Apparently angered over what he believes is his former employer reneging on a promise to pay the court costs associated with his indictment on conspiracy and fraud charges in 2003, former Charter Communications Inc. senior vice president James “Trey” Smith claimed in court filings last Wednesday that company chairman Paul Allen and former CEO Carl Vogel knew all along about the MSO's practice of keeping non-paying subscribers on the rolls to artificially inflate customer numbers.
INDICTED IN 2003
Smith was indicted in July 2003, along with three other former Charter executives, for misleading investors by inflating basic-subscriber numbers and manipulating cash-flow growth figures by paying some vendors additional money for equipment, which was then kicked back to Charter and recorded as revenue.
Smith was initially indicted on counts of wire fraud, mail fraud and conspiracy to commit wire fraud. He pleaded guilty to one count of conspiracy to commit wire fraud on April 22 and was sentenced to two years probation and a $175,000 fine. The other three executives also pled guilty. Former Charter chief financial officer Kent Kalkwarf got the most jail time — 14 months — two years probation and a $200,000 fine. Former chief operating officer Dave Barford received 12 months in jail, two years probation and a $200,000 fine and former Eastern region senior vice president David McCall was sentenced to two years probation and a $200,000 fine.
Charter filed suit in February to get back $1.9 million in court costs from Smith.
In a countersuit filed last week in U.S. District Court for the Eastern District of Missouri, Smith released an e-mail message from Vogel to Allen in November 2002 that appears to show the two executives knew of the subscriber scheme well before the government.
In the e-mail — dated Nov. 12, 2001, about one month after Vogel was hired — the then-CEO wrote to Allen and former Charter director William Savoy (then head of Allen's Vulcan Ventures investment arm) that a shortfall in basic subscribers in October of that year would be offset by the addition of the disconnected customers.
“Without boring either of you with the details, the way we will make the numbers is by carrying over some 86,000 disconnects, which I don't like but I will allow until I have better visibility to the 2002 budget,” Vogel wrote, according to the filing.
Later in the e-mail, Vogel appeared to implicate former Charter CEO Jerald Kent, who resigned abruptly from the St. Louis-based MSO in September 2001 after a falling out with Allen.
“Obviously we are running out of tricks that clearly were employed in the Jerry Kent era and the operations team will need to deliver,” Vogel wrote.
Neither Vogel, Allen nor Kent was accused of any wrongdoing by the government. According to published reports last week, U.S. Attorney James Martin said that the government was confident it had fully investigated the matter.
In a statement, Kent said that in early September 2001, after examining several reports and questioning mangers, he learned that some disconnect orders were not being completed in a timely manner and that the practice had been started — on a small scale — in June of that year.
“Upon learning this information, I gave unequivocal direction, at several management meetings, that this was not the way we were to conduct business and that the practice should stop immediately,” Kent said in the statement. “Additionally, in a news release, I informed investors that we would not meet our public guidance for basic subscriber growth.”
That news release was issued on the morning of Sept. 11, 2001.
“Within days thereafter, I resigned from Charter, for reasons unrelated to these events,” Kent continued. “In summary, I left with clear direction to conform to an appropriate disconnect policy and full disclosure that we would not meet our prior guidance. How and why my directives might have been disregarded after I left, and to what degree, would be mere conjecture on my part.”
Charter senior vice president of communications Dave Andersen said that Charter does not comment on litigation. In a statement, he added that Charter has cooperated fully with the government's investigation.
“We feel it appropriate to note, however, that under our agreement with James H. 'Trey' Smith, Charter advanced millions of dollars for his attorneys' fees and other defense costs prior to his guilty plea,” Andersen wrote. “Under that same agreement, and following his plea, we have a fiduciary obligation to our shareholders to seek the return of these funds, and that is the basis for our legal action against Mr. Smith.
“We will respond to the allegations of the recent filing as appropriate in the normal course of such legal proceedings. It's worthwhile to note, however, that each of the documents involved in the recent filing was provided to the government during the course of its investigation.”
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