In The Shadows: The Rise And Fall Of Torrey Point
In 2011, Juniper Networks was locked in a bitter battle for network market share with archrival Cisco Systems. Juniper, playing the part of the plucky underdog, was coming off a banner year of growth in 2010 and had introduced a number of new products, including the QFabric data center technology, that the company hoped would help it put some major dents in the Cisco machine. In addition to new cutting-edge products, Juniper had a growing and fiercely loyal partner corps that the company believed would help it gain ground against Cisco. One such partner was Torrey Point Group, a shining star in the Juniper channel. The Sunnyvale, Calif.-based solution provider, originally founded in 2005 as Torrey Point LLC, became one of the strongest solution providers in Juniper's partner stable and a key soldier in the vendor's battle against Cisco.
Torrey Point rose to prominence first as the vendor's Western Region Partner of the Year in 2009 and 2010, bucking the economic downturn, and was named to CRN's 2011 Fast Growth list with a whopping 325 percent growth rate over two years. The networking solution provider reached more than $60 million in revenue by 2012 (and the No. 275 spot on CRN's Solution Provider 500 list), and to top it off, Torrey Point earned its biggest prize: Juniper's Partner of the Year for the Americas for 2011.
But at the same time Torrey Point was generating massive sales and earning glowing praise from Juniper, it was engaged in an elaborate scheme with Juniper's primary competitor: Cisco. According to documents obtained by CRN from the Los Angeles Superior Court, Torrey Point was secretly selling new Juniper equipment to Cisco, a violation of the Juniper partner agreement that eventually led to Torrey Point's de-authorization as a Juniper solution provider.
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"They had a legitimate business with an $80 million run rate, great people, and a strong partnership with Juniper, but it wasn't enough," said one former Torrey Point salesperson, who wished to remain anonymous. "It was classic greed and arrogance."
The documents show dozens of purchase orders and invoices totaling millions of dollars of Juniper equipment that was originally procured by Torrey Point and then sold to Cisco through another company, PHW International, owned by two of Torrey Point's top executives: CEO Steve Fazio and Executive Vice President and COO Ryan Young.
Fazio and Young have not responded to repeated requests for comment.
According to former Torrey Point and former Cisco employees with direct knowledge of the Torrey Point-Cisco relationship, the purchasing of Juniper products was part of a larger "program" within Cisco where the vendor would use the products for the purpose of analyzing and deconstructing the products for competitive advantages.
The documents were part of a lawsuit filed by Torrey Point founder and former CTO Michael Baker, who sued the company, along with Fazio and Young, in November 2011 for wrongful termination, breach of contract, fraud and other charges. Baker had relaunched the solution provider as Torrey Point Group with Fazio and Young in 2007, and the three men served as joint owners and top executives.
But Baker accused Fazio and Young of pushing him out of his own firm in late 2011. According to court documents, Baker also owned a part of PHW and was "shocked" to learn it was being used to sell Juniper products—ordered by Torrey Point—to Cisco. Court documents also show Young and Fazio were included on email correspondences with Cisco regarding the PHW orders.
Fazio and Young filed a cross complaint against Baker, alleging the theft of proprietary information, defamation, and breach of contract, among others. The cases were settled last summer, and the terms were not disclosed.
CRN contacted Neil Capobianco, an attorney at law firm Dentons in New York, who represented Torrey Point, Fazio and Young in the lawsuit. Capobianco said he was "not at liberty to disclose any confidential information" regarding the case and hung up.
Baker and his attorney declined to comment. However, the court documents filed in the lawsuit speak volumes about the relationship between Torrey Point and its top vendor, Juniper, as well as its ties to Cisco.
NEXT: Peaking Behind The Curtain
For example, one invoice from PHW shows an order for $900,821 worth of Juniper products, including networking line cards for its MX series routers, for Cisco in June 2010. Another invoice from June 2011 shows $48,450 for QFabric-related products ordered by Cisco.
The document also included a purchase order from Cisco. One such order, dated January 2012, totaled $258,500 for additional MX series products. The shipment was sent to a Cisco office in Milpitas, Calif., and received by a Cisco marketing engineer. The order was fulfilled by PHW.
