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Business/Economy

Inside the Alaska broadband company whose former CEO is charged with wire fraud

  • Author: Nathaniel Herz
  • Updated: April 29, 2018
  • Published April 28, 2018

A telecommunications company employee holds a section of the armored fiber-optic cable that in the summer of 2016 was buried along a street in Nome to connect to Quintillion’s underwater broadband project. (Bob Hallinen / ADN archive)

For rural Alaskans who complain of slow, expensive internet access, the Arctic broadband project being built by Quintillion sounded like a dream. Its underwater fiber-optic cable would stretch 1,200 miles from Prudhoe Bay, on the Alaska's North Slope, around the northwest coast, connecting to isolated communities along the way and bringing cheaper, faster service.

But the plan always came with a big question — its $250 million cost, which critics asserted was far too high to make sense for a project serving an area with some 12,500 people.

That skepticism peaked earlier this month when Quintillion's former chief executive, Elizabeth Pierce, was arrested on a federal wire fraud charge punishable by up to 20 years in prison.

Federal prosecutors allege Pierce recruited investors using faked contracts she forged in the names of Quintillion customers — promising hundreds of millions of dollars in revenue that didn't exist.

Elizabeth Pierce (Provided by World Trade Center Anchorage)

Quintillion executives say the company is moving on, undeterred by the legal case.

But the charge against Pierce has brought new attention to Quintillion's activities in Alaska in its five years of existence — a period in which it touched some of the state's biggest businesses and institutions. The company sought political and financial support from state lawmakers, Alaska Native corporations and others.

It was aggressive, in the face of skepticism, about defending its business plan, going so far as to sue one critic for defamation when he called the project a "scam."

Quintillion's doubters are now claiming vindication.

"I ran all the numbers and just could not figure out how this could make any sense," said Martin Cary, an executive at Anchorage-based telecommunications giant GCI, which clashed with Quintillion. "It sounded too good to be true. And it turns out it is too good to be true."

Quintillion's new chief executive, George Tronsrue III, says the company's business remains viable.

Quintillion's undersea Arctic network launched in December and is working in the five Alaska locations where it's installed.

Its major investor, Cooper Investment Partners, says it's still committed to the project. Quintillion is turning up service to two school districts before July, and is also in discussions with potential new customers that include federal agencies, Tronsrue said in a phone interview Thursday.

"I've made a career in this industry doing things that people said couldn't be done, and that's what me and my team intend to do here," Tronsrue said. He added: "We're focused on the future. The future is bright and the present is going well."

'We were going to be hooked up'

Internet access in rural Alaska has long lagged behind the speeds, prices and reliability enjoyed by urban consumers. Distance, isolation and scale have made it tough for the infrastructure to pencil out.

In Anchorage, GCI's customers can pay $145 a month for download speeds reaching 250 megabits per second, with 500 gigabytes of data — or about 80 two-hour, high-definition movies — allowed before speeds are reduced.

In Utqiaġvik, the North Slope hub town on Quintillion's route, GCI's $150-a-month plan covers 50 gigabytes of data and downloads that reach 6 megabits per second — less than 1/40th the speed of the similarly priced Anchorage package.

The Federal Communications Commission's definition of "broadband" is download speeds of at least 25 megabits per second.

Quintillion's plans for high-speed broadband access had undeniable political appeal. When one of its cable-laying ships stopped in the Aleutian Islands in 2016, Gov. Bill Walker and first lady Donna Walker flew to meet it.

The Ile de Sein docks at the Unalaska Marine Center in August 2016. The ship was on its way north to lay fiber optic cable for the Quintillion high-speed internet project. (Photo by Laura Kraegel / KUCB)

"We were all fascinated by it," said Nome Mayor Richard Beneville. "We were going to be hooked up: It was going to be cheaper, it was going to be faster, it was going to be all these things."

Quintillion wasn't the first to propose an undersea Arctic cable. A precursor, Arctic Cable Co., involved an Alaska Native village corporation, as well as Ethan Berkowitz, the current Anchorage mayor who was working as a consultant at the time.

The company, which announced its idea in 2010, wanted federal stimulus money to help build a $1 billion, 10,000-mile fiber-optic cable from Tokyo to London, with a stretch that would run along Alaska's coast.

But the stimulus money never came and the project died when its backers failed to raise the money it needed.

Quintillion was formed in late 2012; it was led by Pierce, who'd worked as an executive at another Alaska telecommunications company, Alaska Communications. Alaska Communications, also a bitter GCI rival, has partnered with Quintillion on parts of its project.

