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Fast's Stock Market Bluff

Fast's Stock Market Bluff

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Published by erickschonfeld
The sordid story from behind Fast Search & Transfer, the "Enron of Norway" that Microsoft bought for $1.2 billion.
The sordid story from behind Fast Search & Transfer, the "Enron of Norway" that Microsoft bought for $1.2 billion.

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Published by: erickschonfeld on Jul 03, 2008
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05/09/2014

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1
Fast’s Stock Market Bluff 
”, Dagens Næringsliv, June 28, 2008
Front page:
Fast’s Stock Market Bluff 
 
Fictions in accounts: 250 million Fictional contracts: 100 million Executives siphoned off: 30 million Chief executive Lervik got rich when he sold Fast before the bluff was revealed.
Inside story:
Fast & Loose 
 
The executives of Fast Search & Transfer manipulated the accounts and fooled the stock market. Someof them enriched themselves with the help of fake invoices. Just before the big scam was revealed,Microsoft acquired the company.
It was the happening of the year. Clients, investors and analysts were assembled in San Diego on February 7,2007 to listen to Fast’s founder and CEO John Markus Lervik’s keynote about the future of search technology.Not only would he talk about technology. He also presented quarterly results for Q4 2006 – and once again aquarter with enormous growth and new records. What nobody explained was that a third of the running incomewas based upon a deal that didn’t exist.
Tired.
“It is a shame, basically, that people in Boston walk around talking about Fast as the new Enron,” sighsAli Riaz on the phone. The former CFO in the Norwegian search company is tired of Fast. Tired of Norwegian journalists’ calls every time new trash emerges from Fast’s accounts, which were earlier so well funded. Tired of being made the scapegoat for years of bad results, accounting problems and blown-up revenues.“I had nothing to gain from manipulation of the accounts. I had no shares in the company. I wanted shares andquit because I didn’t get any. If you want to find out what’s wrong with the accounts, you need to look at thosewho could gain from it. And it wasn’t me. Talk to Robert Keith, Thomas Fussell or John Markus Lervik,” Riazsays. He has only a final greeting before he hangs up.“I have no wish to talk to you. When I left the company, it had more than 250 million dollars in the bank. Do notcall me again.”
Growth or unbelieving.
It was just before May 17, 2007, only a few months until Fast’s accounts were toemerge as pumped-up with contracts that didn’t exist.Fast Search & Transfer once again reported record turnover in first quarter, with an unbelievable 50% growthfrom the year before. Again.Fast emerged more and more as a fairytale, a wash-proof Norwegian fairytale – based upon research fromNTNU and brought out into the world by the company’s founder and CEO John Markus Lervik.The company had gained new life after it almost hit rock bottom in 2001. That time, Fast was stamped as an airystock bubble. When the bubble broke and the deficit of over two billion NOK was digested by the stock market,Fast’s share price fell 98%. The technology fairytale had been valued to almost as much as Hydro a year before.Now, it was reduced to a gnat.In the turbulence that followed, Lervik, a young technologist from Øksendal in Møre og Romsdal, ascended to of CEO. Together with CFO Ali Riaz, he started the work to rebuild Fast from the ruins of the dotcom crash.Longing to seem successful. Lervik and Riaz in reality ran the company together. They regularly reported hugegrowth and incredible sales figures.
 