PHW, however, is not an authorized Juniper reseller. In fact, it's not a reseller of any kind. According to the company's website, PHW is "a boutique private equity investment and management firm specializing in the technology industry." There are no executive officers or managers listed by name on the website, but the company's phone number is the same as another company called PreOwned Hardware. (The automated answering system for the number simply says, "Welcome to PHW.")
PreOwned Hardware, according to the company website, specializes in selling and purchasing used and refurbished IT equipment and lists Juniper, Cisco and Alcatel-Lucent as its primary vendors. The website even has a "pre-owned hardware specials" section that lists dozens of Juniper and Cisco networking products.
In addition, one of the contacts listed on the PHW invoices and purchasing orders is Jeremy Biggs, who worked at Torrey Point and is the brother-in-law of Fazio. Biggs confirmed to CRN that PHW was part of Torrey Point and that the company was used to sell Juniper products to Cisco.
In some cases, Torrey Point, through PHW, sold Juniper products to Cisco that were still in beta or pre-release phases and were not yet commercially available, according to multiple sources with direct knowledge of the matter. While the majority of product Torrey Point sold to Cisco through PHW was from Juniper, the solution provider also shipped equipment from two of its other vendor partners, Arista Networks and Alcatel-Lucent. According to the documents, PHW moved more than $2 million worth of Juniper, Arista and Alcatel-Lucent products to Cisco in 2011 alone.
Cisco, meanwhile, said the purchasing of Juniper, Arista and Alcatel-Lucent products was for legitimate purposes and maintains that there was no wrongdoing on its part.
"We regularly buy our competitors' equipment for testing and to independently verify some of their technical claims," said Cisco spokesperson John Earnhardt.
"This is a common practice by most IT vendors. Additionally, these purchases also help us ensure that our intellectual property is protected."
In essence, Cisco said it was buying Juniper gear not to obtain its competitor's IP, but to ensure Juniper wasn't stealing Cisco's IP. Dr. Bruce Abramson, an attorney and expert in technology IP law, said there's no criminal wrongdoing on Cisco's part because the purchases made through Cisco were finished products and not trade secrets or IP. "There's a line between business intelligence and corporate espionage," he said. "It doesn't matter if the product was commercially available or not. It matters if it was legally available."
Nevertheless, Abramson said the practice could be detrimental to Juniper and other vendors. "Is there damage by having a product end up in the hands of competitors before it's even released? Yes, potentially," Abramson said. "The competitor can work on a direct response product faster or they could develop advertising or marketing to undermine the original company's product."
Ivan Zatkovich, principal consultant at eComp Consultants and an expert in IP and technology, also said the practice could have harmful effects for a manufacturer if its products in question are falling into the hands of the competition before they're even commercially available.
"That could give a competitor a potential six-month jump, depending on the testing cycle of the product, on their ability to catch up and replicate the [technology] advances and compete better against the original manufacturer," Zatkovich said. "That could potentially mean lost future revenue."
But Abramson said purchasing a competitor's products for testing and reverse engineering is not only a common and accepted practice, but "an important component of entrepreneurial capitalism" in the IT industry. "This is part of what makes markets work," he said. "You're supposed to know how your competitor's products work and incorporate as much as you can to make the next generation of your product better."
NEXT: A 'Cardinal Sin'
A 'CARDINAL SIN'
It's unclear when exactly Torrey Point began moving Juniper products to Cisco. The documents obtained by CRN show purchase orders and invoices from PHW and Cisco starting in 2010.
Sources also say Torrey Point's secret relationship with Cisco was extremely lucrative for the solution provider. While Torrey Point's legitimate Juniper business was growing rapidly, it was turning a substantial profit on selling gear to Cisco on the side. According to several sources with intimate knowledge of the situation, Torrey Point received often-substantial discounts for Juniper products via special pricing arrangements with the vendor. Those sources also say Torrey Point was at times making 50 to 60 points of margin on the Juniper sales to Cisco.
The PHW sales weren't limited to Cisco, either. After establishing a clandestine relationship with Cisco in 2010, records show Torrey Point, through PHW, also made sales to Alcatel-Lucent. According to documents obtained by CRN, PHW quoted $1.6 million worth of networking product for Alcatel-Lucent on a single day in October 2011—and the orders were for Cisco products, not Juniper.
