TEL AVIV, Israel — A U.S. firm claims it has been denied commercialization rights to Israel’s new TecSAR spy satellite by Israel Aerospace Industries Ltd. (IAI), its state-owned Israeli partner and Israel’s Ministry of Defense (MoD). The U.S. company, Core Software Technology (CST) Inc., claims IAI, which manufactured TecSAR, and the IMoD struck a parallel deal with Singapore, granting that small nation use of TecSAR’s radar imaging capabilities.
CST’s allegations against the controlling shareholders of ImageSat International, owner and operator of the IAI-built Eros satellites, are contained in a lawsuit filed in the U.S. District Court for the Southern District of New York.
In its 187-page complaint, CST, a founding partner in ImageSat along with IAI, alleges that IAI and MoD concluded a deal with Singapore in mid-2000. CST claims in its lawsuit that under the terms of that agreement, Singapore agreed to underwrite more than $1 billion in development costs for TecSAR and other Earth observation projects.
At the same time, according to the complaint, ImageSat was concluding a $91 million financing package through Merrill Lynch and several New York institutional investors that included negotiation of a so-called master agreement.
CST contends IAI and MoD subsequently misrepresented and/or circumvented that master agreement by selling Earth observation satellites and technologies directly to international customers – including Singapore – instead of going through ImageSat.
Officials with Israel’s MoD, IAI and ImageSat all declined comment on the references to the Singapore deal contained in the complaint.
ImageSat was founded in 1994 through a joint venture between CST and IAI. Over the years, as a result of capital investments, restructuring transactions and other actions, CST’s ownership stake in ImageSat has plummeted from 50 percent to approximately 1 percent, according to court documents. Today, ImageSat’s major shareholders include IAI and Elop, a subsidiary of Elbit Systems Ltd.
The suit alleges that IAI and Elbit Systems Ltd., together with their supporters on the ImageSat board of directors “wrongfully and fraudulently” expropriated rights to sell the IAI-produced TecSAR and commercialized versions of MoD’s Ofeq spy satellites. The suit claims the alleged collusion was “in direct contravention of explicit non-compete and first right commitments to CST and ImageSat’s other investors.”
According to CST’s complaint, ImageSat faces “irreparable and immediate injury and the loss of hundreds of millions of dollars in revenues,” as a result of “transparently deceptive and directly competitive activities of IAI and Elbit.”
CST alleges that IAI and Israel’s MoD concluded their agreement with Singapore at the same time that the ImageSat partners signed off on the master agreement, which they contend codified CST’s rights to commercialize MoD’s Earth observation satellite programs.
According to the complaint, IAI and Israeli partners in ImageSat created two versions of the master agreement: one which clearly articulated ImageSat’s commercialization rights to all Israeli military satellites, and another one that appeared to limit ImageSat’s rights only to electro-optic and not synthetic aperture radar imagery.
“This now appears to have been a highly improper and purposeful effort to ‘carve out’ IAI’s synthetic aperture radar (SAR) satellite technology, probably related to the successful conclusion of negotiations among IAI, the MoD and Singapore under which Singapore agreed to provide over $1 billion in financing to subsidize the enhancement of IAI’s satellite imaging technology,” CST alleges in the complaint.
Neither Israel nor Singapore have ever publicly acknowledged that they have bilateral space programs or joint involvement in TecSAR, which was successfully launched in January by an Indian Polar Satellite Launch Vehicle.
In addition to the Singapore deal, CST faulted a more recent agreement between IAI and Northrop Grumman Corp. as a violation of ImageSat’s noncompete rights to commercialized versions of TecSAR.
Announced by the two firms in April 2007, the marketing agreement allows Northrop Grumman to purchase up to six radar satellites, technology and services from IAI for an estimated $1.6 billion.
The Northrop-IAI marketing of TecSAR and its imagery continues, said Jeff Grant, vice president and general manager of the National Systems Division at Northrop Grumman Space Technology. In a mid-August interview, Grant said: “These lawsuits have had absolutely no negative impact on either Northrop Grumman’s relationship with IAI or our efforts in the United States to develop a market for [TecSAR].”
