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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.”
Dirty Secrets
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.”
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.
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 Cadillac of Everything
The Cadillac of Everything
While Bryan brought billions of capital dollars to the company and senior management hammered out vendor financing deals worth hundreds of millions of dollars with suppliers such as Cisco Systems, Lucent Technologies and Nortel Networks, lavish spending, lax controls and signs of theft and kickbacks raised red flags for many inside the company.
But no one, company employees said, seemed interested in putting the brakes on in any way.
Bryans personal expense account alone often topped $45,000 per month. Among the items he charged to ICG: the services of maid Maria Sosa for his apartment, a $5 tip to a handyman named Richie and a $878.62 Bloomingdales shopping trip, according to submitted receipts.
Personal expenses on Bryans company credit card were “routinely paid without question,” Owen said, including charges for his “political activities” and expenses for a private business he owned, she said. Bryan was a prolific fund-raiser for former President Bill Clinton and former Vice President Al Gore, and was former national finance chairman at the Senate Democratic Campaign Committee, for which he raised $54 million in two years.
Owen, who worked for ICG for two years, said she was told “not to audit executive expense accounts,” but she said she did so anyway, lumping them under a general employee travel and expense audit.
It has been widely reported in the months since ICGs collapse that company executives spent money for luxuries like corporate limousines with personal drivers, first-class airline travel and an executive condominium in California. But Owen said executives also were reimbursed for things that had already been paid for by the company directly. In some cases, employees submitted expenses for personal country-club memberships that were not authorized under the individuals employment contracts.
Owen said her audits showed that the company had paid for many things that were not authorized, but no efforts were made to seek reimbursement from employees. These activities were not confined to senior management, she said.
Owens audits also turned up evidence of kickbacks involving employees in both California and Denver, she said, with regard to warehousing and construction contracts.
Owen said she repeatedly brought these and other questionable activities uncovered in her audits to senior managers, including Beans and Herbst, the companys chief financial officer and head of the audit committee of the board of directors.
“They didnt really want to hear about it,” she said.
“I refute any allegations that our financial reporting was inaccurate,” Herbst said in a brief phone interview. “If there was something else going on — and I have no reason to believe there was — then I knew nothing about it. I believe our financial reporting was absolutely accurate.”
Herbst denied that he ever sought to suppress or downplay internal audit reports. “That is categorically not true,” he said. “Beyond that I have no comment.”
But it was Herbst — who served with Bryan on the audit committee and came to ICG from a company owned by Bryans brother — who told Owen to “tone down” her audits, Owen said.
“I thought that Bill Beans was interested in what we had found and was going to do something about it,” she said. “But nothing happened.”
Owen said she had been hopeful that the investment in ICG by Malone and Hicks would result in a “turnaround” of the vast internal problems at ICG. But she said the two never looked at the internal audits or sought information about the problems inside.
Owen took a voluntary layoff in January.
Ominous Edifice
Ominous Edifice
One of ICGs biggest expenditures was for the plush — some say ostentatious — $34 million corporate headquarters Bryan had built in Denvers Tech Center. The building is a lavish edifice of black marble designed by an architect who was a college friend of Bryans. When it was dedicated in 1998, Bryan told The Denver Post:
“The building slants outward and upward, a little bit like our business. We are a relatively small company in a competitive industry, and in order to be successful, we have to be pretty darn aggressive. We wanted a dramatic-looking building that reflected what were all about.”
But to those who lost their jobs and stock options, the building is now an architectural symbol of something else — of things being “askew” within the company.
“The building tilts,” quipped one former employee, “just like ICG was tilted . . . out of kilter, you might say, with good corporate norms.”
Executive turnover kept the company in a kind of constant turmoil, said Cindy Schuster, former director of business development.
“We had trouble in business development figuring out exactly where the company wanted to go,” she said. “One executive might order equipment for a major product line he was promoting, and then leave before the project was initiated. No one knew what to do with the equipment or the project, so they did nothing with it.”
Additionally, Bryans persistent absenteeism — he lived in New York most of the time and visited Denver two or three times per month — left senior vice presidents competing with each other for control, a former communications director at the company said.
“No one knew who was in charge,” he said. “There was a vacuum of leadership. They hired people who had worked for the regional Bells or other telecom companies and had been passed over for top jobs. They seemed to come to ICG with the agenda that they would make money quickly and get out. There was no corporate culture, no loyalty. It exacerbated the problems immensely.”
