The Inside Story of ICGs Collapse

Until its sudden and mysterious collapse into bankruptcy last fall, ICG Communications seemed to have it all.

Until its sudden and mysterious collapse into bankruptcy last fall, ICG Communications seemed to have it all. Big money, backers with political clout and a flashy, globe-trotting CEO — J. Shelby Bryan — who, with the help of well-placed friends, convinced sophisticated financiers and thousands of investors that the keys to a telecom empire were jangling in his pocket.

Investors poured money by the billions into ICG, starting in 1996. Bryans former employer, Morgan Stanley Dean Witter, brokered his IPO of junk bonds. With the firms guidance, and some of its money, he would bring nearly $2 billion in capital into the company over the next four years. In the months just prior to ICGs fall, telecom billionaire John Malone and Texas investment guru Thomas Hicks would invest and help raise almost $1 billion more.

Seizing the opportunity opened up by federal telecom deregulation in 1996, Bryan and ICGs directors had a voracious appetite for acquisition. Using the Denver companys gold-rush bankroll, they transformed it from a satellite communications firm that linked cruise liners and Navy ships to shore into the biggest competitive local exchange carrier in the country.

But ICG was not what it appeared to be.

There were deep, systemic problems within, problems unknown to average and institutional investors like the pension funds of the Chicago police and Alabama teachers, which together lost $12 million on the companys stocks and bonds. Less clear is whether those problems were also unknown to the companys more sophisticated financial backers, like Hicks and Malone.

An investigation by Interactive Week into the deeper recesses of ICG has turned up reports that the company was rife with abuse, fraud and theft long before it staggered into bankruptcy court last November.

Sales agents falsified order documents. Employees and executives padded expense accounts and charged the company for presidential campaign fund-raising activities and a wide range of personal luxuries. Equipment was stolen. Millions of dollars in improper commissions and kickbacks were paid. The former security officials and auditors who revealed these practices said they existed at all levels of ICG.

"The books were cooked," said Karen Owen, former director of audit ser-vices at ICG. "There isnt any other way to describe it. Every major management system in the company was broken. They couldnt determine accurate numbers for revenue or expenses. So they lied to Wall Street."

A string of shareholder lawsuits alleging securities fraud have been filed against the company and its former officers, and Securities and Exchange Commission officials have interviewed at least one company official about the events that led to ICGs fall.

No criminal charges have been filed against any current or former ICG employees or executives with regard to these allegations, but internal documents obtained by Interactive Week and dozens of interviews with former executives, supervisors, engineers, sales officials, security personnel and auditors paint a picture of a company out of control, recklessly managed and crippled by internal abuse.

Current and former ICG executives and key investors declined repeated requests for interviews about the allegations. But late last week, after a discussion with Larry Stuart — the lead attorney for Hicks — his investment firm, Hicks, Muse, Tate & Furst, issued a statement that said it, "along with all other ICG shareholders, was apparently the victim of a massive fraud."