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. Last Updated: 07/27/2016

Georgians Take NY Phone Firm to Court

TBILISI, Georgia -- Three years ago, a tiny New York company called Videotel, which had never installed a public telephone system, persuaded the Georgian government to give it an exclusive 25-year contract to operate all international communications out of the country.

Profits were to be split 80-20, with the lesser share going to the Georgian government, which also had to contribute investment capital. At least one U.S. lecturer in telecommunications law in the United States uses this contract as an example of the worst ever signed by a government.

Until the Georgian authorities finally pulled the plug in October 1993, the Videotel deal meant just six telephone lines between Georgia and the outside world, and some dodgy practices, like business trips to Venezuela charged to Videotel's Georgian joint venture.

Having terminated Videotel's exclusive license, Georgian leader Eduard Shevardnadze's government is now fighting a lawsuit in the U.S. courts, accusing the company of fraud and poor service.

According to Georgian telecommunications officials, Videotel has countersued Georgia for breach of contract and loss of earnings, which they put at $45 million. The seven-employee company at one point enlisted the lobbying services of, among others, the former U.S. Defense Secretary Caspar Weinburger.

In August of last year, Weinburger wrote to the World Bank, which was preparing a $40 million loan to upgrade Georgia's decrepit domestic telephone system. He suggested that if the former Soviet republic broke Videotel's contract, then the member of the bank's board from the U.S. Treasury Department would, under federal law, be required to oppose loans to Georgia. "I am sure we can agree that Georgia's abrogation of a binding contract would have severe ramifications," wrote Weinburger.

The former defense secretary apparently did not know that Videotel is run by a man with a criminal record. One of the company's co-owners, Joseph Schwartz, served two prison sentences for fraud in the 1970s. The other, Easa Easa, who is also a real estate developer, was reprimanded in 1989 by the New York State attorney general for failing to give condominium buyers required disclosures about his business activities.

Prior to the Georgia contract, Videotel had never installed a public telephone system.

In 1992, Videotel executives submitted expenses claims to its Georgian joint venture for trips from the United States to Venezuela. They also charged it for thousands of dollars worth of telephone calls from Tbilisi to Colombia. Videotel says it was trying to secure extra business for the Georgian government by seeking to route Latin America's international calls through Georgia.

Last year, when a World Bank team visited Georgia to talk about the proposed $40 million loan, it concluded that Videotel appeared to lack the experience and financial backing to be able to meet the terms of its contract.

When the decision was taken to drop Videotel, the Georgians put out a tender for a 10-year non-exclusive license to provide international communications out of the former Soviet republic. It was won by the Australian state telephone company, Telstra, who will pay $13 million for the license and investment costs. The profit split is 60-40, with this time, the Georgian government getting the lion's share. Videotel will probably sue, if its lawyers can stomach another round of litigation.

Last year, Videotel sued the German state telephone company, Deutsche Bundespost, which stepped into the breach at short notice to manage Georgia's satellite phones until Telstra took over. Videotel contended the German firm had tried to steal Videotel's Georgian business. A court in Berlin ruled against Videotel and ordered the Americans to pay all costs.

In November, as part of a lawsuit, Videotel agreed to pay $46,000 to a Californian company, IDB Communications Group, for telecommunications equipment ordered in 1991. Others with claims pending against Videotel include the Austrian and Russian state telecommunications companies, who relayed satellite calls from Georgia for the American company.

A ruling on the U.S. court case is expected in April or May. In December there were no satellite communications out of Georgia at all. A Georgian group, leasing equipment from Deutsche Bundespost, had its equipment expertly sabotaged. "Somebody who really knew what he was doing destroyed the equipment," said one Georgian engineer who saw the damage.