Lawsuit alleges Clearwire rigged pre-WiMAX markets to get ETF revenue

Clearwire (NASDAQ:CLWR) is still being dogged by a lawsuit claiming that in mid-2008 it deliberately offered service to customers who would receive sub-par service so that it could gain revenue from early termination fees.

The lawsuit, which was filed in the U.S. District Court for the Western District of Seattle, alleges that in May 2008 Clearwire's management devised a scheme dubbed "Project Star Trek" to artificially boost its gross subscriber numbers in its pre-WiMAX markets to attract interest from investors. In 2008, Clearwire combined with Sprint Nextel's (NYSE:S) mobile WiMAX business and received $3.2 billion in investments from the likes of Google (NASDAQ:GOOG), Intel, Comcast, Time Warner Cable, Bright House Networks and Trilogy Equity Partners.

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

According to the complaint--which cites an internal email and statements from a former Clearwire employee named Donald Hammond--Clearwire's management used a sales system "pre-qualification tool" to determine whether a potential customer lived within range of Clearwire's towers. The suit alleges that Clearwire made a change to the tool, and that customers who lived in areas that were one mile beyond the range of Clearwire's transmission towers were signed up for service. As a result of this poor service, the complaint alleges, these customers would churn and Clearwire would receive revenue from ETFs.

The complaint alleges that Clearwire's engineering department, as well as former CEO Ben Wolff and former COO Perry Satterlee, knew of the changes, and that Satterlee directed the changes be made. The decision to make the changes was conveyed to Gabe Suarez, who was Clearwire's director of engineering at the time. The complaint cites an email, dated May 22, 2008, that is from Suarez and describes changing the sector limits, or range, of the "pre-qual tool."

In April 2009 Clearwire was hit with a similar lawsuit, which alleged the company's pre-WiMAX service was shoddy and unreliable. The lawsuit also claimed Clearwire's advertising was misleading and that its ETFs were unlawful.

The earlier complaint alleged that "when [Clearwire customers] seek to cancel their Clearwire service because they discover that, in fact, Clearwire service is slow and unreliable (or for any other reason), the consumers learn that their long-term contracts contain an Early Termination Fee provision pursuant to which Clearwire charges a fee of up to $220 for canceling."

For more:
- see these two filings (PDF)

Related Articles:
Lawsuit alleges 'slow and unreliable' Clearwire service
Clearwire plans to reshuffle 'Clear,' 'Rover' retail strategy
Shakeup: Clearwire CEO Bill Morrow steps down, replaced by Chairman John Stanton
Clearwire: resolving dispute with Sprint is key to getting more funding

Article updated April 1 with comment from Clearwire.

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