Author: Jess Davis

Verizon Communications Inc. on Friday rested its defense in Texas federal court against U.S. Bank NA’s claims the telecom giant grossly inflated the value of Idearc Inc., which later filed for bankruptcy, in a $9.9 billion spinoff deal, but won’t get a ruling in the case before December. U.S. District Court Judge A. Joe Fish denied a renewed motion from Verizon for judgment on partial findings after the parties rested, and said he will review the case and post-trial briefs from the parties before issuing a ruling. In lieu of closing arguments, the parties will submit proposed findings of fact and post-trial briefs by Nov. 16 and responses to those briefs, if any, will be due Nov. 30. The two-week first phase of the trial was limited to setting the value of Idearc at the time of its 2006 spinoff, and an unscheduled second phase will address the bank’s further allegations that the deal involved fraudulent transfers. The bank, acting as trustee for Idearc following its 2009 restructuring, alleged in trial that Verizon’s executives planned a complex scheme to inflate Idearc’s value and sink it with with more debt than it can handle. U.S. Bank alleges Idearc was worth only $6.5 billion and was insolvent at its launch, given its $9.1 billion debt. "We're very pleased the court provided us the opportunity to establish that Idearc was solvent when it was spun off in November 2006," said Verizon spokesman Bill Kula in a statement. "We look forward to the judge's decision in this case." U.S. Bank, through its attorneys, declined to immediately comment on the end of the trial. In its defense this week, Verizon argued Idearc, a spinoff of its print and electronic directories business now known as SuperMedia Inc., was worth upward of $12 billion and easily supported the debt. Its valuation expert, Jeff Balcombe of The BVA Group LLC, said Friday that U.S. Bank reached its $6.5 billion estimate through deeply flawed methodology that ignores how investors viewed the company at the time of the spin. Balcombe said the market provides the best evidence of Idearc’s value at the spin and that U.S. Bank’s expert, Carlyn Taylor of FTI Consulting Inc., was wrong to give it such little weight in her testimony. Market evidence, like Idearc’s stock price and the eager response from sophisticated financial institutions that bought Idearc’s debt, is "objective, contemporaneous, consensus evidence" that provides meaningful insight into the value of the company in 2006, he said.

Bankers from Goldman Sachs Group Inc., JP Morgan Chase & Co. and the former Bear Stearns testified on behalf of Verizon this week, saying the company properly disclosed all the risks of investing in Idearc, including declining revenues for its print Yellow Pages division, growing competition from Google Inc. and other online directories and a management team that had not before led a publicly traded company. Idearc and Verizon executives who worked on the spinoff denied purposefully tweaking financial data they released to investors to make the company seem more profitable than it was. "I find it totally implausible that Verizon could have pulled the wool over the eyes of a very large, efficient market," said investment banker Michael McCarty of MM Dillon & Co., who testified as an expert. U.S. Bank, which presented its case last week, painted a picture of Verizon as a company that wanted to squeeze as much cash as possible out of its failing directory business and chose to present a too-positive case for the company’s future to the investing public. The bank’s valuation expert said when she compared what Verizon knew internally to what it told the outside world, she was "shocked" by the degree of deception and secrecy that led up to the spin. The bank contends Idearc’s stock price is an inaccurate portrayal of its real value, because the market relied on the inaccurate data Verizon provided about its past performance and potential for growth. The bank challenged Verizon’s witnesses this week with questions of bias, saying their testimony is shaded by their ongoing relationships with the communications giant, and that the valuation models they used do not show the full story of how Verizon expected Idearc to perform once it was an independent company. The plaintiffs are represented by Haynes and Boone LLP and by Neligan Foley LLP. The defendants are represented by Weil Gotshal & Manges LLP, Kellogg Huber Hansen Todd Evans & Figel PLLC, WilmerHale and Carter Stafford Arnett Hamada & Mockler PLLC. The case is U.S. Bank NA v. Verizon Communications Inc. et al., case number 3:10-cv-01842, in the U.S. District Court for the Northern District of Texas.

--Editing by Rebecca Flanagan.

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