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Trouble in Telco Land: Cisco Brazil Raided, Ericsson Blows Up

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[qi:011] It’s been a bad day for telecom equipment vendors. Cisco Systems’ (CSCO) Brazilian office was raided by that country’s authorities for undisclosed reasons. Local media is suggesting there are “tax issues,” including a potential tax liability (and penalties) of up to $830 million. (If you are from Brazil, please send us some links and translations.) This is the first time the company has been snared in such a snafu. (via Nikos Theodosopoulos of UBS Research.)

In another other piece of dismal news, Ericsson (ERICY), one of the beneficiaries of the 3G boom, was grounded today. It is going to miss its revenue and earnings estimates, reports the WSJ. Too few carriers, too many equipment makers — this is exactly what I was talking about yesterday. Slower spending by Cingular and other Western mobile operators is behind the slowdown, analysts postulate.

Both in North America and in Western Europe, particularly the UK and Italy, we have situations where operators have late entered into consolidation talks and network sharing talks, and such discussions that typically hold back short-term orders

Given their 3G exposure, it wouldn’t surprise me if Alcatel-Lucent (ALA) adds to the drumbeat of bad news.

26 Responses to “Trouble in Telco Land: Cisco Brazil Raided, Ericsson Blows Up”

  1. Ulan Ude

    Wrong comment Luciano. First of all is Steinhauser, not Steinberger. Secondly, I was in Las Vegas (Cisco Sales meeting for FY07) when Steinhauser harassed a couple of brazilian employees. He was way too drunk and everybody noticed it. Don´t get me wrong, Carnevali is known everywhere as a gangster, but Steinhauser is no lamb either…

    • Ulan, I know Rafael well and I assess he is, besides one of the kindest person I’ve met, one of the best professionals I had the honour to work with. Your charges about harassment makes me suspect you had obscures interests on this. I have never seen him drinking even a glas of wine.

  2. Rafael Steinberger is problably the deepthroat in the case of Cisco. He was fired a year ago in an obscure event and Carlos Carnevale, LatinAmerican chief executive, spraied out that that Rafael was fired after a case of aharassment. Everybody that knows Rafael is convinced that he will never envolved in a aharassment event or frauds. Carnevale is in jail. Rafael is problably assisting the investigations.

  3. I am a former Cisco employee and previously worked for Carlos Carnevali, the MD for Latin America. It was a well known fact that Carlos had ownership in MUDE, the exclusive Cisco distributor in Brasil.

    In fact, when Carlos entered Cisco in 1994 there were multiple Distribution channels in Brasil. Carlos cancelled these contracts and moved all to distribution through an unknown company called “Uniao Digital”, where he had ownership. Uniao Digital became a $300M distributor, and later changed its name to MUDE. It was always well known in the industry in Brasil that Carlos had ownership in MUDE; what was not known was the extent to which he would go to save $$ by avoiding importation taxes.

    In fact, under the umbrella of Cisco, Carlos was essentially increasing the margins for MUDE for his own benefit. Cisco US most likely had no idea what Carlos was doing, as product is typically purchased FOB California or FOB Miami and Cisco US never has any involvement in the export process. Cisco do Brasil should also have no involvement in the import process, as the product is imported by the Distributor MUDE.

    Bottom line, anyone who has worked closely with Carlos knows that he is a very corrupt businessman. In the end, it was probably his mistreatment of a current or former employee that took him down.

