A federal grand jury indicted four former Charter Communications Inc. executives,
charging that they inflated revenues and basic-subscriber counts to prop up the
cable operator’s stock price.
Two former senior executives face 14 counts of mail fraud, wire fraud and
conspiracy to commit wire fraud: former chief operating officer David Barford and former chief financial officer Kent
Kalkwarf.
The former heads of two regions faced fewer charges. Former Western region
senior vice president Trey Smith was indicted on eight counts of wire fraud and
conspiracy.
Eastern region senior VP David McCall was indicted on one count
of conspiracy to commit wire fraud.
Former CEO Jerry Kent was not charged. Neither was the company itself.
Prosecutors charged that beginning in 2000, Barford and Kalkwarf realized that
Charter was falling short of financial goals.
Their solution was to cut a deal with manufacturers of digital set-top
converters, agreeing to pay an extra $20 on each of hundreds of thousands of
boxes if the vendors would funnel the money back by buying advertising time on Charter
systems.
The extra set-top costs were counted as capital spending, which doesn’t
affect reported revenues or profits.
But the advertising sales would be counted as revenue and fell straight to the
bottom line.
When auditor Arthur Andersen LLC challenged the deal, Kalkwarf allegedly reworked
the contracts to make it seem that the new set-top prices were unrelated to the
advertising purchases.
Charter bought 850,000 boxes under the scheme, booking $17 million in
artificial revenue.
Prosecutors contended that in 2001, all four ex-executives worked to inflate
Charter subscriber counts by letting nonpaying customers stay on the books
longer than normal policy dictated, calling the process "managed
disconnects."
The indictment said McCall and Smith initially protested, but later
instructed employees to relax nonpay policies.
