Cisco Acquiree NDS Corp Under Fire Over Alleged Piracy Involvement

NDS Group Ltd.,

The Australian Financial Review on March 27 reported that a so-called "secret unit" within the Rupert Murdoch-owned News Corp. promoted a wave of high-tech piracy in Australia that damaged several telecom providers and News Corp competitors, including Austar Television, Optus and Foxtel, and allowed News Corp to pursue acquisition targets at cheaper prices because of those weaknesses.

The AFR's report suggests that the secret unit was housed in NDS, and was initially created to combat internal fraud and root out piracy against News Corp.'s various pay TV companies. AFR reporter Neil Chenoweth writes that according documents uncovered by the newspaper, NDS not only encouraged piracy by hackers of competitors but also of companies with whom NDS was working, including Foxtel, which used NDS' pay TV smart cards.

It all adds up to the sabotaging of business rivals, writes the AFR, which is publishing to its Web site thousands of e-mails held by that security unit's operational chief that were obtained by the newspaper. News Corp. sought to suppress that e-mail archive, the AFR adds.

NDS is vehemently denying the allegations made by the AFR's story, and said it was cleared of piracy allegations following a lawsuit filed by Echostar against NDS dating back to 2003.

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Echostar sued NDS for $2 billion, alleging piracy and copyright infringement on NDS' part that led to the compromise of Echostar's satellite television programming platform. But in August 2010, the Ninth Circuit Court of the United States awarded NDS $18 million, stating that Echostar "did not succeed 'on any significant issue' or 'achieve any of the benefit it sought in bring suit' under the Federal Communications Act." In January 2012, the U.S. Supreme Court denied a petition to hear a challenge by Echostar.

The matter is closed, NDS insists.

"These allegations -- most of which are ten or more years old -- were the subject of a long-running court case in the United States which concluded with NDS being totally vindicated of all allegations of piracy and its accuser having to pay almost $19 million in costs," said NDS in a statement posted to its Web site. "Emails referenced by the Australian Financial Review from a stolen hard-drive were submitted by Echostar as evidence during that trial and considered by the court that vindicated NDS."

NDS said the allegations had been investigated by the United States Department of Justice and several federal-level courts "who have all rejected allegations that NDS was responsible for TV piracy or that NDS distributed codes that facilitated that piracy."

"It is telling that Australian Financial Review and Mr. Chenoweth chose to leave these important facts out and selectively referenced by court findings and NDS statements," the NDS statement adds.

In a statement from the AFR, Editor-in-Chief Michael Stutchbury writes: "The AFR fully stands by Neil Chenoweth's extraordinary report of pay TV piracy involving News Corp subsidiary NDS. Anyone who reads Chenoweth's extraordinary report will be struck by the complexity and murkiness of the relationships, actions and motives involved in the NDS story. The AFR welcomes any further investigation of the serious matters he has brought to light."

NDS has a long and complex history. Based in Staines, U.K., the company was established in 1988 and acquired by News Corp., which was then its top customer, in 1992. News Corp. spun off NDS as a public company in 1999, and it was once again taken private by an investor group led by Permira in late 2009. This past December, NDS filed with the U.S. Securities and Exchange Commission for an intended IPO worth up to $100 million.

Cisco said on March 15th it would acquire NDS Group for $5 billion, a blockbuster move that would make NDS Cisco's largest acquisition since paying $6.9 billion for Scientific-Atlanta in 2005. NDS Executive Chairman Dr. Abe Peled is joining Cisco as a senior vice president and chief strategist, and Cisco gains about 5,000 employees, plus offices in the U.K., Israel, France, India and China, as part of the deal.

Following a year largely devoid of major acquisitions as it restructured throughout 2011, Cisco recently returned to its more traditional pace of frequent and varied M&A moves.