A grey market whodunnit

A 14-day civil trial featuring allegations of deceit thrown by and against 3Com Canada may hinge on an e-mail attachment that no one admits to writing.

The document the company says it received four years ago from Zorin International Corp., a now defunct Toronto reseller, is the heart of its

claim that Zorin and its principals – Sam Marotta and Domenic Sicilia – deceived it into giving special discount pricing on millions of dollars of switches and hubs, which were supposed to go to China and Australia in 2000.

Instead, the trial heard, some of the equipment was traced to England, while some went to the U.S. where it ended up on the grey market.

But this week in his final summation Zorin’s lawyer charged that if there was any deceit it was by 3Com Canada, which forged the controversial attachment as part of a conspiracy to deceive its parent, make a big sale and frame Zorin.

Justice Russell Juriansz of the Ontario Superior Court of Justice reserved judgment, which is expected to come down later this year.

To understand the mysterious attachment it’s necessary to go back to the beginning of the trial: In December, 1999 then 3Com Canada president Nick Tidd was told by staff members Tim Scattolon and Patrick Kewin, then director of channel sales, of an opportunity to make big sales outside Canada through Zorin.

Headed by Domenic Sicilia and his partner, Sam Marotta, Zorin was the worldwide hardware buyer for Learningstation.com, an American-based education application service provider with agents in several countries. Sicilia also headed Learningstation in Canada.

At a Dec. 9, 1999 meeting, arranged by Zorin sales manager Lee Redwood, Jim Pennington, who was the head of Learningstation.com, told 3Com representatives that he was working to make subscription deals in China and Australia that could require thousands of switches and hubs.

Tidd testified he was interested, but cautious: Dan Servos, his predecessor, had been dismissed because of grey market sales of 3Com gear, he testified, and he didn’t want the same happening again. He told his staff the company required that all deals needed to be verified with end-user information if special discount pricing was needed.

It was. On Dec. 15 Redwood sent Scattolon an e-mail saying “”Here are the nine core products we are requesting pricing for. We have spoken to and handed a purchase order for $50 million to Tech Data this morning.”” The message list tens of thousands of hubs, switches and modems needed, hundreds of thousands of Learningstation subscriptions, with addresses and contacts of the end users including China’s ministry of education and universities in England and Australia.

At the end of the message is an attachment: “”Immediate requirement for China”” and a list for over 5,000 pieces of 3Com equipment. The message goes on to note that Zorin’s office will be closed for the Christmas holiday. “”That is why it is of the utmost importance that we get this released as soon as possible. Respectfully, Sam Marotta, Domenic Sicilia and Lee Redwood.””

The problem is that at trial Redwood said he authored the main message but not the attachment. Marotta and Sicilia said they didn’t write it either.

The request sent 3Com Canada and its U.S. parent, which had to approve the special pricing, into overdrive. The judge was shown e-mails buzzing back and forth as company executives examined the request, asked for more information from Zorin and sought confirmation from Beijing.

Special pricing was approved and sent to Tech Data Canada, which sold gear to Zorin on Jan.7, 2000 based on purchase orders from Learningstation Canada. Then things got cloudy for 3Com, the court was told. It couldn’t get confirmation that Learningstation had a contract in China, demanded more documentation from Marotta and eventually put a hold on more special pricing requests for China. Eventually, the court was told, that shipment was tracked to England. What happened to it after that, no one at 3Com knows.

In the meantime, 3Com was processing a request for a second special pricing order for equipment for Australia. E-mails presented in court show the pressures going on at the vendor.

On Feb. 4, for example, one official wrote to a senior vice-president that 3Com was still working hard to validate the China deal. “”I have no evidence at this time, which suggests that this (Australia) is not a good deal,”” he wrote, but adds he has “”information from a confidential source in China, which questions the deal.””

He recommends approval of the SPQ subject to a 3Com representative being shown the installed gear. Tidd and Kewin are confident in the deal, it adds. The vice-president replies that “”there are risks both ways . . .if we do it and it turns bad, or if we don’t do it and lose great business.””

