Four Ex-Charter Cable Execs Indicted for Fraud

Reuters | July 24, 2003 | Jeremy Pelofsky

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WASHINGTON (Reuters) - Four former executives of Charter Communications have been indicted on fraud charges related to inflating the cable operator's revenue, operating cash flow and subscriber count numbers, the U.S. Justice Department said on Thursday.

Charter Chief Executive Carl Vogel said the indictments should not impact the "company's ability to execute its operating plan going forward" and that neither the company nor its current directors were the target of the inquiry.

Former Chief Financial Officer Kent Kalkwarf and former Chief Operating Officer David Barford were charged with trying to boost the company's revenue and operating cash flow results when they realized Charter could fall short of projections in 2000.

The indictment charges that the two men had Charter overpay suppliers for set-top boxes used to provide digital cable service. Then the suppliers bought advertising from Charter using that overpayment. This led the company to falsely include more than $17 million as revenue and cash flow for the year, according to indictment.

They were indicted on 14 counts of mail fraud, wire fraud and conspiracy to commit fraud, and could face five years in jail and fines of up to $250,000 for each count if convicted.

Also indicted were former senior vice presidents David McCall and James Smith on charges that, together with the others, they managed disconnections to meet projected subscriber growth projections in 2001.

In November, Charter delayed filing its income statement in order to adjust past tax expenses, but said at the time that adjustments would not affect revenue or operating cash flow.

But in April, three months after securities regulators opened a formal investigation of the company's books, Charter disclosed that it had overstated its revenue and cash flow for 2000, 2001 and the first three quarters of 2002.

The company was ultimately forced to borrow $300 million from its chairman Paul Allen, a co-founder of Microsoft Corp., to meet its credit arrangements.

"These men are being made scapegoats, these are matters of accounting judgments," said Robert Haar, Kalkwarf's lawyer from the firm Haar and Woods. "Moreover they were the collective decisions of many at Charter."

Barford was put on paid leave in October, pending the result of the investigation. Two months later, he and Kalkwarf were fired citing issues in a grand jury investigation.

"Mr. Barford is innocent of all charges leveled against him in the indictment and he looks forward to proving that in the upcoming months," said his lawyer, Jeff Demerath, who is with the firm of Greensfelder, Hemker, and Gale.

The government said some Charter subscribers were disconnected but not removed from the books or its subscriber count until after the end of the quarter, while others were not disconnected until after quarter ended, despite requests to stop service or having not paid their bills for services.

They even went as far as creating fictitious subscribers and adding to their numbers customers who had free or nonpaying accounts, the indictment said.

McCall was indicted on one charge of conspiracy to commit wire fraud. A woman who answered the telephone at his home in South Carolina declined to comment and his attorney was not immediately available for comment.

Smith was indicted on eight counts of wire fraud and conspiracy. "Mr. Smith is innocent of the charges and is going to fight them," said his attorney, Neil Peck, with the firm Snell and Wilmer.

The two also face penalties of five years in jail and up to $250,000 in fines for each count if convicted.

"This prosecution is another step in the federal government's efforts to rebuild confidence in our market system by holding corporate executives responsible for their actions," U.S. Attorney Ray Gruender in St. Louis said in a statement.

Shares plummeted to a low of 76 cents in October 2002 from a high of $24.45 in July 2001. In the last four months, its shares have recovered to $4.78 at Thursday's close.

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This has been expected for a while, and I expect more Charter indictments in the future.

Perhaps Paul Allen and Marc Nathanson will be next.

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"These men are being made scapegoats, these are matters of accounting judgments,"

No, its not. An "accounting judgement" is whether you record the monies from a large contract all at once or over a period of time (for example). What they did was fraud.

Paul Allen's the kiss of death for any startup. Plus he owns the Portland Jailblazers. Hey these former Charter guys can join the team, they haven't had a felony in a while.

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This fellow is a poltroon.

With each passing day Ann Coulter's main/minor points in Treason are being proved true by the behavior of the demonrats. It is becoming glaringly obvious that they really detest this country.

I don't think the average person is being fooled. It will prove decisive next year.

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Yeah, I made an investment in Leap Wireless in large part because of Allen's involvement. I rode it way up and fortunately was stopped out with a small gain.

Paul rode that puppy all the way down.

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Paul Allen's the kiss of death for any startup.

It seems like microsoft was the only one he was part of that didn't go down in flames. And I think that was because Gates was running everything. I read "Fire In The Valley" a while ago, and I remember that Gates reportedly told Allen early on in their business dealings that "We'll get along better if I'm in charge."