On the sales side, commissions were paid on sales before they resulted in revenue. Eighty-one sales employees hired between March 1999 and May 2000 were given up-front payments totalling nearly half a million dollars, according to a sales commission audit. All of them had left the company within nine months; several of them never generated any sales.
There was also an absence of inventory controls and an apparent push to spend for the sake of spending.
“We were buying equipment from Cisco Systems and someone told Bill Beans that someone had placed a single purchase order with them for more than $50 million. He wanted ICG to have the biggest purchase order ever, so we put together a single order for $61 million. It was about ego,” said Keith Minard, the companys former director of network deployment, who was discovered to have a falsified résumé and a criminal background.
Minard was fired in February of last year over allegations he misappropriated companyequipment and ran an adult Web site on company equipment, allegations he denied. He spoke to Interactive Week before we discovered evidence of his criminal past. His comments were confirmed by other sources.
Meanwhile, the companys former security investigator, Greg Caldwell, said that Beans and another corporate executive directed him to conduct a forensic audit of company equipment in September. His findings — or lack thereof — confirm details about lax inventory controls cited in documents obtained by Interactive Week.
“We attempted to track all this equipment for the data center in Denver through project numbers, and tried to tie those to purchase orders and bills of lading,” Caldwell said. “When that didnt work, we tried to backtrack it through serial numbers, but the numbers had not been properly recorded. We just couldnt do it. The records just were not there.”
Caldwell said he told company officials that such a situation made it very easy for the company to be abused internally by fraud and employee misconduct. Evidence from his investigation led to several firings.
“In fairness, the accounting department was pretty overwhelmed at the time, preparing for the bankruptcy, so it was difficult to get help from them. But records that should have been there were not there. Serial numbers had not been recorded in many cases,” he said. The forensic audit became an exercise in futility, and was abandoned “basically at my recommendation.”
That spending was wide-open at ICG was clear to management.
“We bought the Cadillac of everything, with all the options, all the trimmings,” said one former supervisor. “There was never any restriction on cash. And toward the end, there was no such thing as a budget. The order of the day was to spend money, and everyone did.”
Internal memoranda prepared after the companys financial collapse and management changes also refer to “exorbitant purchases” by former employees, raising the possibility that individuals with purchasing authority diverted funds from the company.
In one instance they refer to a $100,000 piece of equipment known as an Enterprise 4500 — most likely a Sun Microsystems Enterprise 4500 Server — which “disappeared” during consolidation of equipment in California. Other documents refer to $100,000 worth of laptop computers that were never returned to the company by ex-employees because of faulty inventory controls. It refers to “untold losses” from missing pagers, cell phones and other expensive equipment signed out to employees.
While ICG would not talk about excessive inventory purchases and lost or stolen equipment, a footnote in the companys 1999 10K — filed with the Securities and Exchange Commission at about the time of the Hicks-Malone investment in the company — noted that “$237 million” in “transport and switching equipment” that the company had purchased “had not been placed in service as of Dec. 31, 1998.”
Criminal Records
Criminal Records
Caldwell first came to ICG in February of 2000 on contract, but by April had been hired as its lead security investigator. One of his first assignments as a contractor, he said, was to investigate the allegations against Minard, who joined the company in 1998 through its San Jose subsidiary, Netcom Online Communications, later renamed ICG NetAhead.
Caldwell was laid off at the end of January and now works as security director at a health industry firm in Nevada. He said his inquiries showed that Minard had a felony record. That raised concerns because of his extensive access to the companys data network.
Interactive Weeks check of court records in Houston showed that, in addition to numerous misdemeanor charges, Minard was twice indicted for and convicted of felonies — once in 1992 for the theft of some $20,000 in computer equipment, and again in 1995 for charges of check and credit-card fraud involving the theft of tens of thousands of dollars from a small Houston audio store. He received sentences of five years probation in the 1992 case, and eight years probation in the second case.
Minard, through his attorney, Michael L. Kadish, said the charges in both cases were false, but that he reached plea agreements both times because he didnt have the money to defend himself.
But Jack Wernli, who owned the audio store, said Minard obtained access to his companys records, duplicated credit-card receipts and wrote checks to himself on company accounts, eventually bleeding the company for more than $150,000.
“I could only prove $60,000 of that loss,” Wernli said. “He was ordered to pay restitution for that amount. He paid at $325 a month for a long time, until recently, when I got a single check for the balance — about $20,000.”
In a lengthy interview at a private club in San Jose, Minard characterized his termination from ICG as revolving around disagreements with executives over business practices in its drive to install some 4 million ports on its data network. He said dozens of employees who worked for him left the company when he was fired. “If I was doing anything wrong, that wouldnt have been the case,” he said.
