Malone, Hicks: Who Knew What When?

Of all the questions surrounding the sudden crash of ICG Communications, one stands above the rest.

Of all the questions surrounding the sudden crash of ICG Communications, one stands above the rest.

Why did two of the nations most influential and sophisticated investors — telecom billionaire John Malone and Texas investment guru Thomas Hicks — sink $730 million into ICG, only to abandon it four months later with the haste of men escaping a burning building?

The answer has apparently eluded everyone except those closest to it — Hicks, Malone and the two men picked by Liberty to serve on ICGs board: long-time Malone associate Gary Howard, executive vice president and COO at Liberty, and Carl Vogel, Liberty senior vice president.

Even ICG insiders who had access to damning documents — documents that showed ICG was well on its way to collapsing long before the Malone-Hicks cash infusion — said they were mystified, in part because neither investor bothered to request those readily available documents before buying a 52 percent interest in the troubled company.

Nor is it understood why those investors would endorse a company without checking internal audits or making other routine inquiries that would have uncovered allegations and evidence of fraud, mismanagement and illegal activities.

"Myself and others at ICG had hopes that Malone and Hicks would come in and turn the company around," said Karen Owen, former director of audit services. "But they never looked at the companys internal audit reports . . . which spelled out in detail what was going on at ICG."

Neither Hicks nor Malone would agree to be interviewed on these issues. An attorney for J. Shelby Bryan, the former CEO and director of ICG, who solicited those investments, did not respond to interview requests.

Hicks, through a public relations spokesman, turned down three separate requests for comment. But his company issued a statement late last week saying the firm was "apparently the victim of a massive fraud."

Malones $500 million investment in ICG came through Liberty Media, a subsidiary of AT&T controlled by Malone. Hicks $230 million investment was made through entities of Hicks, Muse, Tate & Furst, the Texas investment firm he heads.

Gleacher & Co. is a boutique investment house the origins of which lie with Morgan Stanley Dean Witter — Bryans former employer. Gleacher added $20 million more to the deal, which was brokered by Morgan Stanley.

The investment in ICG was not an isolated event. Malone had made a name for himself as one of the most savvy and aggressive players in telecommunications with the $59.4 billion sale of his cable company, Tele-Communications Inc., to AT&T in 1999. AT&Ts move into cable represented a new battle strategy in its fight with the regional Bell operating companies it once owned; it was looking to gain access to customers without using the RBOCs local loops.

Malone has been investing in telecom technologies for years. Liberty, as an investment arm for AT&T, put billions of dollars into fiber-optic network builders and fixed wireless carriers.

Hicks Muse also became major investors, following Malone into a variety of telecommunications deals.

Beyond the influence that Malone and Hicks wield on Wall Street — their ICG investment drew prompt and favorable notice for the company from analysts — both have corporate and personal ties to national political figures that make them two of the most prominent investors Bryan could have found.

Hicks is a friend of President George W. Bush and a major contributor to his political career. Hicks was appointed to the University of Texas Board of Regents when Bush was governor, and Hicks purchase of the Texas Rangers baseball team from a consortium of Texas businessmen that included Bush made Bush a multimillionaire before his campaign for president.

Hicks has contributed hundreds of thousands of dollars to Republican candidates and committees supporting Republican issues and candidates. He is a member of the "Pioneers," an elite group that helped fund Bushs campaign for president. He also contributed $10,000 to the Senate Democratic Campaign Committee when Bryan was its national finance chairman.

Though his own personal political contributions are conservative, Malone has helped define the direction of AT&Ts considerable political activity as a member of the companys board of directors and one of its largest stockholders.

Bryan was a potent potential ally to Liberty and AT&T, not only because of his personal friendships with former President Bill Clinton and former Vice President Al Gore — for whom he helped raise millions of dollars — but also because of his close ties to Senate Democrats.

Bryan raised more than $54 million in 1997 and 1998, helping the Senate Democratic caucus position itself to split control of the upper chamber with Republicans in the 2000 elections.

Bryan and ICG were among the many telecom players courted by AT&T after the 1996 Telecommunications Act gave competitive local exchange carriers and AT&T a common goal: to overcome in Congress, state legislatures and state regulatory bodies the "last mile" monopoly controlled by the politically powerful regional Bells.

Malones drive to align AT&T with emerging CLECs like ICG and other facilities-based telecommunications companies, like fixed wireless carrier Teligent, was a public strategy that was evidenced in Libertys investment portfolio.

Now also in bankruptcy court, Teligent was controlled by Malone and Hicks when it completed a stock swap with ICG valued at $60 million to $80 million just before ICG imploded. Hicks, Vogel and Howard served on the boards of both Teligent and ICG at the time.

More recently, IDT Communications, a calling-card and long-distance company controlled by Chairman Howard Jonas, Malones friend and business partner, made a startling announcement: In April, IDT said it would acquire the ICG and Teligent stock held by Liberty and Hicks Muse in exchange for shares in IDT.

The deal left some stock analysts scratching their heads, wondering why cash-rich IDT would want the stock of two bankrupt telecom carriers with heavy debt. The company has yet to explain its intentions.

Then, late last month, Jonas resigned his new position as chairman of Teligent without comment. The company did not return calls from Interactive Week seeking interviews on those issues.