Evidently, Torrey Point was engaged in a web of agreements with networking vendors, selling equipment to the highest-bidding competitor. Alcatel-Lucent, ironically, was both a beneficiary and a victim of this practice.
Alcatel-Lucent has not responded to requests for comment. While Torrey Point's sales to Cisco and Alcatel-Lucent were not illegal, they did constitute a blatant violation of the solution provider's reseller contract with Juniper, Arista and Alcatel-Lucent. A standard reseller partner agreement expressly states that a partner is prohibited from selling or delivering a vendor's product to any of the vendor's competitors.
"There's a lot of pressure in the reseller business, and you have to be creative sometimes," said a former Torrey Point engineer, who wished to remain anonymous. "But there's bending the rules and then there's breaking the rules."
CRN spoke with several executives in the IT industry and channel about the Torrey Point matter, and the consensus was that a partner occasionally breaking its reseller agreement to sell the vendor's gear to the competition is not at all uncommon; in some cases, they say, a vendor may look the other way if it's an isolated incident.
In that respect, selling a vendor's products to the competition is like a baseball player stealing signs or using too much pine tar: a lot of people do it, and you can get away with it if you don't flaunt it or take it too far.
But what is uncommon, executives say, is for a top-level, partner-of–the-year-caliber solution provider to engage in such a practice with the volume, scale and duration of time displayed by Torrey Point. One solution provider who asked to remain anonymous said the selling of any products, let alone beta and pre-release technology, to competitors is "a cardinal sin in the channel."
NEXT: Torrey Points Death Sentence
TORREY POINT'S DEATH SENTENCE
In the summer of 2013 Juniper severed ties with Torrey Point and de-authorized the company as an official Juniper reseller. For Torrey Point, which made approximately 80 percent of its revenue from Juniper, the de-authorization effectively put it out of business. "It was a death sentence for the company," said one former Torrey Point employee, who wished to remain anonymous.
Juniper declined comment on Torrey Point's partner status or the solution provider's relationship with Cisco.
According to sources with direct knowledge of Juniper's deauthorization of Torrey Point, several factors beyond the Cisco sales contributed to Juniper's decision. Those factors include a systemic approach to deceive Juniper, from the alleged creation of fictitious customer accounts to the use of affiliated companies to move the Juniper equipment behind the vendor's back.
Baker's lawsuit and his allegations against Torrey Point, Fazio and Young characterize the PHW revenue generated by the sales to Cisco as "massive fraud" as well as gross violations of Torrey Point's reseller agreement, which put Torrey Point's business in danger. "Fazio and Young jeopardized the continued viability of Torrey Point for a mere short-term gain in breach of their fiduciary duty," the complaint states.
Baker settled the lawsuit with Torrey Point, Fazio and Young for an undisclosed amount last July, not long after Juniper had officially dropped Torrey Point as an authorized partner.
As a result of the de-authorization, Torrey Point was left with few options and was fast-tracked for an acquisition (sources say Juniper facilitated the process to ensure many of its large customer accounts were taken care of). Last fall, Torrey Point's assets were acquired by Juniper partner FishNet Security for an undisclosed sum. At the time, the deal was portrayed publicly as a major win for Torrey Point, with Fazio declaring in a press statement that the company was "excited about joining one of the industry's fastest-growing and most respected solution providers."
And according to former Torrey Point employees with direct knowledge of the situation, FishNet acquired the company's assets for a steep discount because of Juniper's de-authorization. Essentially, FishNet acquired a $70 million VAR and one of Juniper's biggest partners for pennies on the dollar, sources say.
FishNet declined to comment on Torrey Point.
Stephen Shapiro, a former senior account manager at Torrey Point who joined FishNet following the acquisition, said most Torrey Point employees had no idea Fazio and Young were selling Juniper gear to its rivals, and only later heard rumors about the Juniper product sales to Cisco after Torrey Point was acquired.
"We had a company meeting a couple of months before the FishNet deal. That's when they broke the news about Juniper," Shapiro said. "It was a shock to a lot of people, and they were worried about the future of the company."
According to sources, Fazio and Young told employees they were contesting Juniper's decision to drop Torrey Point as a partner, but the two never explained what caused Juniper to take that action.
