Charter Communications shareholder Herb Lair is suing Microsoft co-founder Paul Allen for securities fraud. Here, he explains why.
Paul Allen, who started Microsoft with Bill Gates, left Microsoft a few years ago and began making a lot of investments. One of those was Charter Communications.
Many thought he paid too much for [local cable] systems that he bought around 1999 and thereafter. However, the [local cable] systems he bought were around $4,000 a subscriber. That amount was comparable to what Cox paid for the TCA systems in Arkansas, including Harrison and Rogers. Also comparable to what Comcast, Time Warner, and Mediacom paid. They all have made their purchases successful.
Paul Allen made several mistakes in the management of the [local cable] systems and started growing debt at a high rate. Mistakes included his choice of managers, capital expenditures (cap-ex), marketing, and debt management. He attempted to run the business as an absentee owner.
When [local cable] systems were first purchased, the average revenue per user was $33, now it runs around $108, more than three times the revenue 10 years ago. Internet and telephone services along with additional channels should have made the systems much more valuable. However recent value in bankruptcy, caused by debt, is approximately $2,000 per subscriber. How can revenue go up over 3 times and value go down 50%?
Although Allen took the company public in 1999, he has operated the company as though it was private. The company IPO’ d in mid $20’s and eventually went to single digits. Another example of another company that operated similarly was Adelphia and Regas family, now in prison.
The problems I have, along with other advisors and stockholders, surfaced in 2006, when an analyst for UBS, Aryeh Bourkoff, started giving glowing reports on how the $2.50 stock could reach $10 in a short period of time. The stock made a steep run to around $4.50 in mid 2007. The problem was the analyst was working on becoming an investment banker. The Paul Allen account would give him a position with UBS where he could earn in the millions with bonuses. In May 2007, he was promoted to the position of Vice Chairman Media Investment Banking at UBS, note timing. Shortly afterwards without Bourkoff as an analyst the stock began to plummet, although his replacement, George Lamberton, still had a “buy” on Charter until mid January 2009, he had a low media profile unlike Bourkoff. When Charter decided to declare bankruptcy, Bourkoff helped negotiate the deal for the creditors and as a result canceled out the stockholders. His greed caused him to go from stockholder’s best’s friend to their worst enemy.
An example would be like the top rated real estate agent selling property for a very wealthy person and then leaking the rumour in collusion with the rich person that there was going to be a major commercial development that would make the property 4 times the selling price. Afterwards the real estate agent goes to work for the wealthy person, getting paid many times what his real estate job paid, and the person who bought the property then finds out that it is not worth 4 times what he had paid, but in actuality it is worthless. In both situations you are dealing with a stacked deck. Everyone who invests, realises there are winners and losers, they just don’t want to hear they had no chance.
The other catch 22 is that they have stated in several financial conferences they had more than enough money to weather the financial crisis until fall 2010. Only to take a voluntary bankruptcy. They either didn’t and stated they did, or they did and wanted to take advantage of the timing (AIG,GM, etc smokescreen) and take bankruptcy at a time when they can get rid of debt and stockholders and still retain ownership (similar to another bankruptcy Allen took on a sports coliseum — way of business). They have a poison pill and NOL tax credit ($1 Billion from Obama) and they are protected with severe penalties and bonuses. There have been many opportunities to sell systems in high dollar markets (LA, Dallas,etc.) but refused, stating they were buyers. Making it sound as though they had more than enough resources to handle any crisis.
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