Four former Charter executives indicted

Friday, July 25, 2003

ST. LOUIS -- Four former top executives of Charter Communications, the nation's third-largest cable television company, were indicted Thursday on federal charges of scheming to defraud investors by inflating the company's revenue and operating cash flow, federal authorities said.

Former chief operating officer David Barford, 44, of Chesterfield, Mo., and former chief financial officer Kent Kalkwarf, 45, of St. Louis, were charged with 14 counts of mail fraud, wire fraud and conspiracy to commit wire fraud for alleged schemes in both 2000 and 2001.

Former senior vice president David McCall, 48, of Laurens, S.C., was indicted on one count of conspiracy to commit wire fraud. Another former senior vice president, James Smith, 55, of California, was indicted on eight counts of wire fraud and conspiracy. Charges against McCall and Smith related to an alleged 2001 scheme to inflate Charter's subscriber numbers.

The men were expected to turn themselves in by noon today, U.S. Attorney Ray Gruender said. If convicted, each defendant could face up to five years in prison and fines of up to $250,000 on each count.

"This is a very significant corporate fraud case," Gruender said.

A Charter spokeswoman did not immediately return a phone call seeking comment. The company, based in suburban St. Louis, is controlled by former Microsoft co-founder Paul Allen and serves about 6.8 million customers in 40 states.

The indictments do not allege that subscribers were defrauded. Authorities said the schemes were aimed at defrauding Charter investors and investors in general by making it appear that Charter had more subscribers and revenue than it actually did.

Gruender said that in August 2000, Kalkwarf and Barford realized Charter might fall short of projected year-end revenue and operating cash flow goals.

Money to suppliers

To inflate those numbers, Gruender said, the executives gave money to Charter's suppliers of digital set-top boxes, equipment placed on subscribers' TV sets through which they obtain digital cable.

Charter asked the suppliers to charge the company $20 more per set top box, Gruender said. Charter then allegedly received the $20 back as advertising revenue -- essentially buying ads with its own money. As a result, Charter falsely included more than $17 million as revenue and cash flow for the year 2000, Gruender said.

The second alleged scheme occurred in 2001 when Charter was finding it difficult to develop new subscribers due to the weak economy and increased competition from satellite dish companies, Gruender said.

The executives instructed employees to disregard normal procedures on disconnecting customers seeking to end their service as well as those failing to pay their bills, Gruender said. Also, in some cases, disconnected customers were not removed from the subscriber count list, Gruender said. He alleged that disconnections were intentionally delayed until after the ends of financial quarters.

The purpose was to help Charter fraudulently meet its projected subscriber goals for 2001, Gruender said.

None of the executives is currently with the company. In December, Charter fired Barford and Kalkwarf amid the ongoing grand jury investigation. Charter said then that in light of issues raised by the investigation and Charter's own review, "regardless of the outcome these changes were appropriate."

Barford joined Charter in 1995 in Los Angeles after serving as an executive with Comcast Cablevision.

Details about the departures of McCall and Smith were not immediately available.

Authorities said Charter's current management was "extraordinarily cooperative" in the investigation.

"They provided us with schemes and potential schemes we were not aware of," Gruender said. His office was assisted by the U.S. Postal Inspector's office and the Federal Bureau of Investigations.

In April, Charter acknowledged that federal securities regulators had formally opened an investigation into the company's accounting practices, how it has counted subscribers and how it accounts for certain costs and "dealings with certain vendors, including programmers and digital set-top terminal suppliers."

Charter's shares peaked at $22 in August 2001, but have been pummeled amid Wall Street concerns about the company's more than $18 billion in long-term debt, the grand jury inquiry and 14 shareholder lawsuits.

On Thursday, shares were down 20 cents to $4.78 in trading on the Nasdaq stock exchange.


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