His attorney said the allegations that he misappropriated ICG equipment were false. Like many employees, Kadish said, Minard often worked from home and thus had company equipment there, which he returned on his dismissal.
“It was no secret within ICG that several internal security employees had a personal dislike for Mr. Minard . . . and it appears that they are displaying their personal pique by making knowingly false allegations against him.”
Minard, 34, said he disclosed his criminal history to a human resources officer at ICG subsidiary Netcom when he was hired. He said he was told “not to worry about it.”
He characterized his felony convictions as “something that happened when I was a kid. Ive turned my life around since then.”
Minard is now a vice president at Euclid, a San Jose Internet start-up that competes with software infrastructure service provider Loudcloud. In a press release announcing his appointment in April, Euclid executives touted Minards network experience at ICG, and said he had a bachelor of science degree in engineering from the Massachusetts Institute of Technology, and a masters of business administration from Rice University.
Minard admitted to Interactive Week that he had only attended MIT for part of one undergraduate semester, and Rice University for a few months of graduate school before dropping out. He said his degree came from the University of Houston.
Euclid spokesman Tony Simpson said the company was making inquiries. After Euclid was contacted by Interactive Week, Kadish said hisclient never told Euclid that he graduated from MIT and Rice, and didnt know how it got that information.
Minard was one of several ICG employees whose backgrounds were not checked or whose résumés had discrepancies that were initially overlooked, Caldwell said.
Hiring individuals with criminal history and falsified résumés and allowing them access to network infrastructure raises serious liability issues for companies and their customers, said Eugene Spafford, a Purdue University computer science professor and consulting editor for the book Computer Crime: A Crimefighters Handbook.
“When youre entrusting a significant part of your communications security to individuals within a company, I think you want to know that they are reliable,” he said. “It is possible with sufficient access, especially to an [Internet service providers] traffic, to plant something called sniffers that can capture credit-card numbers and passwords of customers. Its a significant issue.
“You have to have adequate background checks to insure that these kinds of problems are minimized,” he said. “Issues like due diligence come to mind. They are not concepts that should be abused.”
Secret Agencies
Secret Agencies
For several years in a row, Dominic Antonini was named ICGs top salesman in southern California. His boss and friend, Adrian J. Brokken, was a top sales manager, repeatedly honored by the company. They were part of an aggressive sales staff that sold local phone service and high-speed data access lines to customers large and small.
But in the fall of last year, their activities came under closer scrutiny after a security official from Denver, assigned to California, noticed something peculiar — Ferraris, BMWs, expensive custom Corvettes and other fancy cars in company parking lots, being driven by individuals whose salaries wouldnt seem to support them.
His curiosity provoked other inquiries, which ultimately led to an investigation of Antonini, Brokken and at least two other salesmen. Internal company documents obtained by Interactive Week show that Antonini and Brokken, both salaried, full-time sales employees, were operating at least two independent agencies that competed against ICG. The company terminated Antonini, Brokken and another salesperson in December, following an investigation.
Antonini ran a company called Quality Sound Communications. QSC owned a Web site that advertised telecommunications services from ICG and a number of its telecom competitors, including AT&T, MCI, Pacific Bell Telephone, Sprint and others. His Web site had links to Telecombrokers, a company that documents show as linked to Brokken.
QSC incorporation documents list one officer for the company, Irene Antonini — Dominics mother.
Antonini, who now operates an office in Costa Mesa, Calif., that lists its name as Telecombrokers, denied both that he had competed with ICG and that he used inside information to take clients away from the company.
“It [the agency] was just a way to generate leads,” he said. “I never churned accounts. There wasnt anything improper about it. They tried to paint it that way, but that wasnt what it was.”
But he refused to say who else was involved in QSC or to talk about its activities in detail. Documents related to the investigation show that Antonini told investigators the same thing — until they confronted him with records showing that he had earned commissions from ICG for direct sales to an ICG customer, and again for sales to the same customer made through QSC.
Investigators told him the activities could result in criminal charges for mail and wire fraud, or civil action, and that they clearly constituted unethical business practices. According to those records, Antonini offered to help with an investigation, and to resign, if the company would not press criminal charges. But he refused to talk about other employees involved.
When he was terminated, the documents show, he asked for an extra day to retrieve his personal property from his office, because it would not fit into the Ferrari he had driven to work — a car, he told investigators, for which hed “paid cash.”