Quintillion's initial idea was to join with a Canadian company, Arctic Fibre, that had its own plans for a London-Tokyo connection. That cable was pitched as a boon to high-speed financial traders, who, in theory, would pay to be able to move their signals three-hundredths of a second faster.

Early plans for the project called for the international traffic to make up 85 to 90 percent of Arctic Fibre's revenue, the company's leader, Doug Cunningham, told a Canadian newspaper in 2012.

Quintillion planned to connect the international line to communities along Alaska's Arctic coast, including Kotzebue, Nome, Barrow and Point Hope. An extension would run from the North Slope oil fields down through Fairbanks, which would ultimately allow faster connections between companies in North America, Europe and Asia.

Arctic Fibre never built its international cable. Quintillion bought the company's assets and said it would build the Alaska cable first — linking it to Tokyo in a second phase and to London in a third.

A 'befuddling' business case

Without the revenue from the international route, Quintillion faced doubts about its initial business model. The federal complaint against Pierce said she obtained more than $250 million in investment in Quintillion, which equates to $20,000 for each resident of the area that it aims to serve.

Many rural Alaska technology projects face similar challenges. The technology exists to improve access and speed, but finding investors to pay to extend it across thinly populated, far-flung areas of the state can be difficult, said Alex Hills, an engineering professor at Carnegie Mellon University who has worked in Alaska telecommunications.

"The business case is the issue," Hills said. "Can you generate enough revenue to justify the investment?"

Terra crews build a tower on the Baldwin Peninsula, near Kotzebue. (GCI photo)

GCI, Quintillion's Anchorage-based rival, is the biggest existing telecommunications player in rural Alaska.

Its rural network, Terra, uses fiber-optic cable and microwave towers. It connects to more than 80 villages with a combined population of about 45,000, and it also links more than 150 medical clinics and schools, according to the company.

Those institutional customers are important because their contracts for internet service can be heavily subsidized by the federal government. Federal subsidies paid 90 percent of the Lower Kuskokwim School District's $12.4 million internet bill from GCI in 2017, for example, according to the state.

GCI received more than $40 million in federal stimulus grants to pay for its $300 million Terra system.

GCI officials said they found Quintillion's business plan puzzling, given that it connected to a relatively small number of communities with seemingly limited potential for revenue.

"You look at the pure, huge dollars of investment versus the small number of communities and the math just doesn't work," said Cary, the GCI executive. "And why that wasn't so obvious to some pretty smart people is pretty befuddling."

Tronsrue, Quintillion's chief executive, would not reveal details about the company's monthly revenue, which could shed more light on its investors' returns.

He suggested that skepticism about Quintillion's business plan stems from "certain detractors," including GCI. And he said Quintillion still has long-term contracts with customers that guarantee revenue — in spite of the fact that, according to the federal government, other contracts drafted by Pierce turned out to be forgeries.

Its network is serving oil and gas customers on the North Slope. It outsourced its payroll and benefits to save money and has low overhead with a small staff of 10, Tronsrue said.

"The budget that I've put together for the business this year shows the company generating positive cash flow this year, and we are on track," he said.

Andy Baker (Loren Holmes / ADN)

Quintillion, in one case in 2014, tried to tamp down skepticism about its business plans.

The company that year filed a defamation lawsuit against Andy Baker, a lobbyist in Juneau with deep connections in the Northwest Arctic. Quintillion claimed that Baker has worked for GCI, though neither the company nor Baker would confirm that.

Quintillion alleged that Baker sent an email to a potential customer: a school district administrator in the Northwest Arctic Borough. Baker's email, according to Quintillion's complaint, attached a newspaper story about Quintillion's project.

"Careful," Baker warned, according to the complaint. "This has proven to be a big scam."

Quintillion and Baker ultimately agreed to dismiss the suit.

Native corporations invest millions, but state says no 

Meanwhile, Quintillion was soliciting investors both inside and outside of Alaska.

It successfully pitched two Alaska Native corporations. One was Calista, which is focused in Southwest Alaska; one of its subsidiaries, Futaris, invested $900,000 in 2014, in exchange for a small stake in one of Quintillion's companies.

A separate investment by Arctic Slope Regional Corp., which is headquartered on the oil-rich North Slope, was valued at $5.75 million at the end of 2016.

Those figures come from the corporations' annual reports filed with the state; spokesmen at both ASRC and Calista said executives were not available to comment on the investments or on any due diligence performed beforehand.