Former Torrey Point CTO Doug Marschke was also shocked by the Juniper news. In 2012, Marschke sold his company Proteus Networks — also a strong Juniper partner — to Torrey Point and joined the company as CTO, filling Baker's vacancy. But just over a year after the acquisition, the company was essentially out of business.
"I was surprised," Marschke said. "I didn't know anything was going on behind the scenes [with Cisco], and the company was doing extremely well, so it was a shock."
Juniper wasn't the only vendor to cut ties with Torrey Point. The official press release for the FishNet acquisition said Torrey Point also had "strong partnerships" with other key vendors including Arista. However, according to former Torrey Point employees, Arista de-authorized Torrey Point as a reseller partner—in 2012.
The documents from Baker's lawsuit against Torrey Point also show the company was selling Arista equipment as well as Alcatel-Lucent products to Cisco. The documents were produced for a deposition in the case in early 2012, and Baker's attorneys issued subpoenas to several officials at Cisco, Juniper, Alcatel-Lucent and Arista, exposing the relationship between Torrey Point and Cisco.
"Arista is a stand-up company, and they cut off Torrey Point right away," said a former Torrey Point employee, who wished to remain anonymous. "Why Juniper didn't do the same, I have no idea." Arista declined to comment.
NEXT: Torrey Point's Ties With Juniper
TORREY POINT'S TIES WITH JUNIPER
While sources say Arista wasted little time in de-authorizing Torrey Point in 2012, Juniper didn't take action until more than a year later. In fact, documents show that Juniper actually warned the solution provider about some of the allegations from former employees concerning Torrey Point's activities.
According to an email dated Dec. 2, 2011, that was part of the court filings, Juniper Senior Channel Account Manager Zachary Kilpatrick told Torrey Point executives, including Young, that several ex-employees were trying to undermine Torrey Point accounts with "a smear campaign," calling Torrey Point "a failing business" and advising customers to cease working with the solution provider.
"This is causing much grief both internally with the Juniper account teams, but also may serve to delay the deals and/or hamper Torrey Point's value and retention of these customers," Kilpatrick wrote.
Kilpatrick did not respond to requests for comment.
It's clear that the fast-growing Torrey Point was a highly valuable partner for Juniper. But it's also clear that several Juniper executives knew of the allegations regarding the Cisco sales in late 2011 and early 2012. If the rumors and allegations from former employees weren't enough, then Baker's lawsuit blew the roof off Torrey Point's double dealings. In fact, Kilpatrick and an unnamed "custodian of records" at Juniper were subpoenaed by Baker's attorneys in February 2012.
There were other warning signs for Juniper later on. According to various sources with direct knowledge of the matter, Juniper discovered discrepancies in product orders for some of Torrey Point's clients. In late 2012, one particular large client had ordered a number of new routers from the solution provider, and when Juniper followed up with the client after the delivery and integration of those routers, the vendor discovered that the number of routers ordered by the client was significantly less than what Torrey Point claimed.
While court documents contained no evidence that the missing products were sold to Cisco or another competitor, the discrepancy was enough for Juniper to take action. According to various sources, the vendor began reviewing Torrey Point's records and financial statements last year. That's when Juniper, upon discovering the web of affiliated companies and hidden sales, saw just how far Torrey Point had gone. But why did it take Juniper nearly a year before finally dropping Torrey Point?
One former Torrey Point employee with firsthand knowledge of the Juniper partnership said the vendor was extremely concerned about the situation and even hired an outside consultant to lead the forensic investigation into Torrey Point, which included extensive internal and external reviews of all related records and accounts. The employee, who wished to remain anonymous, said the process took as long as it did because Torrey Point was such a big partner and the vendor wanted to make sure it got the decision right. However, other sources CRN spoke with, who also have direct knowledge of the Torrey Point-Juniper relationship, said Juniper initially gave the solution provider a slap on the wrist for the Cisco sales in late 2011/early 2012 for two reasons.
First, Torrey Point had become such a crucial revenue generator for the vendor. And second, because the practice of occasionally selling some products to the competition is a common transgression in the channel.
But the extent to which Torrey Point went to create and conceal an entire side business with Cisco was, in the end, a deal breaker.
