Verizon Told of Risks Before Idearc Spinoff, Lawyer Says

Verizon Communications Inc. disclosed to investors the risks in the directory business that filed for bankruptcy after a 2006 spinoff, including declining revenue, a lawyer involved in the transaction said.

Steven Slutzky, a partner with Debevoise & Plimpton LLP, which handled regulatory disclosures for the deal, countered claims by creditors of the business that Verizon hid those risks.

“I think the disclosure was very extensive and very thorough,” Slutzky testified today in federal court in Dallas.

Verizon is fighting a lawsuit brought by creditors of the unit, Idearc Inc., who claim the second-largest U.S. phone company loaded the business with debt, driving it into bankruptcy in 2009.

The reorganization of Idearc, now named SuperMedia Inc., created a trust to bring lawsuits on behalf of creditors with claims totaling $6 billion.

Slutzky pointed to a regulatory disclosure by Idearc in November 2006 that reported that the unit’s operating revenue was steadily declining, falling to $3.37 billion in 2005 from $3.83 billion in 2001.

The section of the 158-page disclosure enumerating potential risks spelled out the rise of Google Inc. and Yahoo! Inc. as competitors to print directories, the reliance of the directory business on small- and medium-sized business and the negative effects of a deep recession.

Another defense witness, Katherine Harless, who headed Verizon’s directory unit and who became president and chief executive officer of Idearc when it was spun off, testified today that investors’ questioned at roadshow presentations whether Google and Yahoo would “eat our lunch.”

She said she replied that the business was exploring ways to work with Internet companies to combine their audience reach with Idearc’s large sales force.

The creditors’ lawsuit is U.S. Bank National Association v. Verizon Communications Inc., 10-01842, U.S. District Court, Northern District Texas (Dallas).

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