Lawsuit accuses GNET of $30M TV scheme

A San Antonio company faces accusations it perpetrated a more than $30 million fraud involving the resale of set-top boxes to AT&T.

GNET ATC, formerly Genesis Networks Telecom Services, and others were sued for fraud, conspiracy and negligent misrepresentation in a lawsuit filed by North Carolina's Arris Solutions on Friday in state District Court in San Antonio.

Arris Solutions is a successor to a Motorola unit that struck a deal with the GNET predecessor in 2008. Under a distribution agreement, the GNET predecessor bought Motorola products — primarily set-top boxes for use with home television systems — and then resold them to AT&T and its affiliates.

AT&T required the distribution agreement because it wanted to purchase the products from minority-owned businesses. GNET'S predecessor describes itself as a minority-owned company on its website. Company representatives didn't immediately respond to multiple requests for comment Tuesday.

GNET purchased the products from Motorola on consignment and shipped them directly to AT&T.

GNET promised that it would require AT&T to make payments for the products directly into an escrow account managed by an independent third-party escrow agent, Arris' lawsuit alleges.

The escrow agent would pay a “fractional percentage” of the payment to GNET on a periodic basis, and the balance would go to Arris.

The arrangement continued for more than a decade until 2019 when, the complaint says, GNET “surreptitiously” stopped requiring AT&T to make its payments directly into the escrow account managed by the Bank of San Antonio.

Instead, GNET started factoring the AT&T payments through Citibank and then “self-funding” the escrow account to make it appear the escrow arrangement with AT&T remained intact, the suit adds.

Factoring is a form of financing.

A factoring company purchases invoices and accounts from other companies at a discount. The sellers get money quickly instead of waiting for customers to pay their bills.

“GNET and its management took money received from AT&T that should have been earmarked for paying Arris and used it for other purposes,” Arris alleges in the lawsuit.

Arris wasn’t aware AT&T was no longer making payments to the escrow account, so Arris continued to build and sell products to GNET on consignment, the suit adds.

“GNET’S deception caught up with it” by the end of June when it began missing payments to Arris, the complaint continues. GNET owed Arris about $9 million at that time.

Representative for Commscope Holding Company Inc., which had acquired Arris in 2019, asked about the missed payments in a July 1 phone call with GNET officials. GNET CFO Brad Kozma cited a reduction in “consumption” by AT&T during the pandemic, an explanation that confused one of the Commscope representatives.

Kozma didn’t reveal that GNET was no longer requiring AT&T to make payments directly to the escrow account, the suit says.

“Instead, he cryptically stated that all bank sweeps occurred in compliance with company financial policy,” the complaint adds. He assured Commscope officials that future payments would be made on a timely basis.

On Oct. 1, Arris officials learned from AT&T that the giant telecommunications company was “moving its business away from GNET.” No one from GNET or its sole member, Goodman Solutions, told Arris about the change.

At that time, Arris already had more than 400,000 additional units in transit to AT&T or being built pursuant to GNET purchase orders. GNET’S account also was past due by about $2.3 million, the suit says.

Arris reached out to GNET representatives before it received an email from new GNET CEO James Frinzi on Oct. 12.

“I regret to inform you that GNET ATC is presently not in a cash position to make payments in full,” Frinzi wrote, according to the lawsuit. “We arrived at this situation as a result of forward funding purchase orders.

“With the decrease in volume, and losing the Directv business, GNET ATC has a complex situation to resolve,” Frinzi added. “Furthermore, it is our understanding that AT&T is terminating GNET ATC as a supplier. Consequently GNET will not be in a position to pay invoices.”

AT&T spun off Directv as a standalone company earlier this year but reportedly retains majority ownership.

In an Oct. 18 response to Frinzi’s email, Arris’ counsel demanded the past due balance of $2.3 million and assurances that GNET would honor its future obligations. Frinzi never responded.

By Oct. 24, GNET owed at least $30.3 million to Arris, the suit says.

Arris suspects “there is a substantial likelihood that GNET is insolvent or in the zone of insolvency,” the suit says. Arris is concerned it may not be able to collect damages from the defendants. It seeks a permanent injunction preventing GNET from transferring any money received from AT&T.

GNET and Frisco-based Goodman Solutions are “part of a web of companies owned and controlled by the Goodman family, including James and Jason Goodman.”

The suit says Goodman Solutions describes itself as a “leading field services company with 2,000 network and electronics technicians, serving customers across the nation.” It’s been in business for more than two decades.

The Goodmans, Frinzi and Kozma are named as individual defendants in the lawsuit.

An Austin lawyer for Arris had no immediate comment.