Losing the Signal: The Spectacular Rise and Fall of BlackBerry (21 page)

Slamming any technology device backed by Silicon Valley’s forceful public relations armies was rare in 2007. Twitter, today’s social media venting platform of choice, was just a year old and technology bloggers sometimes pulled their punches out of fear of being cut off from future interviews and product events. When the British celebrity took a sledgehammer to the admired BlackBerry brand, his comments went viral. Was he trying to sabotage BlackBerry, a BBC reporter asked? Unrepentant, Fry replied, “Honestly:
play with the Storm for two days as I have and you will admire my patience at not throwing it out the window.”
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Although reviews were devastating, BlackBerry’s fans had faith in RIM’s record of producing reliable phones. Borrowing a page from AT&T’s Apple promotions, Verizon lubricated sales by heavily subsidizing Storm phone purchases for any customer signing up for a two-year phone contract. After rebates, the touch BlackBerry sold for $200. The low price, combined with BlackBerry’s reputation for quality and innovation, attracted hundreds of thousands of customers early on. While sales soared, RIM’s engineers worked feverishly to repair software glitches with upgrades. The more phones sold, the more time RIM had to clean up after its Storm. By the end of January 2009 hope grew within the company that Storm might lift off. The company’s chief promoter, Balsillie, told the
Wall Street Journal
RIM was producing 250,000 phones a week to keep up with demand.
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In a bullish forecast he pronounced that Storm was “an overwhelming success.”

On a frigid February morning in 2009 Mike Lazaridis and Jim Balsillie walked from a downtown hotel toward Toronto’s city hall. News they had been dreading for years had hit the papers the day before. There was no more hiding it. The CEOs and former chief financial officer of Canada’s most celebrated business had agreed to collectively pay more than C$90 million to settle allegations that RIM backdated stock options to enrich themselves and others. Now, RIM’s bosses were on their way to a public hearing, a firing squad, really; penalties, sanctions, and reprimands from the Ontario Securities Commission awaited them. Restrained by lawyers from discussing the case, they said little about what lay ahead. Even if they could, the conversation would be painful. The three-year investigation into improper stock option grants had driven a wedge between them. The business partners who once finished each other’s sentences were now finding it difficult to start conversations. Lazaridis and Balsillie still called and e-mailed regularly to discuss business, but it wasn’t the same. When they reached a mirrored glass-and-steel office tower near city hall, the humbled executives glanced at each other. “Let’s get this over with,” was the best Balsillie could manage.

There was barely room for Balsillie and Lazaridis to maneuver when the elevator opened onto the twentieth floor. The hallway was crammed shoulder-to-shoulder with media. Swallowed by TV crews inching backward with rolling cameras, RIM’s founders were forced to do the walk of shame. Slowly moving toward a large hearing room, the two CEOs, as always, marched to
different rhythms. Lazaridis, wearing a stately blue suit with an Order of Canada pin in his lapel, moved as if in a trance, face frozen, eyes downcast. He might have been in a funeral procession. Balsillie, meanwhile, grinned maniacally into the cameras, eyes merrily alive. Light from whirring cameras picked up his flashing aqua tie. There was no shame here. RIM’s chief promoter could have been ambling up a red carpet to grab an award.

The cocky smile certainly didn’t play with OSC staff—men and women who had spent difficult years investigating and negotiating the forthcoming settlement. When the three members of the presiding OSC panel walked onto a raised dais at the front of the hearing room, Jim Douglas, Balsillie’s lawyer, noticed some of the staff were staring with irritation at his beaming client. “Jim, you’ve got to stop smiling,” he whispered. Balsillie turned off his movie premiere grin, but he’d made his point. He’d been through this before. When his Trinity College elders punished him for blowing his own horn too loud at dinner, the trick, he’d learned back then, was to hang tight and smile right into his accusers’ faces. “They wanted to bring me down,” Balsillie would later recall of the OSC hearing. Smiling, he says, was his way of saying: “I’m giving you nothing. I’m not letting you break my spirit.” Lazaridis’s wooden face told a different story. Sitting next to the man he blamed for the regulatory nightmare, he had the look of a defeated general.

Jim Turner, the OSC’s vice chairman and head of the panel, told the crowded hearing room that the case against RIM involved “shocking” corporate misconduct and governance failures.
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For nearly a decade RIM improperly enriched the compensation of more than sixty executives and managers by switching stock option grants to more lucrative dates. The scheme was not properly disclosed to the company’s shareholders. Practices were so lax that directors never reviewed or approved many RIM option grants. Four company directors had been among the lucky recipients of backdated options. The biggest winners in the deception were the company’s top executives. Options changed to more lucrative dates for Balsillie, Lazaridis, and the company’s chief financial officer, Dennis Kavelman, resulted in $66 million worth of excess profits. Most of the gains were generated by a remarkable run-up in the company’s stock price, but lower option prices obtained through backdating amplified the rewards.