At least two other Native corporations — Nome-based village corporation Sitnasuak and Kotzebue-based NANA Regional Corp. — were also approached by Quintillion, according to current and former officials.

"The opportunity just didn't fit the direction nor the thresholds that were established for our investment criteria," said Bobbi Quintavell, Sitnasuak's president.

Quintillion also paid a lobbyist, Bob Evans, $80,000 between 2014 and 2015 to represent its interests in Juneau. Evans pushed an idea to allow a state economic development organization, the Alaska Industrial Development and Export Authority, or AIDEA, to issue up to $50 million in bonds to support Quintillion and Arctic Fibre, according to the current Alaska House speaker, Dillingham Democratic Rep. Bryce Edgmon.

The proposal, in April 2014, was amended into an Arctic infrastructure bill that passed the state House. But the next day, the representative who sponsored it, Bob Herron of Bethel, withdrew the Quintillion proposal without any explanation.

Herron, who is no longer in the Legislature, didn't respond to requests for comment. But another member of Herron's House majority at the time, Nome Democratic Rep. Neal Foster, said the amendment was revoked because it hadn't been studied enough.

"We just took Bob's word for it. Everybody assumed that somebody else had vetted it," Foster said. "Once we started talking it was like, 'No, this got put in on the fly.'"

Quintillion also had "preliminary discussions" directly with AIDEA, said spokesman Karsten Rodvik. And Pierce at one point gave an informational presentation to the organization's board of directors, said one member, Gary Wilken.

Those discussions did not produce any investment.

"It was high-level, and we just sort of scratched our heads and said, 'That's nice,'" Wilken said. "It never even got to us discussing whether we'd put a dollar into it, or a hundred million."

Quintillion forges on as customers await service

The largest investment that Quintillion successfully recruited is from a Manhattan-based private equity fund, Cooper Investment Partners.

The equity interest in Cooper, through a series of holding companies and trusts, is ultimately owned by a trust formed under Bermuda law by Len Blavatnik, according to the Federal Communications Commission. Blavatnik is a Ukrainian-born American citizen ranked 23rd on Forbes' list of richest Americans, with an estimated net worth of $20 billion.

Quintillion calls Cooper its "majority investor." The federal complaint against Pierce said Quintillion's largest shareholder — identified only as a "certain private equity firm headquartered in Manhattan" — invested more than $200 million in its fiber-optic system between May 2015 and December 2017.

The complaint says an FBI special agent, Sean Bartnik, spoke to an official at the "victim firm." The official said the firm never would have invested in Quintillion if, as the government alleges, it knew Pierce had forged signatures on the contracts that guaranteed revenue.

But Cooper, in a prepared statement, said it remains committed to Quintillion "and its continued success." Its officials were not available to answer questions, according to a Quintillion spokesman, Tim Woolston.

"We support management's mission of strengthening and expanding relationships with existing customers while developing relationships with potential new customers to continue to deliver high-speed broadband to previously underserved and unserved people, communities and organizations," Cooper's statement said. "We are seeing incremental growth and progress with new prospective clients, and our main focus is providing Quintillion's management team with the support and resources needed to execute on business opportunities now and in the future."

Pierce also faces a civil lawsuit in Alaska filed last year by an individual investor, Julian Jensen. Jensen, in an online professional profile, identifies himself as a Quintillion project manager in Anchorage.

Jensen, in his complaint, said he paid Pierce $325,000 for stakes in Quintillion companies in 2013 and 2014. But neither Quintillion's boards, nor Pierce, have transferred any ownership interest to Jensen, he said.

Jensen, through attorney Allen Clendaniel, declined to comment.

Pierce's attorneys, Jimmy White and Joshua Lowther, did not respond to requests for comment.

Workers lay warning tape above the fiber-optic cable being buried along a street in Nome in 2016. Quintillion laid undersea fiber that connects Nome, Kotzebue, Wainwright, Barrow and Point Hope to Prudhoe Bay. (Bob Hallinen / ADN archive)

Beneville, Nome's mayor, said "everybody's collective jaw dropped" when the U.S. Department of Justice announced Pierce's arrest. Pierce had made visits to Nome, and she and Beneville were on a first-name basis.

Quintillion's underwater cable has been installed, Beneville said. He said he has  been assured that "everything is moving ahead, and this is like a bump in the road."

Institutional clients in Nome are already using Quintillion's service, but residential customers, who will buy broadband through a local telecommunications company, are still waiting for it, Beneville said.

"We want the service," Beneville said. "We're anxious to have it here."

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