance for the entire country.

On paper, it all looked good, but in the end it was all just paper. In July, the US Securities and Exchange Commission and the US Attorney’s Office filed complaints against two company officials in two separate cases — one civil, the other criminal. The SEC charged former CEO Oliver Hilsenrath, 46, and General Counsel David Klarman, 39, with “egregious security fraud” for allegedly bilking their own firm of $3.6 million between 1996 and 2001. Authorities claim that the pair funneled money to offshore companies that they owned and controlled through phony consulting deals. The SEC complaint seeks to force them to pay civil penalties and prohibit them from ever again serving as officers or board members of any publicly traded company. The US Attorney’s indictment charges them with 36 counts of wire and securities fraud.

The troubles at US Wireless first came to light in 2001, when an outside auditing firm discovered the alleged multimillion-dollar theft and forced the company to restate its financial position. The result: a rapid spiral into bankruptcy that left dozens of East Bay residents unemployed. “It was a thinly capitalized company,” recalls David Robkin, a Philadelphia venture capitalist with Liberty Ventures who served on the US Wireless board. “It was still in the development stage and didn’t have any major sources of revenue. After this came out, the company was delisted from NASDAQ and lost the ability to raise capital.” Within months, all one hundred employees had been laid off, and by the end of 2001 the company’s technology had been sold off for a paltry $2 million. By early 2002, US Wireless was shuttered.

Although the company’s death spiral allegedly stemmed from the greedy machinations of execs Hilsenrath and Klarman, it raises lingering questions about the proper role of a company’s board of directors and auditing firm. Both the US Wireless board and the company’s primary auditing firm, Haskell & White, failed to uncover the problems. Although no one from the board or Haskell & White has been charged with any criminal or civil wrongdoing, both entities clearly had a hand in the unraveling of US Wireless. It was not until the company’s books were inspected by a second auditing firm, PricewaterhouseCoopers, that the alleged sham consulting deals came to light. But by that point, it was too late.

Corporate reformers aren’t surprised. They say corporate board members often aren’t as diligent as they are required to be, and companies often choose auditors that will give them the results they want. “I have to believe these people are intelligent enough to have had some suspicions,” says Kellie McElhaney, a business professor at UC Berkeley’s Haas School of Business. “They should have done due diligence and taken their responsibility more seriously.”

Mark Latham, a former UC Berkeley business professor who founded the San Francisco-based Corporate Monitoring Project, agrees with McElhaney that both the board and the company’s accounting firm should have picked up on the problems. “Under the law, the board is supposed to look out for shareowners’ interests,” he says, “but there is no enforcement mechanism to see that happens. Officially, accounting firms are supposed to check whether there’s anything sneaky going on, but there’s no incentive to do that. They’re hired by the board. No board is going to hire an auditor that gets the board fired.”

In addition to Hilsenrath and two venture capitalists, the US Wireless board included some seasoned veterans of the telecommunications field. Board member Barry West was senior vice president and chief technology officer for Nextel Communications. Director Dennis Francis had twenty years in telecom and had been a vice president at AT&T. Board member James Eisenstein was chief development officer of American Tower Corporation, one of the leading wireless communications developers and operators in the country.

In interviews with two former board members, very different stories emerged as to why the outside accounting firm was brought in to oversee the work of Haskell & White. Irwin Gross says the new auditing firm came in at his urging because the Lehman Brothers investment house was about to raise $100 million for the company and wanted assurances that its books were in order. But David Robkin also claimed responsibility for the move, saying that after his in-house auditing committee discovered some irregularities, it brought in PricewaterhouseCoopers, which uncovered the executives’ alleged scheme. How Haskell & White missed the problems is unclear. Officials at the Irvine-based accounting firm didn’t respond to interview requests.

Perhaps both Robkin and Gross are squirming a bit under the glare of history, which now shines an unflattering light on the company’s board. Robkin, whose venture capital firm invested and lost $1 million on US Wireless, insists that no alarm bells went off about the consulting deals because they’d been approved by the CEO and company attorney. “These were the two most senior people in the company,” he offers.

Gross, meanwhile, says board members had no way of figuring out what was happening with the company’s consulting deals from the documentation they typically received each month. In hindsight, though, he concedes that the board should have been more diligent. “There was no way to tie those companies to those guys,” he says. “When they set up those companies, they put a lot of company stock in them. Apparently, they were paying these companies consulting fees and it was never shown to the board of directors and just shown as an expense. … We took a lot of what we heard on the face and should have insisted more strongly on the auditors.”

