If Straight Path Has A Problem, IDT Might Have A Bigger One

The Next Chapter in the Straight Path Saga is IDT
By now, investors are probably already aware of the criticisms that have been launched against Straight Path Communications (NYSEMKT:STRP) and its portfolio of 39 GHz spectrum that has ostensibly been the enticing asset for investors who are interested in investing in the next wave of “5G” communications. The arguments as to why this may be misleading have been expounded upon in depth by Kerrisdale Capital in a recent presentation. While most people are familiar with the Straight Path story, few look into the parent corporation, IDT Corporation (NYSE:IDT), which spun off Straight Path and bestowed upon it the licenses that comprise most of Straight Path’s assets.
We know that Kerrisdale Capital has been overtly critical of Straight Path and we have also seen criticisms in two reports by Sinclair Upton Research. In these reports, Sinclair Upton alleges that IDT may not have set up the necessary infrastructure in order to properly receive its 39Ghz license renewals from the FCC in 2011. As part of the renewal process, the FCC requires that infrastructure, including the type necessary to theoretically operate a network, be set up when applying for licenses (ostensibly so that people can’t just buy up wireless spectrum and hoard it).

You can read all of these previous critical reports by using these links:

1. Kerrisdale Capital critical report on Straight Path Communications, issued October 2015
2. Sinclair Upton critical report on Straight Path Communications, issued November 2015
3. Sinclair Upton update report, issued on December 3, 2015

While these reports have had a clear effect on Straight Path’s share price, none of them seem to have had an effect on IDT’s share price, which has been in a steady decline for the last 12 month period on its own.
[drizzle]
Again, IDT is the company that spun off of STRP as a housing vehicle for its 39 GHz licenses.
Sinclair Upton’s research alleges that there is “overwhelming evidence that the vast majority of Straight Path Communications’ 39GHz 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.“
The Sinclair report is alleging that 39GHz radios and other equipment that needed to be deployed in order for IDT to receive license renewals were never set up and that IDT lied to the Federal Communications Commission, which could constitute fraud. We believe that if this is found to be true, this could get back to not just Straight Path, but IDT as well.
Sinclair also claims in their report that “almost all of the 39GHz 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 have been able to meet their performance specifications, as their purported systems defy the laws of physics, geometry, economics and commons 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.”

These allegations seemed suspicious enough that we wanted to give it a look.
Like with all of our projects, we conduct our own due diligence instead of relying on the research of others. Knowing that there were well over 100 of these applications/sites filed in 2011, we wanted to take a larger cross section than Sinclair’s three sites and reach out to property managers of the locations in question. Our intention was to try and determine if other antennae/radios had been placed, or if Sinclair’s three location cross section may have led it to erroneous conclusions.
In this article, we review our results, which corroborate previous allegations that little or no equipment was set up, or remains set up. We believe our findings may culminate in a regulatory situation that may have backlash for not only Straight Path’s investors, but also IDT’s investors as well.
The Company Admits It Has Found Irregularities
In Sinclair’s original analysis, they examine three different examples:

1. North Platte, NE – Sinclair claims that “all buildings in the area are 1 story tall and that there are no cell phone towers or tall structures in the vicinity”
2. Twin Falls, ID – Sinclair claims that “there are no buildings around higher than 5 stories tall, no cell phone towers or large structures to place an antenna”
3. NY/NJ/LI – Sinclair claims that copied and pasted applications for this area erroneously reference the “San Francisco-Oakland-San Jose” market despite the application not being for that area

After these allegations came to light, Straight Path on December 1st, filed the following 8-K, stating:

The preliminary results of our investigation into the renewal allegations indicate that a significant amount of the equipment that had been installed in connection with the substantial service showings is no longer present at the original locations. We have informed the FCC about the status of our investigation. We have arranged for replacement equipment to be procured and deployed, as we continue to prepare to deploy upgraded equipment later in fiscal 2016 for point-to-multipoint (PMP) applications at 39GHz, while pursuing our long-term plans for providing 5G mobility services using our licensed spectrum. The point-to-multipoint equipment is being produced by Cambridge Broadband Networks Ltd., a leader in development of PMP technology. To date, we have invested $1 million to expedite Cambridge’s production of a PMP product for 39 GHz spectrum.

We cannot, at this time, give any assurance as to how the FCC may proceed in this matter. If the FCC were to disagree that we have complied with its rules, it may impose fines and/or additional reporting or operational requirements, revoke or condition our licenses, or take other action.

