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Did Clearwire Commit Fraud?

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Editor's note: An original version of this story attributed the service changes to Clearwire's Clear 4G network, however the changes occurred in the company's original Expedience network. The Fool regrets the error.

A new motion in an old lawsuit alleges fresh evidence that Clearwire (Nasdaq: CLWR  ) committed fraud -- knowingly recruiting customers outside the effective range of its original wireless network, then charging them usurious cancellation fees.

The motion, filed in the U.S. District Court in Seattle last Thursday, cites a former Clearwire sales manager, Donald Hammond, as a key witness to the alleged fraud. Hammond twice spoke at length with the plaintiff's attorney, Jonathan Tycko, and in those conversations provided details of a program called 'Project Star Trek,' executed sometime in mid-2008, the documents say.

According to the motion, the code name referred to changes to Clearwire's pre-qualification tool, which would allow salespeople to sell service to customers that had previously been considered outside the effective range of its service. The goal, the motion says, was to increase the company's gross subscriber additions, making the stock more attractive to investors.

A copy of an internal Clearwire email that refers to changes to the pre-qualification tool was included as supporting documentation in the motion, as was the text of an anonymous letter that appeared to confirm most of Mr. Hammond's accusations.

Clearwire, for its part, denies any wrongdoing.

"Any allegation that Clearwire conspired to mislead its customers is baseless and absurd. We flatly deny any inference of fraud. We will vigorously defend ourselves against any such allegations," wrote spokesperson Mike DiGioia in an emailed statement.

Compelling though this narrative may be, investors weighing the potential fallout need to bear three things in mind:

  • First, the motion refers to a case that was dismissed in February of last year. Tycko and the class action group of plaintiffs represented in the new motion are asking that the case be reconsidered, so that discovery may unearth additional evidence supporting Hammond's allegations.
  • Second, it doesn't appear as though anyone has officially deposed Hammond as a witness. We can't fully judge the quality of his testimony till that's occurred.
  • Third, with Verizon (NYSE: VZ  ) pushing the envelope on mobile broadband speeds and AT&T (NYSE: T  ) making every effort to get its network ready for 4G handsets, Sprint Nextel (NYSE: S  ) has plenty of incentive to stand by its WiMAX partner.

But that's my take. Where do you stand? Let us know what you think about the Hammond's accusations, Clearwire's service, and the likelihood of irreparable harm to the underlying business using the comments box below.

The Motley Fool recently introduced a free My Watchlist feature that allows users to stay ahead of the curve and receive up to date news on companies like Clearwire, or any of its competitors. To get up-to-date Clearwire news and analysis, add the company to your watchlist today:

Fool contributor Tim Beyers is a member of the Motley Fool Rule Breakers stock-picking team. He didn't own shares in any of the companies mentioned in this article at the time of publication. Check out Tim's portfolio holdings and Foolish writings, or connect with him on Twitter as @milehighfool. You can also get his insights delivered directly to your RSS reader. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool is also on Twitter as @TheMotleyFool. Its disclosure policy is straight up.

Read/Post Comments (12) | Recommend This Article (3)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On April 04, 2011, at 7:50 PM, TMFSpeck wrote:

    Well, I'm here to tell you that I experienced the Clearwire scam and am poorer for it. After promising speeds they couldn't deliver, since we were evidently out of any reasonable coverage area (and after assuring us we could cancel at any time if unsatisfied), we did indeed cancel, only to pay over $100 in cancellation fees. I've told everyone who will listen that Clearwire is a scam, and I'll be the first to line up in a class-action suit.

  • Report this Comment On April 04, 2011, at 10:59 PM, keny2bq wrote:

    T-Mobile has been doing this for years! they had the worst coverage, but once one signs their contract, you are locked in for 2 years or pay hefty fees!!! so? pay the fee or switch when your contract is up.

  • Report this Comment On April 04, 2011, at 11:08 PM, keny2bq wrote:

    i do feel these companies should be held accountable for what they say and it should be added to their contract; if you don't get stated speeds or coverage then you can leave w/o penalty. i think T-mobile would have gone out of biz with that clause!

  • Report this Comment On April 04, 2011, at 11:15 PM, alwaysmylove wrote:

    Not surprised at all and i hope that this serves as a lesson for the other companies that might think about doing the same thing. Listen, Wimax was a failure from the start and this company probably knew it. The range that this product has is very poor and also the limiting per sector use. This company has sounded desperate to build before the LTE products came out. They probably used the sales numbers to bring in new investors. Bottom line i believe this guy Hammond. Hope this company goes down with their lies!!!!!!!

  • Report this Comment On April 05, 2011, at 2:56 AM, Aryabod wrote:

    To claim that WiMax was a failure utterly manifests your ignorance. WiMax for your information is currently used in approximately 200 countries around the globe in its different forms; Fixed, Nomadic and Mobile (802.16e). The IEEE just recently approved WiMax 2 (802.16m), which purports to have mobile download speeds in excess of 100 Mbps. WiMax 2 will be ready for deployment in the latter part of 2011 and it will be backwardly compatible with its legacy platform. The upgrade costs will be minimal and mainly entail minor hardware adjustments and a software upgrade.

