Sinclair Upton Research short report on Straight Path Communications (STRP) – How to commit fraud against the FCC and get away with it (until now).

The first report came from Kerrisdale Capital now a new report is out. H/T ZeroHedge

Updated: 11/05/2015 2:30PM EST

Yonatan Cantor, PR at Straight Path Communications, sent the following statement to ValueWalk

We generally do not comment on movements in our stock that are not related to company actions.  We do understand that there have been additional allegations raised by holders of short positions in our stock.  We do not believe that there is merit in their claims and will respond accordingly at the appropriate time.

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Executive Summary

There is overwhelming evidence that the vast majority of Straight Path Communications' ("Straight Path") 39 GHz spectrum licenses' Required Notification of Construction/Coverage Applications were obtained under fraudulent misrepresentation, because the systems were never built on the sites as specified in the filings.

  • Michael Rapaport, as a representative of IDT Spectrum and Spectrum Holdings Technologies ("IDT"), the transferors of Straight Path's 39 GHz licenses, has likely committed over 150+ counts of fraud against the US government and made a mockery of the FCC's trust-based license renewal process. Instead of spending vast amounts of time, money, and resources to actually building up the required 39 GHz wireless sites in the 173 Basic Economic Areas (BEA) across the country, IDT/Rapaport gamed the system by filing construction/coverage substantial service Required Notifications that would pass FCC renewal process with nothing but a word processor.
  • Almost all of the 39 GHz systems that are claimed to be "constructed" by IDT to provide Substantial Service as required for their 39 GHz license renewals in 2011-2012, cannot possibly been able to meet their performance specifications, as their purported systems defy the laws of physics, geometry, economics, and common sense. Readers, investors, and the FCC can easily verify for themselves that IDT’s systems were never built or operating at the time of renewal.
  • Even if Straight Path's licenses have any value at all (which they don't), because they were renewed under false statements of coverage/construction, the licenses are at high risk of being terminated and stripped from Straight Path's ownership. Thus, the fair value of Straight Path stock without ownership of the 39 GHz licenses and being banned from future FCC spectrum participation is $1.00-2.00 per share, or approximately liquidation value.
  • We urge the Federal Communications Commission (FCC) and regulatory authorities to immediately open an investigation into the license renewal process of Straight Path's 39 GHz licenses and ask Straight Path for proof that the Required Constructions were met for all of the systems claimed to be built in the 173 Basic Economic Areas. Companies should not be allowed to lie to the US Government and get away with it.

Due to the danger of retaliation from the company and individuals involved, this report was written under a pseudonym, Sinclair Upton Research. People who commit fraud for millions of dollars are willing to do anything to keep their illegitimate gains.

Background

In early 2011, IDT Spectrum, LLC (“IDT”) a subsidiary of IDT Corporation, had a big problem and it needed a solution, and it needed it fast. At that time, IDT owned 931 licenses in the 39 GHz spectrum and those licenses would expire and be terminated by June 1, 2012, unless IDT could show that it met the substantial service requirements of Section 101.17(a). If IDT did not meet those requirements, they would not be able to keep those licenses until the next expiration date of October 18, 2020, which would cost them their investment in those licenses.

Under FCC renewal requirements for each license, IDT had to show that they constructed systems to either 1) broadcast 39 GHz signals with 4 point-to-point links per 1 million population within each county-sized Basic Economic Area (BEA) service areas or 2) under the point-to-multipoint safe harbor established for LMDS provide coverage to 20 percent of the population of the license's BEA service area. For each BEA, there are 14 licenses consisting of 100 MHz Channels between 38.6-40.0 GHz. However, leasing the sites for the systems, building the hardware, and operating the radio and antennas in all 173 BEAs across all 50 states would cost a lot of money, at least $10-12 million dollars by another (now bankrupt) spectrum holder company’s estimates.

Enter Michael Rapaport.

Rapaport, former president of IDT Spectrum, LLC, came up with a working, but illegal solution. First, IDT would build 1 actual, real system (we believe this is the system covering San Francisco-Oakland-San Jose in BEA163 filed on 7/28/10), get it renewed by the FCC, and use that paperwork as a template to make fillings in all the other 172 BEAs. This is acceptable, if IDT actually built the systems.

But, IDT did not actually build most, if not all of the other 172 systems as required, but still filed the Required Notification of Construction/Coverages falsely asserting that they did build them. The FCC, lacking the manpower to inspect each and every application, and having a trust-based license renewal process, approved those licenses for renewal, and IDT got almost all of their licenses renewed cross-country. This was quite unusual, because the other large holders of 39 GHz licenses (FiberTower, Airband), attempted to renew but still failed to meet the substantial service requirements and let their licenses expire.

In mid-2012, IDT and Rapaport had another similar problem. Rapaport, through his company Spectrum Holdings Technologies, LLC (“Spectrum Holdings”), acquired 200 licenses in 39 GHz from Level 3 and PTPMS Communications in 122 BEAs that were about to expire because the substantial service requirements were due on June 1, 2012. Spectrum Holdings was assigned ownership of these licenses on May 31, 2012. Amazingly, after just 12 days after getting the licenses, by June 12, 2012, Spectrum Holdings filed their Notifications of Construction/Coverage for every license. How did Spectrum Holdings build up systems in every state in the country in just 12 days? The answer is, they didn’t. Spectrum Holdings simply used the same template as IDT, used find/replace in a word processor to change IDT to Spectrum Holdings, left the rest of the specifications and locations of the site exactly the same, and got these new licenses approved. Problem solved. In 2013, Spectrum Holdings assigned their licenses to Straight Path Communications, who also now owns the former IDT Spectrum licenses.

The FCC is very clear on the requirements for construction/coverage and substantial service, it is not a theoretical exercise for potential or hypothetical signals coming from a proposed system. At the time of the filing, the system must be broadcasting and operational. If IDT and Spectrum Holdings renewed their 39 GHz licenses under the fraudulent misrepresentation that the systems existed and met the requirements when in reality they did not, then their licenses should never have been renewed in the first place and should now be taken away from them now. Plus, there is the tiny issue about lying to the Federal Government, who, like most people, does not like being lied to.

In this report, we show evidence that many, if not all of the 39 GHz system sites that IDT/Spectrum/Straight Path purported to build were never built nor operating to the required performance specifications to meet substantial service. We were not able to

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