RIM’s executives and officers didn’t dispute the OSC allegations. What they bitterly contested, in negotiations leading to a settlement, were the proposed penalties. One initial OSC demand, according to those familiar with
discussions, was for Balsillie, who accepted responsibility for the backdating, to step down as CEO and director of the company. The OSC retreated from the requirement after RIM’s lawyers argued that the loss of the company’s strategic, financial, and sales chief would send the stock price of one of Canada’s leading companies into a tailspin. With no successor in the wings, RIM’s shareholders would suffer if Balsillie was pushed out. The other flashpoint, known only to a small circle, was Lazaridis. In the fall of 2008 his lawyers made a request for lighter penalties. His lawyers, according to people familiar with negotiations, argued Lazaridis was unaware of the scale or impropriety of the practices and therefore should not be subjected to significant regulatory sanctions.

When details of the settlement were revealed at the OSC hearing, Balsillie was the primary target. He had agreed to step down as a RIM director for a year and pay a $5 million penalty to the commission. Lazaridis remained a director and suffered a $1.5 million penalty. Together, the CEOs and Kavelman agreed to pay the commission a combined $83 million, one of the largest set of sanctions ever paid by officers of a Canadian company. The four directors during the time of the backdating, Lazaridis’s childhood friend Doug Fregin and long-standing board members Kendall Cork, Douglas Wright, and James Estill, who received backdated options, were ordered to attend a directors-training course, while RIM agreed to hire an outside consultant to address boardroom failings.
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Once the OSC panel approved the sanctions and penalties, Balsillie’s grin was back firmly in place. His next challenge was a swarm of reporters waiting in the lobby of the office tower. With a glum Lazaridis standing behind him, Balsillie, who had just yielded his board seat and a substantial fortune, faced the pack with an oddly triumphant smile. “We are very pleased to put this behind us,” he told reporters. Surprised by an evident lack of contrition, a reporter asked if he wanted to apologize to shareholders. “Absolutely,” Balsillie said. “We take full responsibility and accept that we’ve made mistakes…. We don’t duck it one bit.”
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When the impromptu press conference ended, Balsillie and Lazaridis left the building to drive back to Waterloo. “We just went back to work,” Balsillie later recalls. Work, however, would never be the same. Several weeks after the OSC hearing, Balsillie appeared in Lazaridis’s office in RIM 4 to confront his longtime partner. The two CEOs were finally free to discuss the case because the SEC had followed the OSC with a separate settlement agreement involving minor penalties of only $1.4 million. The securities investigations
were over and the two CEOs were finally free to discuss the case. Agitated and emotional, Balsillie uncorked months of suppressed resentment. In his mind, Lazaridis had betrayed their partnership by going behind his back to ask for leniency from the OSC. “I was shocked and very hurt by his action,” Balsillie recalls. He reminded Lazaridis of the big messes he mopped up during their fifteen-year partnership. When U.S. Robotics balked at paying for RIM’s faulty modem cards in the late 1990s, it was Balsillie and his sales team that saved the company by selling thousands of the devices to Korean buyers. When Lazaridis was devastated by the NTP patent defeat, Balsillie took the reins and the emotional beating during the tortured legal odyssey. Why hadn’t Lazaridis stood with Balsillie during the settlement talks? “I’m so hurt,” Balsillie said.

For Balsillie, it was all out on the table. But Lazaridis did not open up the same way. Ever reserved, he didn’t share with Balsillie his own disappointments. He’d told close confidants he felt betrayed by Balsillie’s failure to prevent a decade of reckless backdating—and had lost his passion for a business he loved. But he didn’t go there with his partner of seventeen years. Instead, he coolly informed Balsillie the securities scandal was different from previous difficulties. The U.S. Robotics and NTP crises were “business,” Balsillie recalls him saying. The backdating scandal was “personal” because his reputation had been dragged through the mud. Staring evenly at a distraught Balsillie, Lazaridis said simply: “I’m sorry you feel this way.” Lazaridis disputes Balsillie’s account of the difficult meeting. He denies that he described the options scandal as personally damaging. He also disagrees that his discussions with securities regulators were aimed to damage Balsillie. In a written response to questions about the meeting, a spokesman for Lazaridis said: “Although Mike’s lawyers obviously took necessary and appropriate steps to defend him in this matter, to the best of our knowledge this was done in cooperation with the other parties and their counsel. Mike did not instruct his counsel to take any steps that were intended to prejudice Jim or any other of the parties.”