What Gross and his colleagues should have paid attention to was what US Wireless was receiving in exchange for its $3.6 million spent on the consulting deals. The SEC and the US Attorney’s office say the company apparently never received anything of value. It certainly wasn’t as if the two execs needed money. Hilsenrath was paid $400,000 a year and, at one point, his US Wireless stock was worth well over $100 million, Gross notes. Klarman made about $250,000 a year plus perks. “I don’t understand how they thought they were going to get away with this long-term and why they were so greedy,” he says.

Gross, who knew Hilsenrath before he started US Wireless, describes him as a charming Israeli who’d created wireless technology for his country’s Air Force. “He was a brilliant, hardworking guy,” says Gross, a venture capitalist whose firm, Ocean Castle Investments, invested in US Wireless. “He was brilliant with technology and had come out of some of the finer places in Israel.” Hilsenrath had a doctorate from Israel’s acclaimed Technion Polytechnic Institute, and had spent his career in the field of wireless technology. He assembled an impressive array of scientists and engineers and brought in management with decades of experience in the communications industry.

Klarman, on the other hand, was a rough-edged, street-savvy New Yorker who made few friends and alienated many in the company, the two former board members say. He was protected by his buddy Hilsenrath, Gross recalls. “If I called him a sleazebag, it would be a compliment,” the former board member says angrily. “He’s not a likable guy.” The former general counsel was recently arrested at his home in New York’s tony Hamptons. His attorney did not return phone calls.

Hilsenrath is not in custody. He’s back home in Israel, although his attorney vows that his client plans to return to face the charges. “We’re arranging for him to return voluntarily,” says Mike Shepard, a San Francisco attorney. “He denies the charges, and to show he means it, he’s returning voluntarily to defend the charges.”

Gross, however, puts the likelihood of Hilsenrath returning to defend himself at less than zero. “He’s hiding in Israel and he’s not going anywhere unless they drag him back,” says Gross. “He left in the middle of the night with his family and sold his house.”

Matt Jacobs, a spokesman for the US Attorney’s Office in San Francisco, says no extradition papers have been filed yet, but the office intends to ensure Hilsenrath shows up in federal court for trial. But in the past, American officials have not been very successful extraditing Israeli citizens to face criminal charges.

Hilsenrath and Klarman were indicted on three counts each of securities fraud, which carries a maximum ten-year sentence for each charge. Hilsenrath also faces 33 counts of wire fraud and Klarman another sixteen charges. A conviction on one count of wire fraud carries a maximum five-year penalty plus a $250,000 fine.

Members of Congress believe that accounting and fraud scandals of this type are less likely to occur in the future due to 2002 federal legislation known as the Sarbanes-Oxley Act. Passed in response to the rash of high-profile corporate fiascos at Enron, Global Crossing, WorldCom, and elsewhere, the act mandates widespread corporate changes for publicly traded companies in an attempt to ensure more accountability. Under the act’s provisions, members of the boards of publicly traded companies are now personally financially responsible for corporate malfeasance that occurs on their watch. The legislation also requires more stringent auditing documentation and controls. Additionally, the law creates a new set of requirements for attorneys who represent public companies before the SEC.

“You’re never going to get rid of human greed or ego, so we have to create systems to keep it in check, and that’s why we have Sarbanes-Oxley,” says UC Berkeley’s McElhaney. “We have to recognize that greed and ego and punish it. In the past, it’s been recognized but not punished.”

But Latham of the Corporate Monitoring Project Team isn’t so optimistic about the legislation’s likely impact. “Sarbanes-Oxley is going to enforce 2 percent of the cases instead of 1 percent,” he warns. He says much corporate malfeasance is hard to catch because the SEC doesn’t have adequate resources to police the five thousand publicly traded companies for which it is responsible, and most wrongdoing isn’t as blatant as what occurred at US Wireless.

To truly reform the system, Latham would like to see company auditors picked by shareholders , rather than by board members who may have a stake in hiding problems. He also proposes letting shareholders use company funds to pay for independent voting advice. Currently, he says, board members have a monopoly on voting recommendations. “We should be giving more power to the shareowners,” he says. “And shareowners should be stepping up and exerting more power.” Until that happens, he warns, “we can expect a show of fixing the problems without really fixing the problems.”

In any case, the new federal regulations came too late for the investors and employees of US Wireless. “This case highlights the ongoing risks for public investors,” says San Francisco attorney Joe Tabacco, who represented two former investors in a case against the company. “My former clients lost their entire investment of tens of thousands of dollars.”

Former US Wireless shareholders have filed numerous lawsuits against the bankrupt firm that are likely to be bundled into one large class-action suit. Given that the company’s assets have all been sold off, it is unclear if they will be able to collect anything.


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