American Wireless Tries to Get Past Negative Publicity : Communications: Controversy has plagued the Irvine company, whose financing approach of selling general partnership interests to the public has raised concerns among regulators.
A few months ago, the obstacles that stood between American Wireless Systems Inc. and thousands of potential pay-TV customers were hills and trees, which sometimes block microwave radio broadcasts to home antennas.
Now, the company’s hurdles include probes by federal investigators and state securities regulators, and a national controversy about con artists operating in the wireless cable industry.
“Our attorney said it’s like a bad cold,” Jeffrey Howes, president and chief financial officer of American Wireless, said of the scrutiny. “It’s not going to kill you but you just have to let it run its duration.”
In its endeavor to acquire funding for this cable-TV alternative, American Wireless has run afoul of securities regulators in four states. The controversy is making the company’s fund-raising efforts less than convenient.
But rather than retreating, American Wireless has faced the problems head-on.
Since April, when regulators began a campaign against industry fraud, the company has found itself explaining its marketing practices, reassuring its investors and defending the personal backgrounds of the company’s founders.
The company has not been sued by any of its partners and regulators have not accused it or its founder of fraud or misrepresentation, according to Howes.
He said American Wireless raised more money through its six different general partnerships in June than in any previous month. Partners in Fort Worth voted to go along with a plan to raise an additional $3.5 million to launch and develop a wireless cable system in that market. To date, the company has raised a total of more than $23 million from 1,500 investors.
Still, negative publicity and regulatory crackdowns have had an effect. American Wireless decided to settle a dispute with regulators in Hawaii and stop soliciting funds there as a result, Howes said.
Several months ago, one skittish partner asked to withdraw a $75,000 investment, and the company agreed. This was consistent with a company policy that requires investors to understand potential investment risks: financing for a full system is not guaranteed, licenses must be obtained, and it could take years for a payoff if subscription rates are low, Howes said.
“That’s a painful check to write,” said Mark Wapnick, an attorney who represents American Wireless. “But the company believes in its compliance program so strongly that there is no question and they cut the check.”
The Irvine-based company has ambitions to build so-called wireless cable-TV systems in six cities. Such systems, using microwave radio technology, could bring as many as 33 pay-TV channels to homes without wires, to compete with cable-TV operators.
Separate from television signals, microwave radio waves are part of the airwave spectrum that only recently has been authorized for TV broadcasts.
Wireless systems, bringing competition to cable-TV monopolies and their rates, are operating in scores of cities. Cross Country Wireless Cable, based in New Jersey, has signed up 30,000 subscribers during the past year in the Riverside-San Bernardino market.
American Wireless launched its first test system in Fort Worth in June, said Richard Wilson, an investor and member of the management committee in Fort Worth.
Sandy Pierce, a Fort Worth resident and one of the system’s first customers, called the service “great.” Living in an area skirted by a lake, Pierce had been told for years that it would be too expensive to string cable to her house.
“We’ve never been able to get it until now,” she said.
The company is charging $16.95 a month for 23 basic pay-TV channels and plans to add more later. Howes is aiming for 1,500 subscribers by the end of September.
But American Wireless and its sister company, Applied Cable Technologies Inc., have raised concerns among regulators because they sell general partnership interests to the public for $6,250 a share. The sister company, while still intact, is a dormant holding company that owns licenses to build wireless systems.
Howes defends his firm’s financing approach.
In contrast to limited partnerships, true general partnerships require that each partner shares legal liability and has management rights. Such partnerships need not be registered as securities, as long as investors exert management control.
The registration process is expensive, takes up to six months for approval in some states and requires full disclosure of potential business risks, said Joseph C. Long, a law professor at the University of Oklahoma in Norman.
A company that operates as a general partnership, where each partner has a say in the management of the business, can avoid registration. Regulators question, however, whether American Wireless’ hundreds of partners have a significant say in day-to-day management.
“How can someone in South Dakota run an operation in Fort Worth?” said Ted Holder, assistant securities commissioner in Arkansas. The state has issued a cease and desist order against American Wireless that prohibits it from raising money there.
Long, who is also special counsel to the North American Securities Administrators Assn., said that most of the wireless cable general partnerships he has reviewed constitute securities.
“Each case has to be looked at separately,” he said. “But the economic reality is that in each of these partnerships the investors rely on the management expertise of somebody else, whether a management committee or something else, and that constitutes an investment contract and must therefore be registered as a security.”
The federal circuit courts stand divided on the issue, with rulings favoring both parties depending on the court and the circumstances, said John Giovannone, an attorney at Sheppard Mullin Richter & Hampton in Newport Beach. Typically, the courts question a general partnership’s true status if the managers of the enterprise are separate from those who supply the capital.
Wapnick, the company attorney, said that the only hearing on the general partnership issue regarding wireless systems was held by regulators in Hawaii. In October, 1991, a hearing officer declared Applied Cable’s partnership system was not a security.
But that hasn’t stopped investigations from proceeding against American Wireless.