  4. elefante Branco

    The important misssing link between Cisco y Mude is Carlos Carnevali who is parcero at Mude and was Mude stock Holder while been part of Cisco in Brasil and LATAM. Follow the link……

  5. For me its interesting how some people think about this situation.
    When Enron or Arthur Andersen had an accounting fraud, they were filed for bankruptcy.
    Now that Cisco is under investigation for corruption in Brazil, people like Alex on October 16th, 2007 think the problem is the Brazilian tax laws…
    In my oppinion the Tax laws can be complex and can be a barriew for innovation in the country, but that is not the problem. The problem is that it seems that Cisco was not doing business according to the country’s laws, and the fact is that 40 Cisco employees were arrested. I hope it was a big mistake from the police, but it’s hard to believe that after 2 years of investigation, the police did something wrong…

  6. brazilian

    I was in another website and someone wondered “how come 500milions made 833milions in taxes:

    In this 833 milions it’s included: TAXES, but over the 5 years that went by (meaning: if they didn’t pay the tax in 2002, for example, in 2007 the present value it’s not the same…), and the FINE as well.

    So, 833mi = FINE + TAXES + “CORRECTION” (don’t know if this words existis in english) of the Present Value over 5 years

  7. Hipocrates

    What the Police says is that Cisco scheme was indeed BASED on using Third-party VARs with the sole purpose of evading importing Taxes. In this way, through “false” importers and third-party companies they were understating Product Prices and falsifying procesdures to grant Importing Tax reduction benefits (i.e. Local manufacturing). They used those third-parties Distributors in Brazil and several Tax Haven Countries.

  8. After getting some information from a friend in Brasil it looks like “Joe” (previous post) is on the right track.
    This “may” have been an issue with the VAR channel and NOT Cisco directly.

  9. Joe,
    Cisco may not have direct sales in Brazil (which I do not know), but they do have presence there. Therefore, it is through Cisco that the resellers and partners import equipments and Cisco is very aware of the transactions, since it is the revenue from these partners that make Cisco’s sales quota.
    Whether Cisco in the US was aware of the wrongdoings or not is a separate issue that investigation will tell.

  10. joe shmoe

    I think Cisco uses third-party distributor model for sales in Brazil — in fact they do not have any direct sales channel in Brazil (like they do to ATT, Financial companies here in US) and hence all the wrong-doing, if any, should really be on the part of the distributor importing Cisco equipment. Time and investigation will tell!

    I, for one, cannot digest that Cisco would have any wrongdoing, IMHO.

  11. Jorge Godoy

    The link above is from one of Brasil’s biggest journals. It states that there was fraud while importing equipments to Brasil that led to no import tax or even a 100% discount of those taxes.

    The value that they cite on this news is around US$ 500 million.

    The investigation has been going on for the last two years, so it is hard to believe that Cisco will escape that or is innocent.

    You can get an English version here:
    The translation is not so bad… Where it says “Revenue” you can think of something like the US IRS.

    It is a shame that such a big company uses those methods to get better “revenue”…

  12. Here is the news link from the local business paper

    Translated link on google. Translation is pretty good actually

    Here are the links and the first 4 items are Cisco related.


    Main points:

    • Federal Police raided the offices, in a operation called “Operation Persona”. 650 agents were deployed.
    • 44 arrest warrants and 93 search warrants were issued for this operation.
    • 5 main executives of Cisco Brazil were arrested, including the president, Pedro Ripper, and a former president (probably Rafael Steinhauser?).
    • The accusations are of tax and customs fraud.
    • Federal Police requested the arrest of 5 US nationals in the USA.
    • The alleged scheme involved using fake companies to import Cisco products through tax havens and the usage of fake invoices to fool Brazilian customs and tax authorities.
    • Cisco Brazil may have imported up to USD 500 million in goods through this scheme.
  14. WOW!! What the heck happened to Cisco in Brasil?

    I will ping a friend of mine who is a telco executive in Brasil to get details.
    What is interesting – I was doing a JV in Brasil recently and decided to pull the plug due to the complexity if the tax laws or lack of clarity.

    This is one area that could keep Brasil from innovation. If there were tax laws that were favorable for investing then you would see many VC’s heading there. There are many great telecom and open source engineers in Brasil.

    Food for thought!

  15. The Cisco in USA seems to be involved. 5 persons in America has their prision request submited to US Dptmt of Justice. Aparently one of the tricks they used was overprice the softwares/firmwares to compensate the underprice of hardware negotiations.