Conflicts of Interest and Board Self-Dealings

In August of 2005, a derivative lawsuit was filed by Highland Capital in the Chancery Court of Delaware against certain then-serving officers and directors of TerreStar. The suit alleged that certain of the Company’s managers had placed their own interests above the Company’s by paying excessive fees to outside companies in which the named directors and officers held interest. (Source for preceding two sentences: Press Release Announcing Lawsuit) Former TerreStar chairman Steven Singer, former director Jared Abbruzzese, and convicted felon Gary Singer were the primary focus of the lawsuit.

In Section 15 under the “Facts” heading, the lawsuit states:

“This lawsuit is being filed because the Motient directors, controlled by Steven Singer, aided by Steven Singer’s brother Gary Singer (who has been banned for life from serving as an officer or director of a public company), and their conspirator Abbruzzese, are conflicted, not independent and driven to hasty decisions adverse to Motient’s best interest by the Singers and Abbruzzese. The effect of these imprudent decisions has been to dilute the interests of Motient’s shareholders in Motient, and thus in its primary asset, Mobile Satellite Ventures L.P. (“MSV”), while at the same time enriching the Singers, CTA, Tejas and Abbruzzese, all at the shareholders’ expense. With this board paradigm rigidly entrenched, the pattern of self-dealing and fleecing of stockholder wealth can only repeat itself in this rapidly changing and evolving industry. Given the corporate chicanery exposed in the last several years, the Defendants simply cannot be entrusted with fiduciary responsibilities for stockholders.”

The filing also stated that Highland Capital and its affiliates were collectively, at that time, the largest individual shareholder of TerreStar and had not “sold or otherwise disposed of” any of its common stock since TerreStar had emerged from bankruptcy. This long-term stake in TerreStar not only appears to align Highland Capital’s interests with those of other shareholders, it seems to provide the correct incentive to properly analyze the strategic opportunities available to TerreStar and then provide recommendations that would best benefit common shareholders. Unfortunately, Abbruzzese, the Singers, and other allegedly conflicted members of TerreStar’s leadership group apparently ignored Highland Capital’s suggestions and warnings. The leadership of TerreStar continued to make decisions that the Company’s falling share price would suggest undermined the interests of all shareholders. (Source for preceding paragraph: Lawsuit Filed in Delaware Chancery Court)

To gain control of TerreStar originally, the Singers and Abbruzzese allegedly utilized the bankruptcy process to seemingly “take over” the Company (then known as Motient). Subsequently, they installed themselves and certain business acquaintances into the leadership team (Steven Singer became chairman, Abbruzzese a director and consultant, and former CTA employee Christopher Downie was named COO) and then proceeded to strip value from shareholders through a series of conflicted actions. These actions appear similar to what they had purportedly attempted to do in other instances. During the 2006 proxy battle, details were produced that attempted to show that the Singers and Abbruzzese then used their influence to reap significant financial gains at the expense of shareholders and employees.

In addition, as mentioned above, Steven Singer shared an office with his brother Gary during the time that these deals were occurring. Though not acting in an “official” role, Gary reportedly participated in TerreStar board meetings and conference calls. Gary Singer performed these activities despite the fact that he had been permanently barred by the SEC from acting as an officer or director of any public company. Furthermore, The Singer Children’s Management Trust, set up for the benefit of Gary Singer’s children, held warrants in Motient and other companies affiliated with CTA, Jared Abbruzzese, and Steven Singer. The Trust also received compensation for advisory work done for Motient. The reason for compensation was unexplained. (Source for preceding paragraph: Lawsuit Filed in Delaware Chancery Court)

Shockingly, the Singers’ relationship with TerreStar has apparently not ended. According to public filings, during TerreStar’s recent capital raise the Company once again brought the Singers in as investors.

During this time period Jared Abbruzzese owned Communication Technology Advisors (CTA), of which Gerald Kittner, another TerreStar director, was an employee. The COO of TerreStar at the time, Christopher Downie, was also a former employee of CTA. In 2002, Abbruzzese managed to get CTA hired by TerreStar to provide financial advice. Between 2002 and the end of 2005, CTA received over $3 million in fees and millions of dollars worth of warrants to buy TerreStar stock. (Source for preceding paragraph: Filing from secinfo.com)

One of CTA’s chief pieces of financial “advice” to TerreStar was to hire Tejas Inc., a small investment firm, to raise money. Tejas was recommended despite the assertion that “prior to being engaged by Motient, Tejas earned less than $100,000 in annual investment banking revenues.” As a result of its subsequent work with TerreStar, Tejas experienced a 2,600% jump in annual profit – it appears that most of their increased revenues were a result of their newly-formed advisory relationship with Motient. At the time of Abbruzzese’s recommendation that TerreStar hire Tejas, Abbruzzese failed to disclose that Tejas had awarded him options to buy 100,000 shares of Tejas. (Source for preceding paragraph: Filing from secinfo.com)

Upon Tejas’ tremendous profit spike, the value of the shares underlying Abbruzzese’s options grew 900% in one year. Soon thereafter Tejas purchased CTA for $65 million, further benefitting Abbruzzese and the other TerreStar board members associated with CTA. (Source for preceding two sentences: Article from Austin Business Journal) The pre-existing financial relationship between Abbruzzese’s CTA and Tejas was not disclosed to the full TerreStar Board at the time, even though Abbruzzesse continued to recommend TerreStar retain Tejas for various engagements. This begs the question whether Abbruzzese and Tejas were in discussions regarding the acquisition at the exact time Abbruzzese was making these recommendations to TerreStar.

In addition to the conflict of interest inherent in the relationship between CTA, TerreStar and Tejas, there are many other allegations of similar behavior in other situations. On May 24th, 2006, Highland Capital sent another letter to shareholders that outlined its fears if the then “lame duck” board of directors was allowed to name its own replacements. As evidenced by the Singers’ recent investment into TerreStar, the questionable relationships appear to have continued.

When it came time in January of 2007 to appoint a chairman for TerreStar Networks, a wholly-owned subsidiary of TerreStar, then TerreStar board member Bill Freeman was the choice. Freeman is quoted as having said: “I look forward to building on the success of the last couple of years and continuing to grow value for our shareholders.” (Source for preceding two sentences: Press Release from January 2007) Yet, from the time of his appointment to the board of TerreStar in May of 2005 to being named Chairman of the Board of TerreStar Networks in January of 2007, the stock price of TerreStar had fallen more than 50%. Freeman was later named Chairman of the Board for TerreStar in March of 2007.

These in-house appointments, in the face of consistent share price declines, raise the following question: Why was an outsider not chosen to lead TerreStar?

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