U.S. SECURITIES AND EXCHANGE COMMISSION
Litigation Release No. 19240 / May 26, 2005
Accounting and Auditing Enforcement
Release No. 2250
UNITED STATES OF AMERICA v. DAVID G. BARFORD, KENT D. KALKWARF, DAVID L. MCCALL AND JAMES H. SMITH III , (United States District Court for the Eastern District of Missouri, Crim. No. 4:03 CR 00434 CEJ)
FORMER OFFICERS OF CHARTER COMMUNICATIONS, INC. SENTENCED FOR PERPETRATING FINANCIAL REPORTING SCHEMES
On April 22, 2005, the Honorable Carol E. Jackson of the United States District Court in St. Louis, Missouri sentenced David G. Barford, Kent D. Kalkwarf, David L. McCall and James H. Smith III for their roles in two financial reporting schemes that were the subject of a July 2004 Commission action against Charter Communications, Inc, one of the largest cable television operators in the United States. One scheme caused Charter to report inflated subscriber numbers during certain periods in fiscal year 2001 and the other scheme resulted in inflated revenue and operating cash flow figures for fiscal year 2000.
In the criminal case, Barford, Charter's former Chief Operating Officer, pled guilty to one count of conspiracy to commit wire fraud and was sentenced to one year and one day in prison and was ordered to serve two years of supervised release after the prison term and to pay a $200,000 fine. Kalkwarf, Charter's former Chief Financial Officer, pled guilty to one count of wire fraud and was sentenced to 14 months in prison and was ordered to serve two years of supervised release after the prison term and to pay a $200,000 fine. McCall, a former Charter Senior Vice President of Operations, pled guilty to one count of conspiracy to commit wire fraud and was sentenced to two years of probation and ordered to pay a $200,000 fine. Smith, a former Charter Senior Vice President of Operations, pled guilty to one count of conspiracy to commit wire fraud and was sentenced to two years probation and ordered to pay a $175,000 fine.
In their plea agreements, Barford, McCall and Smith stipulated to certain facts, including that they knowingly participated in a scheme to defraud Charter's stockholders by causing Charter to materially inflate the number of subscribers that it reported to the public in press releases and in filings with the Commission. The purpose of the scheme was to meet internal and Wall Street analysts' subscriber growth forecasts. The number of subscribers and subscriber growth were material factors to prospective buyers and sellers of Charter's stock. Barford and others at Charter instructed employees to stop or postpone for longer than normal the disconnection of subscribers who had not paid their bills or subscribers who requested that their service be terminated. McCall and Smith were directed to use these manipulative means to meet the forecasted subscriber numbers and in turn, they instructed Charter employees to hold disconnects. As a result of this conduct, Charter reported materially inflated subscriber numbers to the public in press releases and in Forms 10-Q filed for the second and third quarters of fiscal year 2001 and in Form 10-K filed for fiscal year 2001. Charter would not have been able to meet its quarterly subscriber growth forecasts without holding the disconnects.
As part of his plea agreement, Kalkwarf stipulated that from on or about August 2000 to on or about February 11, 2001, he and others knowingly devised a scheme to defraud Charter's stockholders by falsely inflating Charter's year-end revenue and operating cash flow in order to meet internal and Wall Street analysts' projections for those financial measures and ultimately to artificially inflate Charter's stock price. After realizing in or about August 2001 that Charter's fiscal year 2000 year-end cash flow would be lower than projected, Kalkwarf, on behalf of Charter, entered into an agreement with two set top box suppliers that would generate the needed cash flow. Specifically, the agreement provided that Charter would pay $20 more for each set top box purchased from the suppliers but then receive the same $20 back from the suppliers as advertising revenue. The purpose of this transaction was not to confer an economic benefit on these suppliers or on Charter, but rather to increase Charter's reported revenue and cash flow. As a result of the agreement, during the fourth quarter of 2000, Charter overpaid approximately $17 million to the suppliers for set top boxes and received the same amount back from the suppliers in advertising revenue. Charter reported the $17 million as revenue and cash flow in its Form 10-K for fiscal year 2000 that it filed with the Commission.
On July 27, 2004, the Commission issued an Order requiring Charter, pursuant to its consent, to cease and desist from committing or causing any violations and any future violations of certain reporting, books and records, and internal control provisions of the federal securities laws and required Charter to undertake significant improvements in its internal controls designed to prevent and detect future instances of the alleged misconduct. The undertakings include adopting a zero tolerance policy on holding disconnects to inflate subscriber numbers, prohibiting the consideration of achieving subscriber growth targets as a component of employees bonuses and replacing its top-down budget process with a bottom-up approach which eliminates industry analysts' projections as a component of setting Charter's budget goals.
For additional information, see Exchange Act Rel. 34-50098 (July 27, 2004);