Probe of Charter’s Accounts Widens

Widening their probe into accounting practices at cable giant Charter Communications Inc., federal investigators have begun questioning program suppliers in recent weeks about the way Charter counts subscribers, according to executives who have received the inquiries.

FBI agents contacted many of the nation’s largest cable channels late last month to inquire about how Charter counts customers who do not pay their cable bills, as compared with general industry practices.

These nonpaying customers are at the heart of a federal grand jury investigation into whether Charter uses them to inflate the subscription figures that Wall Street investors rely on to value the company. In addition, Charter has been hit with several shareholder lawsuits alleging that the company used creative bookkeeping to inflate the figures.

A Charter spokesman would not comment on the FBI inquiries or on the company’s subscription accounting practices. Charter is the nation’s No. 3 cable provider, with about 6.7 million cable customers nationwide, including about 500,000 subscribers in Southern California.

The St. Louis-based cable company, controlled by billionaire Paul Allen, co-founder of Microsoft Corp., has lost about 90% of its stock value this year, and its shares closed Monday at $1.52 on Nasdaq. That’s because of investor concerns about the federal probe as well as the company’s $18-billion debt load.

In the wake of the investigation, Charter placed its chief operating officer, David Barford, on paid leave in October. Carl Vogel, who took over as chief executive late last year, is expected to undertake a broad housecleaning of the management ranks in hopes of restoring investor confidence.

The federal investigation, disclosed in August, has until recently concentrated on questioning current and former Charter employees. One entire floor of Charter’s parking structure has been converted to a copying center to replicate internal documents for federal investigators. Charter also has cooperated with the probe by turning over computer files from its regional offices, sources say.

The latest FBI inquiries come as program suppliers have been raising their own questions about Charter’s subscriber counts. These numbers are used by channels such as ESPN and Fox News to bill cable operators such as Charter for their programming.

In a letter to its programming suppliers dated December 2001, Charter said it had overstated the number of its paying subscribers for the entire year because it had included nonpaying customers.

The company blamed the error on its spree of acquisitions and the challenge of introducing a software system to track its expanded customer base. As a result, the letter indicated, Charter had overpaid the programmers for their services in 2001. Attached was Charter’s assessment of how much money it planned to recoup from these channels through deductions from their future license fees.

When Charter began implementing those deductions in April, many programmers objected, saying Charter failed to provide any subscriber documentation. Some demanded to audit Charter’s books but were told the information was not readily available, sources say.

By September, according to the sources, Charter had dropped many of its demands for reimbursement in the midst of the controversy.

One high-level Charter official said the situation has been resolved with most programmers, although many say the yearlong dispute has caused lingering ill will. Some large channels also believe they still are owed money.

In an attempt to clean up Charter’s customer accounting, Vogel, the new CEO, this year began purging the company’s books of nonpaying customers, at least some of whom continued getting cable service. The largest number came in the first quarter, when Charter removed 149,000 nonpaying subscribers. An additional 42,000 were removed in the second quarter, and 86,000 in the third quarter. In all, about 277,000 deadbeats were cut, representing about 4% of Charter’s total subscription base.

It is unclear how long the nonpaying subscribers were counted on Charter’s rolls.