Ultimately the second SPQ was approved. But the trial was told, that 3Com was soon contacted by distributor Ingram Micro that its gear was appearing on the grey market in the U.S. By checking serial numbers 3Com concluded that some 600 pieces were the Australia-bound gear bought by Zorin in late January.

Eventually 3Com had to credit almost US$6.4 million back to Tech Data because its equipment wasn’t installed in a Learningstation operation, for which the company is suing Zorin, Marotta and Sicilia in addition to general and punitive damages.

But let’s go back to the Dec. 15 e-mail and the testimony of Zorin’s Lee Redwood. He said put the first part together after consulting with Marotta and Learningstation’s Pennington because Scattolon needed details of the plan. The figures were “”loosely based,”” he said, and the entire outline a “”forecast.”” However, pushed by 3Com lawyer James Orr, he acknowledged that’s not a word used in the message.

But Orr argued in his summation, the e-mail, combined with the attachment that there was an immediate requirement for China, was intended to make 3Com think Learningstation had a contract with Beijing.

No, testified Marotta, he made it clear to Kewin there was no contract and that the figures were targets.

Sicilia agreed, testifying “”it appeared to me it was a forecast of where Learningstation was headed in the world market.”” He admitted that in December, 1999 there was no immediate need by Learningstation for 3Com equipment in China.

And the shipments? On Jan. 7, after Tech Data Canada was notified the special pricing was approved, Marotta says a sales manager at the distributor told him there was 3Com equipment in its warehouse. He testified he asked Learningstation’s U.K. agent, a company called Gamma Global, if it wanted it. They told him it would be sold to the Chinese ministry of education, he said, so Zorin ordered and shipped 2,550 hubs and switches the same day. This was the shipment which 3Com traced to England.

Orr made much of a shipping document in 3Com’s hands which says the destination was Learningstation, Hong Kong, not Beijing.

In late January the same Tech Data manager asked Marotta if he could take more 3Com gear because it was close to the company’s year end. Marotta testified he called a New York company called Computer Service Point (CSP), which had been designated Learningstation’s agent for Australia, which wanted it. Zorin ordered just over 2,000 switches and hubs and shipped them to CSP. Some of this shipment was resold on the U.S. grey market.

In questioning Marotta, Orr made much of inconsistencies in his testimony. For example, the reference in the Dec. 15 e-mail to a $50 million purchase order was really a commitment to Tech Data to buy Compaq and 3Com equipment, Marotta said. But Orr noted that in a pre-trial hearing Marotta said he didn’t know what it referred to.

Zorin lawyer Nicolas Tibollo alleged the whole thing was a plot by 3Com Canada to set up his clients. If there was any deception of 3Com U.S. it was by the Canadian subsidiary “”because of their desire to move a massive amount of product quickly.””

There was no reason between Dec. 9 and Dec. 15 for 3Com Canada to believe there was a firm deal between Learningstation and China, he argued. The Dec. 15 e-mail was clearly only a plan for a broker to sell high volumes of gear, he said. As for the Dec. 15 attachment,””somebody”” from 3Com Canada drafted it. He also noted there are other 3Com documents it says came from Zorin, which the company disputes.

But he ran into heavy questioning from the judge, who asked where the Dec. 15 e-mail described the plan for several countries as a forecast. It doesn’t say they are done deals, replied Tibollo.

In the end, Orr told the judge, the case wasn’t about grey marketing or whether 3Com’s investigation of the deals was thorough, but whether Zorin, Marotta and Sicilia lied. Tibollo said they were framed.

And author of the attachment? It’s a mystery.

Meanwhile, this week a second trial was scheduled to start in which 3Com alleges an Ontario reseller cooked up phony government documents to get special discounts on equipment.

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Howard Solomon
Howard Solomon
Currently a freelance writer. Former editor of ITWorldCanada.com and Computing Canada. An IT journalist since 1997, Howard has written for several of ITWC's sister publications, including ITBusiness.ca. Before arriving at ITWC he served as a staff reporter at the Calgary Herald and the Brampton (Ont.) Daily Times.

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