NEXT: Seeing The Red Flags
SEEING THE RED FLAGS
While many Torrey Point engineers and salespeople joined FishNet, Fazio and Young were not among them. Young is currently listed as CEO of Kore-Tek, a solution provider based in Minneapolis that specializes in optical network architecture; Fazio, who is listed as a managing partner of Kore-Tek on the company's website, is also CEO of Atlantic IT Group, a New York-based consultancy. In addition, Atlantic IT Group and Kore-Tek appear to be part of a network of other companies owned by and associated with Young and Fazio, including PHW and PreOwned Hardware.
CRN attempted to contact Young for comment and discovered that Young's extension and voice-mail greeting are the same at all four companies. In fact, the general voice-mail greeting for Kore-Tek's phone number identifies the company as Torrey Point Group.
CRN also learned that in addition to Baker, several other former Torrey Point employees sued the company, accusing Young and Fazio of refusing to pay their bonuses or commissions and/or honor their contracts. Some of these lawsuits, such as Baker's, were settled.
Many former Torrey Point employees say they were unaware of the Cisco sales and the affiliated companies until after the company was de-authorized by Juniper. One former executive at the company said most employees, including himself, had no idea what was going on and were spending all of their time driving legitimate Juniper sales. "From my perspective, everything was on the up and up," he said.
But former employees also said there were some "red flags" at Torrey Point and describe a sometimes chaotic environment in which, despite the company's impressive revenue, it was often difficult to obtain contractual bonuses, commissions and even small travel and expense reimbursements. A tipping point occurred in 2011 when Torrey Point actually missed its payroll, leaving more than 50 employees without a paycheck for that period.
One former network engineer, who would only speak with CRN on the condition of anonymity, said Fazio and Young told the staff Torrey Point missed payroll because of a paperwork error. Everyone eventually received their paychecks, but employees were skeptical.
"The revenues were great. There was no reason why they couldn't pay the bills," the former employee said. "So where was the money going?"
According to documents obtained by CRN, Torrey Point was also moving vast amounts of money to and from the affiliated companies. In Baker's lawsuit, the complaint claims that in addition to deceiving Juniper, Arista and others, Fazio and Young "appear to have defrauded their lender, GE Financial, by diverting more than $4 million of revenue away from Torrey Point to PHW International."
GE, however, said it was unaware of any fraud on the part of Torrey Point. "We did have a financing relationship with Torrey Point Group, and it concluded within the last six months and we were paid in full," said Mike Marcolina, senior managing director for GE Capital Distribution Finance's Technology,
Electronics, and Appliances division. GE could not say whether the balance had been paid by Torrey Point or by FishNet following its acquisition of the company last November.
An audit of Torrey Point's 2010 financials performed by accounting firm Gentile Pismey & Brengel, which was entered into evidence as part of Baker's lawsuit, showed the solution provider was generating tens of millions of dollars in legitimate revenue, as well as a strong profit. But the audit shows a number of financial transactions between Torrey Point and PHW and other affiliated companies such as Atlantic IT Group. According to the audit, Torrey Point purchased $100,532 worth of computer equipment and parts from Atlantic IT Group, while PHW reimbursed Torrey Point for computer equipment and parts totaling $1.7 million for the year.
CRN contacted many former employees and executives for this article, and nearly all requested anonymity. Several people declined to comment at all and asked not to be named in the article. A few former employees have even gone so far as to eliminate any references to Torrey Point from their LinkedIn profiles.
The documents obtained by CRN give a limited view of Torrey Point's activities. It's unclear how much money Torrey Point made off selling its vendor partners' products to the competition, and how much was being moved between the solution provider and its affiliated companies, but invoices and purchase orders viewed by CRN show that Cisco alone paid at least $3.3 million to PHW over the course of two years.
But that activity apparently led to the downfall of a prominent, solution provider. Not only was Torrey Point one of Juniper's most valuable channel partners, it also was a rising star in Silicon Valley. When Torrey Point said in November 2010 that it was expanding its headquarters in Sunnyvale, former mayor Melinda Hamilton said, "They are a great company with wonderful employees, and we look forward to seeing them grow even more successful in the future."
Michael Simmons, a former sales director with the company who left in 2011, agreed. "It was a great company. It was growing," he said. "There were a lot of talented folks there on both sides, sales and engineering. They had a tremendous pool of talent and unbelievable potential. To this day, I've never understood why this happened. It was a shame."