Regulators in South Dakota, Michigan, and Arkansas have outstanding cease and desist orders against the company, which prevent it from soliciting investors in those states. California’s Department of Corporations has been investigating the company for a number of months.
“We’re trying to determine if their representations of what they are marketing are accurate,” said Bill McDonald, the California agency’s assistant commissioner. “We want to know if they have licenses for the areas they say they have; if they are as valuable as they say they are.”
American Wireless officials maintain that regulators’ opinions are outmoded. Telephone conference calls and fax machines have enabled the company to make sure that its general partners have absolute management control, they say, including the right to fire American Wireless as the managing entity.
“If the partners don’t like American Wireless, they can blow us out,” Howes said. “They like that fact. They couldn’t do that in a limited partnership.”
In Fort Worth, a management committee of 10 general partners has hired its own attorney and constantly monitors American Wireless’ performance. The company provided transcripts of management committee meetings, in which partners have typically made decisions, such as whether to carry the Playboy Channel in the programming or pay for an office sign.
Hawaii regulators at first balked at American Wireless’ advertising claims that a proposed system in Minneapolis could be worth $239 million five years after it began. American Wireless officials say standard industry formulas led to that valuation.
But Hawaii securities attorneys signed a confidential settlement with American Wireless on the general partnership issue in June. American Wireless voluntarily stopped soliciting investors in that state, partly because of the bad publicity that had been generated, Howes said.
He said the company won’t give in so easily in other states and it is out to prove that general partnerships can work, even if it means being hit with negative publicity via public battles with state regulators.
Aside from the general partnership issue, a separate investigation by the Federal Trade Commission--ostensibly into the company’s sales practices--also hangs over the company, Howes said. FTC officials declined to comment.
“After 10 months of investigation, (FTC investigators) haven’t come up with a single practice that is deceptive,” Howes said. “And they’ve been peppering our investors with questions.”
Howes said the company has cooperated completely, sending the FTC a stack of unsolicited documents more than three feet high. He said the company never cashes checks until a company compliance officer interviews the investor on the phone in a tape-recorded conversation to be sure that the investor understands the risks involved.
The company needs to raise additional funds and obtain more licenses in some markets. The Fort Worth market, for example, requires as much as $11 million to build the system to 66,000 subscribers during the next four years, he said.
The company also plans to raise an additional $3.5 million in its Minneapolis market, where it has already raised $10.9 million. Much of that money has gone toward paying marketing costs, obtaining licenses, and obtaining equipment and office space, Howes said.
There are other headaches. The company has licenses to build a system in Fort Smith, Ark., but two school administrators at one point said that American Wireless’ contracts for the licenses on several channels had expired. (Educational television has initial rights to up to eight wireless channels.) The company then became involved in a dispute with another businessman, Jim Meek, who had also signed a contract with the school districts for the licenses.
But David Wooley, assistant superintendent for the Alma School District near Fort Smith, now says Howes’ company has rights to the licenses. Meek said he hopes the FCC will award the licenses to him.
Wapnick, who has copies of contracts that give American Wireless the right to build in Fort Smith, said that the company believes the school boards acted beyond their legal rights when they awarded the contracts for licenses to Meek.
American Wireless officials say the company is a victim of guilt by association.
This spring, the FTC brought attention to the wireless cable industry when it declared that many so-called application mills, which processed applications for Federal Communications Commission wireless cable licenses, were ripping off the public by charging high fees for applications that were rarely successful in FCC license lotteries.
The FTC said $25 million could be lost to fraud during the next year, on top of $50 million already invested.
Orange County was home to a number of the application mills, which used questionable tactics, such as promising investors they could receive astronomical returns of $1 million within a year after a $5,000 investment, said Robert Schmidt, president of the Wireless Cable Assn. in Washington.
After effectively shutting down the application mills by barring new applications, the FCC unintentionally fostered a second generation of scam artists who claimed they had already obtained licenses and needed money to build systems, said Long of the North American Securities Administrators Assn.
“This is fraud du jour ,” Long said. “The wireless cable scam itself is the largest single enforcement problem that states have today.”
Howes said that American Wireless stands apart because it intends to complete its proposed wireless systems, and has already hired more than 125 employees.
He said his company has also set itself apart by hiring top-notch industry people, including Steven G. Johnson, chief operating officer and an industry veteran; Bill Jenkins, chief executive officer, who is a former cable operator and former bank president in Texas; and Todd Parriott, an FCC law expert.
“The company is erroneously lumped into the category of the applications mills,” Wapnick said. “What we have to do is distinguish from those people who are legitimately trying to operate, and those who are scamming people.”
But some wary followers note that company executives have not invested in the partnerships, that their own backgrounds include previous business failures, and their early wireless cable enterprise--Applied Cable Technologies --was marked by controversy.
Howes acknowledges that he had a $275,000 judgment issued against him after a former landlord sued Multivest Financial Services in Irvine, a company he founded several years ago that went under after it failed to obtain seed money.
“I made a mistake,” Howes said. “That does not constitute a string of business failures.”
