The breach of contract and fraud lawsuit that defunct DSL provider NorthPoint Communications filed against Verizon Communications is back in the news. A few months ago I noted that a July 29 date was set for the jury trial to begin. Verizon attempted to get the lawsuit, which could be worth as much as $4 BILLION, thrown out. A judge rejected the bid on Friday and the jury will begin hearing the case on the originally scheduled date.

A few things to take into consideration here:

Verizon has never mentioned the NorthPoint lawsuit, which could have a serious material impact on the company, in any of its Securities & Exchange filings. I find this very troubling because the suit had gotten little play in the media until this week and shareholders may have been oblivious to the suit's existence. Should shareholders be worried now? Should shareholders have been warned? Considering the wave of distrust raining down on Corporate America, I would not want to go before a jury and explain why my company pulled the plug on a deal that put a couple of thousand people of work, left 100,000 people and businesses without Internet service and killed any remaining value for shareholders.

The basis of the lawsuit is that Verizon entered in an August 2000 agreement to acquire NorthPoint and gave the company $150 million in financing at the time. In November of 2000, Verizon pulled out of the deal, citing the fact that NorthPoint's Q3 2000 revenues were about twenty percent below expectations (about $5 million). This sent NorthPoint in a tailspin and in rapid succession the company laid off a huge chunk of its workforce, filed for bankruptcy and then shutdown.

"In return for being able to merge GTE and Bell Atlantic the FCC forced Verizon to invest $500 million in competition. They agreed to buy Northpoint and gave Northpoint $150 million down payment. They then told Northpoint to spend it and all its available cash speeding up the buildout of its network. Northpoint did. Verizon then backed out of the deal. They then got the FCC to give them credit for over half of that going toward its commitment to invest in competition! And, naturally [FCC Chairman] Powell agreed," Robert Lee, a telecom junkie and former business executive, wrote in an email to me and others last night.

"Coincidentally, once Verizon had bankrupted Northpoint, Verizon raised the price on DSL from $39.95 to $49.95, a full 25%, setting off a wave of Internet access broadband increases that spanned modes (cable, wireless, etc). Verizon mistakenly thought that Covad would not emerge intact from its bankruptcy. They were wrong. They inadvertently helped sew the seeds of their own destruction. The $10 meant a lot more to Covad (which could not charge more also) than it did to Verizon," Lee also wrote.

DISCLOSURE: Lee is a Covad shareholder.

Follow the money. Angelo, Gordon & Co., which describes itself as "Specialists in Non-Traditional Investments", stands the most to gain if NorthPoint wins the lawsuit. NorthPoint is no longer in business and the company has no assets. A court appointed trustee is overseeing the case and I am making the assumption that if the lawsuit is won, the money will go to creditors, bondholders and others. Enter Angelo Gordon; the New York firm "invested" $7.5 million to back the NorthPoint lawsuit. Because the case is going to a jury trial, if NorthPoint wins, Angelo Gordon will get twenty percent of the payout. So say a jury awards NorthPoint $4 billion; Angelo Gordon scores $800 million on a $7.5 million investment. Btw, Angelo Gordon also ponied up $50 million in "death spiral" financing to Excite@Home last year.

AT&T eventually acquired NorthPoint's assets for about $135 million. This was for an infrastructure that took about $1 billion to build out. AT&T then pulled the plug on NorthPoint's 100,000 customers. This effectively killed MSN's DSL business. To this day, it doesn't appear AT&T has ever utilized any of NorthPoint's assets. About six months after AT&T scooped up NorthPoint's assets, Excite@Home filed for bankruptcy. Don't forget, AT&T held a seventy percent stake in Excite@Home. AT&T attempted to buy Excite@Home's assets, but the deal was scuttled by bondholders. Excite@Home then went out of business and its 4 million plus customers were dispersed back into the folds of the ISP's the company had deals with (AT&T, Cox, Comcast, Rogers and others). A few months after Excite@Home went belly-up, AT&T announced that it would merge its broadband/cable unit with Comcast.

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