Two Lawsuits Pending
CST’s lawsuit against controlling shareholders in ImageSat was filed almost simultaneously with an appeal by a group of minority shareholders in ImageSat who are associated with a year-old complaint recently dismissed on jurisdictional grounds. That suit was filed in the U.S. Court of Appeals for the Second Circuit.
The original complaint filed in July 2007 by former CST Chief Executive Stephen Wilson and a group of minority ImageSat shareholders accused IAI, Elbit and ImageSat controlling shareholders of fraud, contractual breech, racketeering and other misdeeds that the plaintiffs in that suit claimed ultimately squandered ImageSat’s market potential and devaluated the minority shareholders interest in the CST commercial satellite venture.
The original suit included 22 specific complaints, each one of which carried relief claims of up to $300 million.
In a July 22 ruling, U.S. Southern District Court of New York Judge Denise Cote granted defendants’ motions to dismiss the case under the doctrine of forum non conveniens. Although the ruling did not address the substance of the complaint, Cote – assigned to the case less than a week prior to rendering her ruling – stated her preference that the matter be adjudicated in Israel.
“Most, if not all of the documentary evidence is in Israel, and many of the witnesses who are critical to the proof of the alleged corporate misconduct reside there … Indeed, the complaint is replete with allegations whose substantiation will require testimony from Israeli government officials and employees. Obtaining evidence and testimony from these government witnesses will be far easier, and perhaps only possible, in Israel,” Cote wrote.
She added that Israel’s business community has a special interest in the case, since allegations made in this commercial dispute could, if proven, damage the ability of Israeli companies to raise foreign capital.
In an August 15 interview, a party to the original CST complaint said the new lawsuit – also filed in the United States – is stronger, contains recently declassified U.S. government information that bolsters earlier claims, and is structured in a way that would make it exceedingly difficult to dismiss on jurisdictional grounds. The new complaint now contains 28 specific counts, which could amount to hundreds of millions of dollars in damages.
“This is a new suit brought by a different plaintiff [CST], which is a U.S. corporation, nearly 100 percent American owned, and which invested more money in ImageSat than all of the earlier plaintiffs combined. It has additional claims and basis for pursuing them in New York beyond what we considered the already strong claims and ties to the United States of the original plaintiff group,” said Ira Brad Matetsky, a New York attorney leading efforts on both cases.
As for the appeal filed by original plaintiffs in late July in the U.S. Court of Appeals for the Second Circuit, Matetsky said the appeal was filed because plaintiffs disagreed with the lower court ruling and believed they had every right to sue in New York. “The appeal will address our disagreements with the District Court decision … and will emphasize certain contractual rights to bring claims under New York law and in a New York forum. We also will show documentation that IAI, Elbit and ImageSat each waived any claim of forum non conveniens, which was the basis of Judge Cote’s ruling,” he said.
Matetsky added that his clients in both outstanding cases would pursue their respective suits expeditiously, and that the appeal on the original case could be heard this fall.
IAI notified the Tel Aviv Stock Exchange and other regulatory authorities of the pending claims Aug. 10. In its notice, IAI stated that it holds 46 percent of ImageSat and is eligible to occupy three seats on the ImageSat board of directors. “Based on a first examination, IAI estimates that claims against the company, its current and former directors of the ImageSat board and others associated with IAI are baseless … More that, IAI has grounds to file countersuits against plaintiffs.”
As for Elbit, a defendent in both cases with approximately 14 percent holdings in ImageSat, a spokeswoman said the company saw no need to notify shareholders or regulatory authorities. “It’s the same baseless complaint that a U.S. judge saw fit to throw out of court. We have no doubt this so-called new case will meet the same fate,” said the Elbit executive.
ImageSat president Shimon Eckhaus, another prominent defendant in both cases, declined comment.