After the unresolved emotional encounter, Balsillie says he and Lazaridis “carried on” with the business of running a still rapidly growing company, but he concedes their relationship was damaged. As far as Balsillie was concerned, it was Lazaridis’s actions with regulators that amounted to a “betrayal” that damaged his trust in his long-time partner. Despite the falling out, Basillie and Lazaridis insist, RIM’s senior partnership remained effective in managing the business. Lazaridis continued to oversee product development, while Balsillie drove sales and services. They communicated daily, consulted regularly on
major decisions, and remained respectful in meetings. Few of RIM’s senior executives or directors were aware of the falling out, but in time it became apparent that, like an estranged married couple, Balsillie and Lazaridis were drifting apart and fault lines would open within the company.

One executive who became concerned about the internal divide was Larry Conlee. Aware of the options falling out, Conlee hoped the rift could be healed if Lazaridis and Balsillie spent more time together. For most of their partnership, the co-CEOs were only footsteps from each other’s desks. In the mid-2000s Lazaridis moved to RIM 4 to keep close to engineering teams and the network operating center that oversaw the company’s data relay network. Balsillie was blocks away in RIM 10 with the company’s sales and administrative staff. Sticking together wasn’t easy in Waterloo because the city’s building height restrictions limited the company’s ability to assemble large groups of staff under one roof. When a new building was under construction, Conlee proposed assembling all senior executives in one wing. From his experience at Motorola and earlier at RIM, Conlee felt senior executives could get a lot more accomplished chatting in hallways and over car hoods when they were in close quarters. Balsillie strongly disagreed. He wanted nothing to do with a “mahogany row” of stately offices that detached top executives from the expanding ranks. “No way would we have stayed with the level of intimacy that we had with the teams if we were all in this cordoned zone,” Balsillie says. To this day, Conlee believes it was a mistake to keep the CEOs apart. “I talked to Mike and Jim about it quite often,” he says. “I thought it was a problem.”

Away from the smartphone wars, Balsillie was fighting a different battle against a powerful adversary. The devoted hockey fan had been trying for years to spend some of his RIM fortune on a National Hockey League team. Two previous deals had fallen through, a 2006 agreement to buy the Pittsburgh Penguins and a 2007 deal for the Nashville Predators. Now, on July 29, 2009, he was in Chicago to face the league for a new bid. The RIM boss, who had brought along his legal pit bull, Richard Rodier, was one of three bidders for the bankrupt Phoenix Coyotes. Balsillie had signed a $212.5 million deal in May 2009 to purchase the struggling team from owner Jerry Moyes on one condition: the Coyotes would have to move to Hamilton, Ontario, an hour’s drive southeast of Waterloo. To do so, he would have to get through the NHL’s top brass, commissioner Gary Bettman, deputy commissioner William
Daly, and the executive committee of the league’s board of governors. Bettman had a reputation as a ferocious defender of the league’s corporate interests.

Balsillie had wanted this face-off for years. The boy goalie from Peterborough who once dreamed of winning a Stanley Cup could now afford a bigger fantasy, thanks to RIM’s plush stock price. With a personal net worth exceeding $2 billion in RIM stock alone, Balsillie could try to win a championship trophy that was first awarded to Canadian amateurs in 1893 but which had not been won by a Canadian franchise since 1993. “I thought it would be a great thing to do,” Balsillie says. For all his noble intentions, however, he appeared so unpredictable during two previous attempts to acquire troubled U.S. hockey teams that all he’d earned for his money and trouble was the contempt of a powerful professional sports league.

The backstory wasn’t pretty. In 2006, Balsillie abruptly tore up a $175 million agreement to buy the struggling Pittsburgh Penguins, he would later tell a court, after the NHL insisted at the last moment he could not switch the team to Hamilton.
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Balsillie’s sudden retreat embarrassed NHL officials and Pittsburgh’s hockey royalty, which supported his bid. Canadian hockey legend and Penguins part-owner Mario Lemieux told reporters he was “shocked and offended” by the about-face of a man he considered a friend.
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Balsillie’s next move to buy the Nashville Predators collapsed in 2007 amid recriminations about combative tactics to move the team north. The Phoenix Coyotes would be different, Balsillie was convinced, because the future ownership of the bankrupt team would not be decided by Bettman or NHL officials. In bankruptcy court, Balsillie believed the league would be a neutered force because the presiding judge was obligated to accept the best available deal for creditors. Once again, the Sun Tzu warrior thought he had a better chance at a victory on uneven ground. “I thought it would be decided by a judge, not the NHL,” Balsillie says.

Balsillie’s confidence disappeared, however, shortly after he and Rodier stepped into a large meeting room that July day in Chicago. Seated there with league officials was Craig Leipold, a Wisconsin businessman and sports investor who owned the Minnesota Wild franchise. He was also the former owner of the Nashville Predators, the man who angrily turned his back at the last minute on Balsillie’s acquisition offer in 2007. As Leipold would later state in a court declaration, he had requested time with the NHL’s executive committee to read a five-page statement about “surreptitious” and “bad faith” efforts by Balsillie and Rodier to devalue the Predators.
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“I simply don’t trust Jim,” Leipold told the governors.
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