Indictments were handed down last week against four former Charter Communications Inc., executives, ending nearly a year of speculation as to the fate of an intense investigation into the St. Louis-based MSO's accounting practices.
Former Charter chief operating officer David Barford and former chief financial officer Kent Kalkwarf were indicted by the U.S. Attorneys for the Eastern District of Missouri on 14 counts of wire fraud, mail fraud and conspiracy to commit wire fraud.
Former Eastern Region senior vice president David McCall was indicted on one count of conspiracy to commit wire fraud and former Western Region senior vice president James (Trey) Smith was indicted on eight counts of wire fraud and conspiracy in an alleged scheme to inflate Charter's subscriber numbers.
Barford and Kalkwarf were both fired from Charter in December, "following a review by the company of various matters, including those relating to the previously disclosed grand jury investigation," Charter said in a statement at the time.
Smith left Charter in 2001; McCall resigned this year. McCall peaded guilty Friday morning before U.S. District Judge Carol Jackson. Sentencing was set for Oct. 17.
If found guilty, the four men face a maximum penalty of five years in prison and/or fines up to $250,000 for each count, according to a statement from the U.S. Attorney's Office.
Barford, Kalkwarf and McCall were expected to surrender to federal authorities by noon on Friday, according to reports.
"Trey Smith is innocent and will be vindicated by a jury in St. Louis," said Smith's Denver-based attorney, Neil Peck. "Reading the indictment itself clearly suggests that this is a case of prosecutorial overreaching by the U.S. Attorney's office in St. Louis in this post-Enron era. I am startled that they would do this."
Peck said that Smith, a resident of Colorado who has been living in Palm Springs, Calif., for several months, was scheduled to surrender to federal authorities in St. Louis later this week.
Charter stock, which has surged in the past two months to near 52-week highs, fell back 11 cents per share to $4.67 each in early trading last Friday. According to analysts that follow the company, the indictments likely signal the end of a year-long investigation that has been a major overhang on the stock.
"We view this announcement in the apparent progress towards the closure of the DOJ investigation as a positive for all Charter securities, as the indictment is related to former employees only and the company itself was not charged," UBS Warburg cable debt and equity analyst Aryeh Bourkoff said in a research note.
But at least one analyst was not convinced that the troubles were entirely over at Charter.
In a research report titled "CHTR: Former Executives Indicted — Stay Away From the Stock," Fulcrum Global Partners analyst Richard Greenfield said that although the grand jury investigation appears to be over, Charter is still being investigated by the Securities and Exchange Commission.
"While some investors may be relieved that Charter itself was not charged by the grand jury, it remains very unclear (management would not comment) what impact the indictments will have on validating shareholder lawsuits," Greenfield wrote in the report. "Furthermore, the SEC investigation remains ongoing. Since the grand jury/SEC launched their investigations into Charter's accounting last year, Charter has initiated two internal reviews and hired a new auditor (KPMG). In April, the company restated its 2000 and 2001 results and continues to believe the restatements are accurate."
According to a press release from the U.S. Attorney's Office, neither Charter nor its current executives or directors were charged in the indictment. Former Charter CEO Jerald Kent — now CEO of Cequel III, a telecommunications investment company based in St. Louis — was also not charged.
But some MSOs wondered aloud what might happen to Kent, especially because the alleged fraud took place during his watch.
"He [Kent] was the one that was trumping the sub growth, the great numbers and all of that," said one MSO executive that asked not to be named. "It's just tragic, and by association, it doesn't reflect well on the industry."
Kent was said to be out of the country and could not be reached for comment. Peter Abel, a spokesman for Cequel III, declined to comment.
In past interviews, Kent had denied any involvement in any past wrongdoing at Charter.
"The last full audit year that I was on board was the year 2000, and all of the items they talked about were reviewed intensely by the audit committee, by the auditors and, in some cases, reviewed by the SEC," Kent said in an April interview. "I don't know if there have been rule changes since that may have prompted some of the restatement, but I can assure you at the time, we obviously had opinions that all of the financials were in accordance with [Generally Accepted Accounting Principles]."
According to the indictment, in August 2000, Barford and Kalkwarf — realizing that Charter may fall short of its projected year-end revenue and cash-flow numbers — devised a scheme to artificially inflate those figures by giving money to the MSO's digital set-top box suppliers in order for those suppliers to then buy advertising from Charter.
"Charter asked the suppliers to charge them $20 more per set-top box," the indictment stated. "Charter then used that same money to buy advertising. In these transactions, Charter paid $20 more than necessary for each set-top box, but then received its $20 back as advertising revenue."
According to the indictment, the scheme enabled Charter to inflate revenue and cash-flow figures by about $17 million in 2000.
The indictment also alleges that the four executives schemed in 2001 to inflate subscriber numbers through a practice called "managing disconnects." That practice, the indictment claims, involved 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 indictments were the result of an investigation begun in August 2002 by the FBI, the U.S. Postal Inspection Service and the U.S. Attorney's office. In a statement, the U.S. Attorney said that Charter itself has not been indicted and was commended for its cooperation during the investigation.
"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 for the Eastern District of Missouri Ray Gruender said in a statement. "We will use all the resources available to us to investigate and prosecute those corporate executives who are willing to bend the rules and cook the books."
In a statement, Charter said that the indictments of the four former officers should have no effect on the company.
"Charter will continue to cooperate closely with the United States Attorney's office in the inquiry," the MSO said in the statement. "This cooperation remains a priority for Charter as it continues to attempt to put the investigation behind it and look to the future."