And Dexter Cohen, a co-founder of American Wireless and its chairman, filed for personal bankruptcy protection in 1990, listing $2 million in debts. A successful used car dealer for decades, Cohen’s dealerships in New England also went bankrupt during the previous recession.
Cohen declined to be interviewed for this story. Howes said the business backgrounds of the founders have also included successful ventures.
Howes and Cohen purchased Applied Cable Technologies in 1990 from Irvine businessman Neil Reifsnyder, who has been involved with several application processing firms, including Costa Mesa-based RTA Inc., which has been ordered to stop doing business in Hawaii.
Marcus K. Dalton, an Alexandria, Va.-based consultant, sued Applied Cable in Los Angeles County Superior Court for allegedly failing to live up to a consulting fee agreement which had been negotiated with Applied Cable.
The company filed a countersuit alleging Dalton owed the company money, and Cohen and other executives of Applied Cable and American Wireless obtained a restraining order against Dalton, also known as K. Marcus Dalton, in March, 1991.
American Wireless officials say it was a mistake to get involved with Dalton. They also say that Applied Cable stopped providing application services in early 1991, when the FCC became inundated with applications and long before the agency decided to shut off the application process.
Dalton said that he has served as a consultant to several application service companies, including Applied Telemedia Engineering & Management of Miami, which have been the subject of regulatory actions.
“I’m glad we are adversaries in a lawsuit because I don’t want anyone to construe that there is any positive relationship between us and him,” Howes said.
Dalton said he has tangled with regulators in the past, but he denied being involved in any schemes to deceive the public. He said his consulting firm, Technosource, has not been the subject of regulatory action.
“I don’t deny controversy, I enjoy it,” Dalton said. “I don’t think American Wireless Systems will get off the ground in Fort Worth. And I think their suit against me is totally without merit.”
Those early troubles and the current controversy have made some cautious of American Wireless. Schmidt of the Wireless Cable Assn. in Washington, asked American Wireless to resign from the association last month.
“I felt we had a perception problem,” Schmidt said. “We are not accusing them of any wrongdoing.”
The company complied. Howes said the company is working to put any past problems behind it.
He said that the company hopes to have 500,000 subscribers in the six markets by 1997, based on estimates that wireless operators often take about 20% of a cable-TV operator’s customers over time.
Russell Ritchie, an industry consultant in Mesa, Ariz., who has served as an expert witness for the FTC on wireless issues, said the company’s plans in Fort Worth and Pittsburgh, Pa., appear achievable, in contrast to many of the systems proposed by application mills.
Since it needs more money and is barely breaking even, American Wireless’ strategy is to try to raise still more funds while it reassures existing investors.
Despite the bad press, investors haven’t been asking for their money back in large numbers, Howes said. In contrast, he said, some investors complain that they have been badgered by FTC investigators using unfair tactics.
“I think there is a unique opportunity here and they have presented everything openly,” said Brad Boyd, a Washington resident who invested $30,000 in several American Wireless partnerships and is a member of the company’s management committee for Pittsburgh. “I look at this as a 3- to 5-year opportunity with no guarantees.”
Unlike the investor who withdrew $75,000, other investors view the company’s current problems as minor glitches. Marvin Hailey, a math teacher in St. Louis who invested $12,500 in American Wireless, said he isn’t bothered by rumors.
“There is a bad light on the industry,” Hailey said. “I’ve checked into it and I feel I’m aware of the risks. They have been up front with me.”
At a Glance: American Wireless Systems Inc.
* Corporate headquarters: Irvine.
* Corporate officers: Jeffrey Howes, president and chief financial officer; Bill Jenkins, chief executive officer; Dexter Cohen, chairman; Kevin King, vice president of sales.
* Sister company: Applied Cable Technologies Inc.
* Nature of business: Builds wireless cable-TV stations.
* Method: Raises funds to build stations by establishing general partnerships in which investors typically contribute $6,250 per share for a partnership stake. (Minimum two-share purchase in some markets.)
* Markets: Fort Worth; Fort Smith and Fayetteville, Ark.; Pittsburgh, Pa.; St. Paul-Minneapolis, Minn.; Sioux City, Iowa.
Some state regulators say American Wireless is selling unregistered securities by marketing general partnerships to the public. The company contends that its general partners can control management of the business, a true general partnership, so they need not be registered.
The Federal Trade Commission has been looking into the sales program of American Wireless since October, 1991.
* Hawaii: Issued a cease and desist order against Applied Cable Technologies Inc., a predecessor of American Wireless, in 1990. The order was overturned after a hearing in March, 1991. The state also issued a cease and desist order against American Wireless Systems in April, which prohibited partnership sales. The order was rescinded after a confidential settlement was reached in June.
* Arkansas: Cease and desist order against sales issued. No hearing scheduled.
* South Dakota: Cease and desist order issued. Hearing postponed.
* Michigan: Cease and desist order issued. No hearing scheduled.
* California: Investigation pending by the California Department of Corporations.
Source: American Wireless Systems Inc., state regulators