Dirty Secrets The Interactive Week Investigation Found:
Company directors ignored or sought to suppress internal audits that exposed fraud, theft, corruption and kickbacks by employees, including senior management officials, a former auditor said.
CEO Bryan was often reimbursed more than $45,000 per month for expenses that included personal shopping trips and the rental of a yacht on which Bryan hosted a political event. One of Bryans private companies, Austin Resources, was also reimbursed by ICG for his personal expenses, internal audits show.
Company executives entrusted network security to people with falsified résumés and at least one convicted thief, a former security official said.
Millions of dollars in improper commissions were paid to dozens of sales agents and their supervisors, according to internal records.
Line counts were inflated and auditors were unable to determine how many were actually in use in order to properly bill customers, according to former employees and documents. One audit showed 60 percent of the dial-tone accounts and 54 percent of the access accounts were delinquent in February 1999, totalling $27 million.
Hundreds of thousands of data and voice lines recorded as sold never generated revenue because of faulty record-keeping, said security officials who think outsiders "tapped" the network to illegally gain free access.
Lax inventory controls left ICG unable to track or account for millions of dollars in servers, ports, routers, switching and fiber-optic equipment, satellite dishes and high-speed data line equipment, internal investigators said.
An accounting policy change initiated by ICG in 1996 allowed the company to book revenue based on sales, rather than installations. While accepted procedure at some companies, in ICGs case it led investors and lenders to believe that the company was growing far more rapidly than it was.
Hundreds of millions of dollars worth of sophisticated equipment was stored under tarps in contract warehouses where poor security allowed people to check out equipment without proper authorization.
Security at data centers, internal reports show, was routinely violated. Employees at one California facility were allowed to "tailgate" each other, entering on a single pass, according to an internal report from July 2000. That practice made it impossible to determine who might have stolen expensive transmission equipment.
Millions of dollars in unnecessary equipment was installed but not used, according to internal memoranda. One report said the company was using "less than 10 percent of its available [network] capacity."
Also at issue is what Malones Liberty Media Group and Hicks investment firm knew about ICG before Liberty, Hicks and boutique investment firm Gleacher & Co. together bought $750 million of its preferred stock and warrants. Malone and Hicks 52 percent share gave them effective control of the company and complete access to its financial condition. The capital infusion that came from Liberty and Hicks in April 2000 when ICG was experiencing increasing problems helped reassure analysts and buyers of the companys stock. Then in early August, when ICG announced it would miss projected earnings, its stocked dropped suddenly, shocking investors. A few days later, two of Malones representatives on ICGs board, Carl Vogel and Gary Howard, along with Hicks took over the companys executive committee. Bryan resigned, although he remains a member of the board of directors. Vogel, who replaced him as CEO, lasted only 30 days in the job before he, Hicks and Howard all resigned without explanation. What prompted the sudden exodus remains a mystery. All that Hicks, Muse, Tate & Furst would say was that "any suggestion that Mr. Hicks or any other representative of HMTF was anything other than a victim is absolutely and categorically untrue." Repeated requests for interviews with ICG executives and directors for this story were rebuffed by the company through its spokeswoman, Susan Koehler. "We feel its a no-win situation for us," she said. But former Chief Financial Officer Harry Herbst, who was also a company director and a member of its audit committee, denied any irregularities occurred. Liberty Media Group owned by AT&T, but controlled by Malone, Libertys chairman was given detailed information about Interactive Weeks inquiries. But Julie Gleichmann, manager of investor relations at Liberty, said it was in a "quiet period" because of its impending spin-off from AT&T and could not talk about company businesses. Liberty subsequently did not respond to direct requests to talk to Malone, to his former representatives on ICGs board Howard, Libertys executive vice president and COO, and Vogel, its senior vice president or to their attorneys. Repeated requests for an interview with Bryan were denied. His personal attorney, Gary Richardson, did not respond to detailed messages about the story. Brad Butwin, an attorney in New York representing Bryan in the pending shareholder lawsuits, said, "You can publish what you like at your own risk. If what you publish is accurate, that is fine. But if it is inaccurate, then I would caution you that you can expect appropriate action to be taken." Bill Beans, who resigned as president of ICG last fall but, like Bryan, remains on the board, did not return calls to his home. John Kane, who preceded Beans as president and left the company in 1999, referred calls to his attorney, Phillip Figa, who said he had advised his client not to comment. Michael Power, the partner in charge of ICGs account at ICGs outside accountant KPMG Peat Marwicks Denver office, said he was "not familiar with any of the issues youre talking about." ICGs new CEO, Randall Curran, hired in September to take the company into bankruptcy and attempt a turnaround, said publicly several weeks ago that ICGs finances had stabilized and that it was "breaking even" on expenses and revenues. The company has laid off a little more than half its 3,000 employees, closed and consolidated offices, and turned day-to-day operation of its 5,000 fiber-optic miles of network over to Cisco Systems. Curran told reporters he expects the company, which now has about 1,400 employees, to successfully emerge from Chapter 11 later this year. But there is also evidence of problems with the companys assets. In an April filing with the SEC, company executives reported they had discovered an "impairment" of assets, which they described as "central" to ICGs pending bankruptcy reorganization. The statement said the company is reviewing the issue with auditors and creditors and will elaborate on its findings later this month. What revelations may be forthcoming is unclear. But former company insiders say ICGs management may be having trouble locating assets, determining whether its network is being used without billing or reconciling internal record-keeping. Despite internal documents concerning those events, the company has never received a qualified opinion on its accounting practices from KPMG Peat Marwick. KPMGs corporate counsel did not return calls seeking comment.
The internal irregularities that apparently flourished prior to the companys collapse raise serious questions about what corporate managers knew, and what they told company directors, who had fiduciary responsibilities to stockholders.