Could the lack of equipment at original locations be because it was never there to begin with?
And if it was never there to begin with, what are the implications for IDT, the company that was in charge of filing the renewals back in 2011, before it spun off the licenses to Straight Path?
Our Research – 37 Sites Contacted, Zero Occurrences of IDT Hardware
The nature of the research that we performed was relatively simple. We did not make on-site visits, but we did try to reach out to a more thorough and significant population of areas where IDT’s sites were supposed to have been set up, in order to understand exactly how much of this work was neglected.
We are going to carry the ball forward by announcing the results of our research with several of the entities that we reached out to over the course of the fourth quarter of 2015 and into January of 2016.
The information that we found corroborates Sinclair’s allegations.
As part of our diligence, we started with a group of about 100 sites that were listed on various licenses by IDT in 2011. From that list, we were able to get in touch with general managers or property managers at about 37 properties. Many of the properties listed on these licenses are homes or commercial office buildings that we were unable to locate a representative for. Yet, we finally got responses from a cross-section of about 37 locations from across the United States that we think accurately and fairly represents the state of all of IDT’s sites from 2011. This represents more than 20% of the licenses they submitted in 2011.
Below is a narrowed down list of all of the sites that we looked at, their pertinent contact person and the number which they can be reached, if people would like to do their own research and reach out. We additionally listed any comments or responses we were given regarding our inquiry as to whether or not they have any infrastructure from IDT on their respective sites.
Here is a list of the properties we contacted:

And a list of the corresponding commentary:

The results here should be alarming to anyone who thinks that IDT had this infrastructure in place at one point, or has it in place now. We are sure that the FCC would be interested in contacting these sites to see exactly how much infrastructure, if any, was ever set up.
One of the most interesting results was from the Hotel Californian Senior Living Home in Fresno, where the property manager told us that she actually recalls possibly being contacted by the company for these purposes in the past, but then declining the company’s offer. She was surprised, to say the least, to hear that her location was listed on one of these licenses anyway.
Many of the hotels that we contacted have changed hands since 2011, many of them have undergone renovations, and some of the buildings were not even open to the public, like the hotel in Syracuse that is currently undergoing renovation to be reopened in summer of 2016.
In speaking with these managers directly, we can confidently state that almost nobody had any idea what we were talking about, with the exception of the one woman who said she may have been reached by the company but, again, declined their offer.
Of course, the caveats to this investigation include the fact that we only got in touch with 37 different sites, although we do feel that even with a small margin of error, as applied to the entire list of licenses, there may be a much bigger problem than the Sinclair report alleges.
In addition, IDT is two degrees of separation removed from these licenses now.
We admit that we do not have access to the spin-off agreement between STRP and IDT, so we don’t know exactly how much liability could potentially be on IDT. However, we have to assume that if this was done under fraudulent pretenses and regulators were interested in pursuing it, that this could eventually lead back to IDT.

Conclusion
When we think about why simple due diligence, like the kind we are performing, wasn’t done in the case of the Straight Path spin-off, we can only point to the fact that IDT and Straight Path are both run by the Jonas family. It didn’t make sense to us that the most basic of research – that seemingly any other acquirer or non-related third-party would have certainly performed – does not appear to have been performed in this case.
We think that if Straight Path has a problem, IDT may have a bigger one.
It is easy to draw the straight-line as to how this liability could potentially affect Straight Path. The licenses that they have may be revoked and the company may be subject to penalties from the FCC. The company may significantly decrease in value if these licenses are revoked.
The question then becomes how this is detrimental to IDT shareholders.
From an investment standpoint, the item of concern would eventually be contingent legal liability for IDT after Straight Path theoretically goes much lower, if not into bankruptcy, and shareholders have exhausted all chances of recouping losses from STRP. IDT would then become the next logical target.
If the FCC steps in and revokes STRP’s licenses, Straight Path has a legitimate chance of going to zero.
Another interesting angle is the class action suits that are currently pending against Straight Path. Although a lot of class action suits do not make it to discovery, we think a motivated attorney that looks to bring Straight Path through discovery may find out that there is far more below the surface that may be able to be used against both companies. We would hope that any firm that is considering a class action lawsuit against Straight Path goes the course of full discovery and tries to unearth exactly what type of diligence and conversations were undertaken by both parties associated with the spin-off.
What will likely happen then is STRP shareholders turning to IDT, looking for legal recourse when none is available through STRP. We believe that IDT still has a significant amount of risk inherent in it from being the original party who applied for these licenses and then spun off a company to house them.

The fraud, if it took place as alleged, happened at IDT and we ultimately believe that they will have to pay the piper in the end. We think it’s important that IDT shareholders know that this unknown regulatory and legal overhang, which may be under review by the FCC, could be a silent but deadly killer for IDT shareholders down the road.