Records also show that ICG officials claimed they did not know of Antoninis association with QSC when ICG paid commissions to the independent agency for business it generated. But Antonini said “everyone” at ICGs offices in southern California knew about the agency and the Web site, and had no objections to them.
Antonini said that while allegations against him were false, problems within the company had convinced him that he should seek employment elsewhere anyway. He said salesmen were encouraged to sell lines whether or not the company could install them in a timely way, and to continue to sell aggressively even when it was taking the company months to connect customers to its network.
“Our faces were the only faces that the customers ever saw, so when they got frustrated because their service was not installed, or wasnt performing, it was us they called to complain to. I finally just got tired of it and gave up,” he said.
Brokken, who was also terminated, documents show, for using customer information to sell services from competitors, also denied he had done anything wrong. He at first offered to talk to Interactive Week about ICG business practices that he said were “questionable.” But confronted with details about his alleged outside agency activities, he refused to discuss the issues further.
Manuel Lopez, who was an engineer at ICGs southern California offices before taking a job at Time Warner Telecom in San Diego, said many people became aware that “inappropriate activity” was going on with the sales staff in southern California. But he said efforts to do anything about it were discouraged.
As an engineer, he said he was frequently asked to supervise installations where lines were oversold. There were a lot of lines being sold, but never installed, he said.
“ICG was 100 percent driven by line counts,” he said. “Company financing depended on line counts. It reminded me of the Vietnam era, when all the talk was about body counts. Same kind of thing, about as accurate.”
In one case, he said, Brokken made a sale of a large number of T1 [1.5-megabits-per-second] and T3 [45-Mbps] lines to the San Diego Community College District.
“I wanted to cancel the order because it was going to result in more expense than revenue. So [ICGs] response was to take me off the account,” he said. “But that was only temporary. They had to put me back on it, because they needed my expertise.”
Officials at the college canceled some lines because of long delays in installation, Lopez said. The account, a large one for ICG, which remains in service, was eventually reconfigured.
ICG officials never seemed to care how much it cost to provision lines of service, and ofteninstalled lines that were so expensive to put in “they were not going to make money on them for years,” he said.
“It was almost the complete opposite of the atmosphere I see at Time Warner Telecom, where I work now,” Lopez said. “Costs are evaluated, service is evaluated. If it doesnt make economic sense to sell the service, we dont do it. At ICG there was way too much money being invested in customers that were never going to give you a payback.
“If anyone had bothered to ask, they would have learned that it was common knowledge among employees that this company was not going to survive with these kinds of business practices,” Lopez said. “But there was never any mechanism to communicate that to senior management.”
The Black Hole
The Black Hole
Tim Alderman, a microwave engineer who spent 25 months at ICGs office in Oakland, Calif., was laid off late last year. He told Interactive Week he had what some might consider “the perfect job — if all you wanted to do was sit in an office with your feet on your desk.
“Most of the time I was there, I never had assignments. But I made it part of my job to try to keep track of the companys microwave equipment,” he said.
ICG was, at the time, selling off its satellite business, converting almost entirely to its fiber-optic networks and focusing increasingly on data traffic. It had lost interest in that aspect of its business, Alderman contended.
Alderman said the company also “lost an entire field of microwave dishes” that were removed from leased property without company authorization. “Maybe it didnt amount to that much money, but the principle was the same,” he said. “It was only $30,000 to $35,000 worth of equipment. But they werent even interested in hearing about it.” Former ICG investigator Caldwell confirmed that security personnel in Denver were aware of the alleged theft.
Alderman said he also witnessed security problems at a storage warehouse in Denver, where, he said, missing equipment was endemic.
“Equipment was checked out by people who were not authorized to take it, and it never got to its destination.” But he said it did little good to complain.
Joe Cedillos, once a senior planner at ICGs Oakland office, said he did not want to go into detail about his experience there.
“Its in the past; Ive moved on,” said Cedillos, now operations director at Time Warner Telecom in Walnut Creek, Calif. “But I can tell you this: Time Warner doesnt do business like ICG did. We only hire honest, ethical people here.”
Cedillos — whom fellow employees and security officials described as having tried repeatedly to expose corrupt practices at ICG — said he couldnt explain why company officials were not interested.
“All I can say is sometimes there are people in corporate America who are more interested in benefiting from criminal activity than cleaning it up,” he said.
Alderman told Interactive Week that his inquiries about inventory problems with regard to satellite-related equipment produced instructions from Denver to conduct audits, which in turn showed that there was unaccounted-for equipment.
