3Com Corp. wins partial victory in grey market trial

Just before it began a lengthy trial against two Ontario resellers for allegedly deceiving 3Com Corp. out of millions of dollars, the communications company did a deal with one of the defendants to testify against the man who hired him.


tactic only partly worked: In a scathing decision, Justice Susan Lang of the Ontario Superior Court has branded Sivananthan Selvanayagam (known by the shortened name Selvan), who headed Intelligent Decisions Inc. of Vaughan, Ont., a “”skilled liar”” and found him totally responsible for creating phony government purchase orders to justify $4.4 million in special discount pricing for 3Com equipment in 1999.

“”I am of the view that Mr. Selvan was the primary mastermind and perpetrator of the deceit,”” she said.

As a result, she said Intelligent Decisions (IDI), which he ran, was vicariously liable for $3.395 million for the fair market value of the discounted 3Com product that was diverted into the grey market between April and October of that year.

Ninety per cent of the product was resold to IDI’s parent company, Applied Innovations International (1997) Inc., which then brokered it to other places, including the U.S.

However, the judge cleared Nicola Cirella, who owned Applied Innovations and hired Selvanayagam to run IDI. 3Com tried to prove Applied Innovations liable because of the relationship. But the judge said it had failed to prove it operated as an integrated operation, or even as an agency, with IDI. The businesses, she said, were separate and distinct.

Cirella, said the judge, was unaware of the invented business cases and false purchase orders created by Selvanayagam for 3Com Canada sales reps. These were used to justify special pricing quotes 3Com Canada gave to distributors, from whom IDI bought the products.

Only one 3Com Canada employee, William Kiatipis (who has since left the company), was suspicious of the huge amounts of product IDI was ordering, the round dollar figures and Selvanayagam’s inability to confirm sales, the judge noted. While he raised concerns, others weren’t suspicious. 3Com staff, she said, weren’t interested in investigating sales that “”were too good to be true,”” and “”they were easily manipulated by Mr. Selvan.””

It was Kiatipis’ call to 3Com’s ethics hotline that led to an investigation, said the judge, who added that his “”integrity is noted and commended.””

Applied Innovations 1997 (AI-97) was one of a group of companies in the U.S. and England which brokered IT product between distributors and resellers. Cirella asked Selvanayagam to head IDI, which brokered and sold to end users.

Selvanayagam took advantage of 3Com’s pricing mechanism: In addition to its list price to distributors for its hubs, routers and switches, it also allowed special price quotes for competitive situations. To get them, the company required proof of a deal. But Selvanayagam created false businesses cases for 3Com to justify the discounts, which were given to distributors from whom he bought the products.

In his testimony Selvanayagam admitted making false purchase orders, lying to 3Com investigators and even lying through three days of pre-trial hearings. “”In short,”” said the judge, “”he admitted lying repeatedly, but swore at trial he was telling the truth.””

“”He was a consummate liar and clearly succeeded in deceiving a large number of people for a relatively lengthy period of time. Further, he did not see himself as a liar. Rather, he saw himself as ‘creating’ business cases and ‘altering’ documents.””

Everyone assumed he was telling the truth and had end users, the judge said. “”True,”” she added, “”everyone had an interest in making that assumption.””

But she rejected claims by Cirella’s lawyer, Wolfgang Kaufmann, that 3Com Canada employees were either complicit in the fraud or recklessly blind to Selvanayagam’s claims of having buyers for millions of dollars of gear. “”Undoubtedly doing so was good for their business,”” she observed. But there was no evidence 3Com knew about his lies.

“”I felt great, as my name was vindicated,”” Cirella said in an interview. As a result of the lawsuit, Applied Innovations and IDI went out of business because vendors and distributors wouldn’t sell it products.

Today he runs BSM Technologies Inc., which develops wireless vehicle tracking and fleet management systems.

In her decision, the judge also mentioned a probe into IDI’s deals was the reason former 3Com Canada president Dan Servos lost his job in October, 1999. 3Com’s investigation into the sales “”found mismanagement to be behind the failure to identify the deception”” earlier, she said.

Meanwhile, a written decision in a lawsuit 3Com brought against two Ontario resellers earlier this year and reported on by Itbusiness.ca is expected to be released very soon. The judge in that case – and, by coincidence, Justice Lang as well – has been appointed to the Ontario Court of Appeal. It is believed that decision will be finalized before he is sworn in to his new post April 23.

3Com lawyer James Orr was not bothered by the fact that the judge didn’t find against Cirella or Applied Innovation. “”We got the decision we wanted against IDI,”” he said. He wouldn’t reveal details of the deal struck with Selvanayagam.

But the case may not be over yet: 3Com may try to collect its award. Orr said that if IDI is unable to pay the judgment because there have been “”out of the ordinary payments”” either to Applied Innovations “”or anybody who owned those companies,”” then it will try to have the funds put back into IDI.

Cirella, however, said the ruling concluded 3Com has no claim against him or Applied Innovations.

In her decision, the judge noted the matter of any apparent payment of profits to Applied Innovations “”must await another day.””

Comment: info@itbusiness.ca

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