    In case you didn't know WiMax and LTE are 85% similar technologies, enabling most WiMax firms to easily upgrade their platforms to LTE if they choose to do so, however numerous 4G chip manufacturers, such as Beceem & Sequans have developed bimodal chips that can easily roam between WiMax and LTE without any interference. This makes renders the debate between platform standards moot.

    Now lets stop picking on Clearwire. How about the false advertizing from ATT and VZ. ATT has been claiming they have the fastest wireless networks for years. Until recently they only had half Sprint's 3G network and absolutely no 4G network. Verizon has been implying for over a year that they have 4G, when we all know until recently they had no 4G network.

    The lawsuit is much ado about nothing and will be thrown out of court a second time. Amen!

  • Report this Comment On April 05, 2011, at 9:32 AM, Gonzhouse wrote:

    AT&T, Verizon, Clearwire, T-Mobile: they all STINK. I'm hoping Google puts them all out of business. It couldn't happen to a more deserving group.

  • Report this Comment On April 05, 2011, at 10:29 AM, gmstreets wrote:

    First lets point out how "good" business is done in america. The whole idea is to take advantage of the ignorance that plagues most consumers. The morally and ethically bankrupt pool together to get the job done. Ultimately all cell phone users suffer one way or another. Did Clearwire pad stats and mislead consumers in regards to coverage? If i recall correctly, when Clwr said they had 4G they actually had 4G according to the FCC. What other provider can say that? Maybe if Clwr had been around as long as others then then we wouldnt be having this conversation. The law of precedent is already set regardless of what allegedly did or didnt happen. They are all guilty in one way or another. So lets not point fingers, they are all "good" companies, arent they?

  • Report this Comment On April 05, 2011, at 1:53 PM, ltminer wrote:

    This guy, Hammond, claims that Clearwire was only selling to users in some markets that were within 1.5miles of a tower, and in those select markets they changed the rules to include users within 2.5 miles. At the time of this change (2008) Clearwire was using a pre-WiMax technology that had a potential range of over 5 miles -- if you had direct line of sight to the tower. I know it worked at greater than 2.5 miles, because I was using it. I had no DSL or cable options, and Clearwire gave me reliable 1.5mbps speed for $50/month. Until then I was paying $100/month for satellite internet that was much slower than Clearwire.

    I also know that you could return the modem in the first 30 days and pay no cancellation fees. This seems reasonable -- especially if they are subsidizing your purchase of the modem. I don't think this lawsuit will get any farther than the last one.

  • Report this Comment On April 05, 2011, at 2:09 PM, Wimax2011 wrote:

    Not sure about the allegations but I know from being a former Clearwire employee that Don Hammond was a complete idiot and a trainwreck of an employee....

  • Report this Comment On April 05, 2011, at 7:01 PM, alwaysmylove wrote:

    To Aryabod, i worked for that company and i can tell you i know the coverage they have. Speeds is not the only issue, it is coverage also. Have you ever had the chance to go to a customers home and tell them to (move it here, o no, move it there) it was embarrassing working for that outfit!!! In theory it works great ( i guess ) but you cannot argue real world tests. Also if its as great as you make out to be, how come they average hundreds of returns a day? Stop trying to sell this crap, Let me ask you this, why cant gaming be done with this WI-Crap? Listen, this company sell poor service and you know it! Shoot, the quality is so bad even as an employee i would not use it!! dont give me that bull, i worked with this crap!! I hope more people that work there stop being afraid and come out like this guy did. To bad the economy is so bad that they are affraid of losing their jobs. But i cant blame them, that was the reason that i stayed there until i found something better that is.

  • Report this Comment On April 05, 2011, at 9:18 PM, alwaysmylove wrote:

    One more thing, If Clearwire really wants to prove a point or rather say prove themselves. SHOW IT!! Don't give us all this crap about what speeds it has or coverage, its that simple. But they wont!!! They should be called clearliars!!!!

  • Report this Comment On April 05, 2011, at 10:32 PM, simonslt wrote:

    This does not add up. The claim made by Mr. Hammond was that project star trek was intended to boost subscriber counts in order to attract investors.The email he sent is dated 5/22/08. CLWR signed a $3.2 BILLION dollar JV with Sprint, Comcast, TWC, Bright House and Google 14 days prior to the start of this supposed fraud endeavor on 5/8/08 and launched a wimax market in Portland 7 months later. This company is based in Seattle and doesn't seem to have any senior management outside of there. Hammond was supposedly in FL so this sounds like a case of a disgruntled former field level employee, they seem to have a few of those but I doubt this is anything more substantial. Those are also some awfully small markets to use if you were going to try and boost subscribers in any meaningful way to investors. Lastly, my understanding of the pre-wimax technology (and RF in general) is that there are no defined mileage limits that signal can reach from a site - terrain, antenna height, foliage all come into play and signal ranges from half a mile out to 5 miles. In other words the claim suggests that the former employee and the law firm don't really understand the technology well and the claim is so oversimplified as to be questionable.

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