How a federal case suggests the critics of an Arctic broadband scheme may’ve been right all along

ANALYSIS: Revelations from a federal criminal charge show that the business case for an Arctic fiber optic cable was never as strong as it appeared.

Fiber optic cable.

More than 200 people had told her that the gigantic Quintillion fiber optic cable linking Europe to Asia by way of the Arctic would never pencil out — which is how Elizabeth Pierce came to give a speech titled “They Said It Couldn’t Be Done.”

Introduced as “a dreamer, an innovator and a person who just likes to get things done,” Pierce delivered the keynote address in May 2017 at the Arctic Broadband Forum in Fairbanks, where industry officials and government leaders discussed internet access in the Arctic.

As the founder and chief promoter of Quintillion — an Alaska company to which she had attracted more than a quarter of a billion dollars in investment from New York and France — she described her efforts to bring high-speed service to the North American Arctic, with plans to connect Europe and Asia.

The Alaska portion, nearing completion as she spoke, would run at 30 terabits per second — fast enough to download 2,500 high def movies in one second — with what she described as “virtually unlimited capacity.”

The financial muscle behind Quintillion came from Cooper Investment Partners in New York, which put up more than $200 million. Cooper also led efforts to borrow $50 million from a French company to finish the subsea portion of the cable off the Alaska coast.

Pierce, now 54, had held a variety of  management positions at Alaska Communications Systems from 2001 until late 2012, when she founded Quintillion.

She described Quintillion as a “very lean team of Alaska-based experts, engineers and finance people who are building something that over 200 people told us couldn’t be built.”

“So what is it that we did that people said we couldn’t do?” she asked the post-luncheon crowd at the University of Alaska Fairbanks. “We built a subsea fiber optic cable in the Arctic without any government grants, completely privately funded.”

It wasn’t the physical placement of the cable that was deemed impossible, but the idea that this could be a paying proposition for private industry.

Pierce said that it was not logical to build the entire system from Europe to Asia in one season, but it made sense to construct the hardest section first — a land-based line in Alaska and a subsea cable off the coast from Nome to Prudhoe Bay.

She predicted the investors and consumers would be happy.

“We get the price down and the demand grows and the use grows, the economy gets better, education gets better, health care gets better.”

Pierce said wholesale costs of bandwidth would drop by an average of 50 percent.

“That’s day one. And it only gets better from there because we have an almost infinite amount of capacity,” she said.

Three weeks earlier the Alaska Congressional delegation had praised Quintillion as an achievement of private enterprise.

Sen. Dan Sullivan said the project was a “great example of private investment partnering with local Alaskan companies,” while Rep. Don Young said it was all because of “hard work, collaboration and private innovation.”

“Many said it could not be done,” Young said.

A year later, a federal criminal charge filed against Pierce tends to confirm the critics who claimed it could not be done.

Pierce, now free on a $1 million personal recognizance bond, stands accused in one of the biggest wire fraud cases in Alaska history.

Federal prosecutors say that the private investment she boasted about a year ago was based on a lie — that Pierce had signed multiple contracts with telecommunication companies in Alaska committing to spend $1 billion over the life of the project to buy bandwidth.

The contracts were “completely worthless,” according to the federal charges, because Pierce had forged the signatures of telecommunications officials who were supposedly promising to have their companies pay for capacity on the system regardless of whether they could find customers to pay them.

Telecommunications companies signed real contracts to buy bandwidth, but they were not nearly as lucrative to Quintillion, an FBI investigation concluded.

“As a result of Pierce’s deception, the investment companies were left with a system that is worth far less than Pierce had led them to believe,” said U.S. Attorney Geoffrey Berman.

In the real contracts with Quintillion, the telecommunications companies insisted on escape clauses to lower their financial risk, potentially reducing the future revenue stream to Quintillion by hundreds of millions.

One telecom executive, quoted in the criminal complaint, wrote Pierce that he needed “an absolute right” to cancel agreements with Quintillion if demand for internet service in remote Alaska communities was not high enough or if the price was too steep.

In an email to Pierce, the executive said that if she tried to use contracts with escape clauses to secure financing, “I do not expect those conditions will allow you to achieve your goals since the banks would not look at that as enough assurance you have a committed revenue stream going forward.”

The government charges that Pierce forged documents that contained no escape clauses in which the telecom companies guaranteed a high level of future payments.

Cooper Investment Partners, the majority shareholder in Quintillion, took the fake revenue agreements as evidence of financial stability.

One of the most startling aspects of the case is that the alleged fake contracts went undetected for so long.

The complex ownership chain of Cooper Investment leads to an entity controlled by Alex Blavatnik and Lincoln Benet.

Blavatnik is the brother of Len Blavatnik, who has a net worth of $20 billion, according to Forbes. Alex is a senior executive at a Blavatnik holding company that owns Warner Music.

The federal charge against Pierce makes the case that she fed Cooper Investment four fake contracts that made the project appear to be a good investment.

As Pierce was speaking a year ago about the success of the project and the Congressional delegation was applauding, the whole thing had started to unravel, according to the criminal complaint.

A telecommunications company received a bill in April 2017 for capacity it did not purchase under a contract it did not sign, the government charged.

It disputed the charge, a complaint that triggered Cooper Investment Partners to begin an internal investigation that led to the discovery of other fake revenue agreements and Pierce’s abrupt resignation three months later.

Matt Boyer, a senior adviser at Cooper Investment Partners,  told a 2016 gathering in Barrow that the company had a “long-dated investment horizon.”

Still, as Pierce put it in her 2017 speech, “They don’t invest to lose their money, they invest for a return. “

The investors published documents claiming that “cash flow secured through off take agreements with Alaskan telecom/service companies” would support the investment.

“The project has already executed long-term off-take contracts with Alaskan telecommunication/service companies and expects to enter into more contracts once the project is built,” the investors said after securing the $50 million French construction loan.

The first phase of the project in Alaska is now operational and Quintillion, without Pierce, continues to move ahead, with ultimate plans to connect England and Japan by way of the Arctic.

The city manager of Nome tried to summarize the economic challenge in speaking with radio station KNOM in January. He said it’s as if Quintillion is trying to sell hundreds of pencils to people who only need one or two.

“So even though it is so cheap per pencil, the cost is prohibitive,” he said.

George Tronsrue III, now the interim CEO of Quintillion, says the new Alaska system has performed flawlessly since going online nearly six months ago, and that it is lining up customers and has a bright future.

“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 in an interview with the Anchorage Daily News.

Columnist Dermot Cole lives in Fairbanks. Contact him at [email protected]