“But the reports would go in, and we would never hear another thing about it,” Alderman said. “We started to refer to Denver as the black hole. Things went in; nothing came out.”
Alderman, who has spent more than 25 years in the telecommunications industry, most of it in satellite and microwave communications, said he also argued with company executives over violation of Federal Communications Commission regulations.
“I brought it up to two executives in charge of regulatory affairs, on several occasions. But they didnt seem interested.” Alderman said that seven of 30 microwave “hops” — transmission paths — operated by ICG in northern California were being run, in whole or in part, without licenses from the FCC. Alderman, who was hired as a expert in microwave transmission licensing, said the company had been earning about $20,000 a month from what he called “bootlegging” of each of those hops.
“This had been going on since at least 1994,” Alderman said. “It is a serious matter to operate unlawfully on the public airwaves. Fines and imprisonment can be imposed in some cases.”
Sorting Through Lawsuits
Sorting Through Lawsuits
in october, a month after icgs stock fell to 11 cents per share from the $39 it traded at late in the previous spring, a series of shareholder lawsuits were filed in U.S. District Court in Denver. Each read much like the other, alleging misrepresentation of the companys financials and securities fraud.
The suits named ICG, Bryan and Kane as defendants. One named former President and COO Beans, who succeeded Kane. The case against ICG itself has been stayed by the federal bankruptcy proceedings. But actions against Bryan, Kane and Beans are not affected by the bankruptcy.
Kane filed a motion to dismiss the lawsuits brought against him, saying there was no evidence that he did anything wrong. Bryan and Beans have not yet responded to the allegations in the suits.
Attorneys for plaintiffs, who would speak only on background, said they have attempted to investigate corporate activities, but havent yet had an opportunity to do formal discovery because a lead plaintiff has not been determined.
Several law firms that represent clients with multimillion-dollar losses are vying for status as lead plaintiff in the case, including those representing the Chicago police pension fund and the Retirement System of Alabama, which represents the state teachers fund.
The RSA rarely participates in this type of complaint, said William Kelly Jr., the pension funds chief corporate counsel, “and we would not have filed the action unless we had reason to believe that serious wrongdoing had occurred here.”
Nell Minow, known in the securities industry as an expert on the responsibilities of publicly held companies, said the issues that surfaced in inquiries about ICG are serious.
“Public companies must have an aggressive policy that encourages employees to come forward if they have evidence or suspicions of wrongdoing,” she said. “To take the opposite tack is dangerous. It can spell a fat, juicy lawsuit.”
She said the audit committee of the board of directors of any company also has a fiduciary responsibility to stockholders to ensure that company assets are well-protected, and that company policies are in place to protect investors.
The problem at ICG, says former engineer Alderman, is that “there were two kinds of people — those who wanted to do right and those who wanted to do wrong. I think the guys who wanted to do wrong won out.”
Manuel Lopez, who was an engineer at ICGs southern California offices before taking a job at Time Warner Telecom in San Diego, said many people became aware that “inappropriate activity” was going on with the sales staff in southern California. But he said efforts to do anything about it were discouraged.
As an engineer, he said he was frequently asked to supervise installations where lines were oversold. There were a lot of lines being sold, but never installed, he said.
“ICG was 100 percent driven by line counts,” he said. “Company financing depended on line counts. It reminded me of the Vietnam era, when all the talk was about body counts. Same kind of thing, about as accurate.”
In one case, he said, Brokken made a sale of a large number of T1 [1.5-megabits-per-second] and T3 [45-Mbps] lines to the San Diego Community College District.
“I wanted to cancel the order because it was going to result in more expense than revenue. So [ICGs] response was to take me off the account,” he said. “But that was only temporary. They had to put me back on it, because they needed my expertise.”
Officials at the college canceled some lines because of long delays in installation, Lopez said. The account, a large one for ICG, which remains in service, was eventually reconfigured.
ICG officials never seemed to care how much it cost to provision lines of service, and ofteninstalled lines that were so expensive to put in “they were not going to make money on them for years,” he said.
“It was almost the complete opposite of the atmosphere I see at Time Warner Telecom, where I work now,” Lopez said. “Costs are evaluated, service is evaluated. If it doesnt make economic sense to sell the service, we dont do it. At ICG there was way too much money being invested in customers that were never going to give you a payback.
“If anyone had bothered to ask, they would have learned that it was common knowledge among employees that this company was not going to survive with these kinds of business practices,” Lopez said. “But there was never any mechanism to communicate that to senior management.”