Three former Charter Communications Inc. executives pleaded innocent in federal court in Missouri last week, claiming that they did nothing wrong and that their actions were approved by their superiors.
Last Tuesday, former Charter chief operating officer Dave Barford and former chief financial officer Kent Kalkwarf pleaded innocent to 14 counts of mail fraud, wire fraud and conspiracy to commit wire fraud before U.S. Magistrate Judge David Noce.
"The indictment arises out of collective accounting and business judgments at Charter. Mr. Barford's actions were legal and were undertaken with the authorization, approval and consent of his superiors at Charter, including the board of directors," Barford attorney Jeff Demerath said.
Barford and Kalkwarf were indicted on July 24 along with two other former Charter executives — former senior vice president for the Eastern division David McCall and former senior vice president for the Western division James "Trey" Smith — and charged with being involved in a scheme to defraud Charter investors by inflating subscriber numbers in 2001 and in the first quarter of 2002, as well as cash-flow figures in 2000.
McCall pleaded guilty to one count of conspiracy to commit wire fraud on July 25. His sentencing is scheduled for Oct. 17.
Smith pleaded innocent on July 28 to eight counts of wire fraud and conspiracy.
According to the indictment, Barford and Kalkwarf allegedly engineered a scheme to artificially boost subscriber numbers by "managing disconnects," or continuing to include disconnected customers on Charter's books, delaying disconnects for subscribers that had either requested to discontinue service or who had not paid for service, and creating completely fictitious subscribers.
The two also allegedly hatched a scheme to increase Charter's cash-flow results by paying digital set-top box suppliers an extra $20 per box, and then receiving that money back as advertising fees. According to the indictment, that plan artificially inflated Charter's cash flow by about $17 million in 2000.
According to the indictment, Barford and Kalkwarf also attempted to create a pool of disconnected customers that it could use to pad future results.
Wall Street had come to expect 2% basic subscriber growth from Charter — about twice the rate of its MSO peers. But in September 2001, Charter reduced its subscriber-growth guidance to 1%, indicating it would have trouble meeting past targets.
Charter was having difficulty meeting even the revised number, as revealed in a series of e-mails between Barford and Kalkwarf.
According to the indictment, Barford sent an e-mail to employees at two Charter divisions on Oct. 5, 2001, stating: "Please provide: Basic net gain in 4Q to get to 1% and 1.4% growth rate for the year. [Then] tell me how many managed disconnects you would still have left over after getting to these numbers."
On Nov. 9, according to the indictment, Barford sent an e-mail to a senior Charter executive stating: "Bottom line is that we will manage to the number of 1% growth but will carry over significant amount of disconnects that we are trying to quantify now."
A month later, on Dec. 7, Barford sent another e-mail to Kalkwarf and a senior Charter executive stating: "We are trying to figure out how many we could disconnect in December and still be in line with others. Is .5% or .6% sellable without revising downward [guidance]? Give me a call on my cell … when you get a break."
In response, Kalkwarf wrote this memo:
"1. One idea is to report the 6,950,000 customers as our actual customers (giving us a growth rate of approximately 1%) but disclose in the call that we have customers included in this number that were the last customers that we brought on for the discounted policy …
"2. We can continue on the same path until late next year and bleed the disconnects in over time.
"3. Take the hit in the first quarter on the call for the change in strategy. [Similar] discussion as point number 1."
Kalkwarf concluded he preferred option No. 1.
"We should still take a hit (140,000 customers times $3,600 per customer is just under $1 per share) but at least we are running the business and we can argue that we did end the year at approximately 1%," Kalkwarf said in the memo.
But in an e-mail he sent to Kalkwarf on Dec. 10, Barford said, "We should stick with the original plan to get to 61,000 net gain for December. This will help us get revenue and cash flow for the year and then we can reserve the customers to get to .5%"
That same day Kalkwarf responded: "My thoughts are to discuss the issue in the first quarter of next year as we are going to take a hit for it no matter what and if we have 0 or negative growth this year after our statements of last week and earlier we take two hits — one for customer growth and one for continued lack of [credibility]."
Also on Dec. 10, Kalkwarf received another e-mail asking, "What do we expect the carryover managed disconnect number to be?"
Kalkwarf responded: "At .5% growth the number is 100,000 — at no growth the number is approximately 60,000 — to completely clean-up the number would be -1% growth."
On Dec. 21, Barford sent another e-mail to Kalkwarf and a senior Charter executive that appeared to point out the dangers of delaying the disconnects.
"I want to give the field direction to dump all of the voluntary and 120-day or greater nonpays right after cutoff to cut down on prorates, bad debt and customer calls," Barford wrote, according to the indictment.
Demerath, Barford's attorney, said that the e-mails, as depicted in the indictment, are misleading.
"You have to read them in the entire context of what was gong on," Demerath said. "That's what the indictment didn't do."