Fast’s Stock Market Bluff 
”, Dagens Næringsliv, June 28, 20082
For a growth company such as Fast, there was only one thing that meant anything: the top line in the accounts,how much the company had sold. To increase sales was more important than creating growth on the bottomline. Growth was more important than profits. It was about growing fast, or rotting on the vine.Fast grew. Fast. And aggressively.Riaz and Lervik pumped out one quarterly report better than the other.
Success and unrest.
On October 2, 2006, a press release was issued from Fast. Ali Riaz had quit. Yesterday.“It was surprising. I didn’t understand why,” says investor Øystein Tvenge, who was a board member at thattime.However this did not seem to be halting progress. Lervik continued to report new records, incredible growth insales and new, unbelievable successes with Fast’s search technology.But internally in the company, the unrest had started to take hold. Employees started to ask questions aboutLervik’s and the management’s aggressive accounting of contracts.DN has spoken to several former employees who felt uncomfortable.“I hadn’t worked for a Norwegian company before; I assumed this was the Norwegian way of doing business.After a while, I realized that what we were doing was wrong. Horribly wrong,” says one individual who workedseveral years at Fast’s USA offices outside Boston.Riaz’ departure did not improve the situation.“It was after his departure that everything started to fall apart,” says a former employee at Fast, who quit in 2007.
The heroin method.
Fast had developed a way to sell software which most easily can be compared to narcoticssales. Fast’s sales team would work for months to get a client to say yes to a trial period of Fast’s searchtechnology. If the client came on track, the Fast sales representative would enter into a ‘tentative deal’, which inFast-language was known as a ‘Memorandum of Understanding’ (MoU). The tentative deal implied that theclient could try out Fast’s technology free of charge for a period. If the client enjoyed what he saw, Fast and theclient would negotiate further for a legally binding contract. Only if such a contract was agreed would the clientpay Fast for the software license.This sales method was so successful that Fast claims only a tiny percentage of clients did not sign contractswhen they first had gotten the taste of Fast’s technology.But to get paid for that which Fast sold became harder and harder through 2006. Something wasn’t right. Thefigures didn’t add up.
Make up on the pig.
Analyst Thomas Nielsen followed Fast for the stock brokers Kaupthing and believed for along time that Lervik and Fast cheated with the accounts.“We see several signs of weaknesses in Fast’s accounts,” Nielsen wrote, cautiously, in an analysis in November 2006.ABG Sundal Collier-analyst Georg Aasen had already the previous year claimed that the accounts didn’t standup to scrutiny.“Fast presented the figures so that the margins looked as if they had increased from third to fourth quarter. ABGSundal Collier’s calculations, however, shows the opposite,” Aasen wrote in a report to his clients in 2005.
 
Fast’s Stock Market Bluff 
”, Dagens Næringsliv, June 28, 20083
In November 2006, Thomas Nielsen pointed directly towards what he saw as the problem: “the trade accountsreceivables are abnormally high compared to income (…) and Fast accounts for revenue which is made publicseveral days into the next accounting period. This indicates aggressive accounting,” Nielsen believed.His conclusion was crystal clear: “Sell.”But the analyst had only seen the beginning. Whilst the analysis was being written, the Fast management was just about to follow through its most daring accounting stunt ever.
Down under.
In fourth quarter of 2006 it must have been a hubbub at Fast’s sales offices. After Riaz soabruptly disappeared, sales revenues fell dramatically, particularly in Europe and Asia. Sales in Europe alonedropped around 50 million NOK from the previous quarter.At the same time, Fast invited the board and investors, analysts and clients to a huge Fast Forward-conferencein USA in January. There, Lervik was to make public the annual accounts for 2006 and a sales drop of 75 millionNOK for fourth quarter would look really bad indeed.But there was also hope: In Australia, Fast salesman Nathan van den Bosch was finally about to get a rewardfor a long period of hard work. Australia’s largest telecom company was already on Fast’s client list through asmaller subsidiary. But van den Bosch had larger plans. He tried to get the whole of Telstra to go over to Fast’ssearch technology. Such a deal would be quite a catch for Fast – and create a solid profit for van den Bosch’squota. The former state monopoly would be among Fast’s largest clients.It was Christmas Eve several days early that year. On December 22, van den Bosch did the incredible: he gotTelstra to sign an MoU – a tentative deal. On the condition that the parties would agree, the deal would beworth 18.6 million Australian dollars – 90 million NOK.But difficult negotiations remained before such a deal would be brought to harbor. “Telstra is a big company. Toapprove a deal of 18 million dollars, it has to go through several layers in the organization and about ten personswould have to approve,” says a person with in-depth knowledge of Fast’s sales organization in Australia.The Fast management did not have time to await for such a long process. A week after the tentative deal wasentered into, Fast counted all the deal as revenue. 90 million in tentative money. Straight into the pay desk.The quarter was saved. Fast was on track to show solid profit margins for 2006. But perhaps more importantly:continue to show solid growth on the top line.
 All over.
After New Years Eve it became clear that the Telstra deal was hanging on a thin line. In January, Fastexecutive Torbjørn Kanestrøm travelled himself to Australia to save the deal. Kanestrøm runs Fast’sdevelopment work outside of Europe and holds the title senior vice president. Inside sources claim it was adesperate act. Whatever it was, it was not successful. Fast’s problem was that the revenues of 90 million werealready recognized.
Drama in San Diego.
In February, representatives from Telstra travelled anyway to San Diego, where Fast heldone of its many Fast Forward-conferences. Telstra uses search technology from Fast in a couple of other, butfar smaller projects, which had been running for years.“All sales people from all over the world were there to nurse their clients. The only one who did not take part wasNathan van den Bosch” says a former Fast employee who was there.Among Fast’s USA employees , his absence was understood as signifying something really wrong with the largeTelstra deal.“The Telstra people were to be treated as nobles. On paper, they were among our largest clients. Buteverybody understood the deal was in trouble when Nathan did not show up.”

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