Charter 2004 Annual Report Download - page 146

CHARTER COMMUNICATIONS, INC. AND SUBSIDIARIES 2004 FORM 10-K
Notes to Consolidated Financial Statements (continued)
the consolidated derivative actions now pending in Missouri the investigation. In the Settlement Agreement and Cease and
State Court, which are related to the Federal Derivative Action. Desist Order, Charter agreed to entry of an administrative order
In addition to the Federal Class Actions, the State prohibiting any future violation of United States securities laws
Derivative Action (s), the new Missouri State Court derivative and requiring certain other remedial internal practices and
action and the Federal Derivative Action, six putative class public disclosures. Charter neither admitted nor denied any
action lawsuits have been filed against Charter and certain of its wrongdoing, and the SEC assessed no fine against Charter.
then current directors and officers in the Court of Chancery of Charter is generally required to indemnify each of the
the State of Delaware (the ‘‘Delaware Class Actions’’). The named individual defendants in connection with the matters
lawsuits were filed after the filing of a 13D amendment by described above pursuant to the terms of its bylaws and (where
Mr. Allen indicating that he was exploring a number of possible applicable) such individual defendants’ employment agreements.
alternatives with respect to restructuring or expanding his In accordance with these documents, in connection with the
ownership interest in Charter. Charter believes the plaintiffs pending grand jury investigation, the now settled SEC investiga-
speculated that Mr. Allen might have been contemplating an tion and the above described lawsuits, some of Charter’s current
unfair bid for shares of Charter or some other sort of going and former directors and current and former officers have been
private transaction on unfair terms and generally alleged that the advanced certain costs and expenses incurred in connection with
defendants breached their fiduciary duties by participating in or their defense. On February 22, 2005, Charter filed suit against
acquiescing to such a transaction. The lawsuits, which are four of its former officers who were indicted in the course of the
substantively identical, were brought on behalf of Charter’s grand jury investigation. These suits seek to recover the legal
securities holders as of July 29, 2002, and sought unspecified fees and other related expenses advanced to these individuals by
damages and possible injunctive relief. However, no such Charter for the grand jury investigation, SEC investigation and
transaction by Mr. Allen has been presented. On April 30, 2004, class action and related lawsuits.
orders of dismissal without prejudice were entered in each of In October 2001, two customers, Nikki Nicholls and
the Delaware Class Actions. Geraldine M. Barber, filed a class action suit against Charter
In August 2002, Charter became aware of a grand jury Holdco in South Carolina Court of Common Pleas (the ‘‘South
investigation being conducted by the U.S. Attorney’s Office for Carolina Class Action’’), purportedly on behalf of a class of
the Eastern District of Missouri into certain of its accounting Charter Holdco’s customers, alleging that Charter Holdco
and reporting practices, focusing on how Charter reported improperly charged them a wire maintenance fee without
customer numbers and its reporting of amounts received from request or permission. They also claimed that Charter Holdco
digital set-top terminal suppliers for advertising. The improperly required them to rent analog and/or digital set-top
U.S. Attorney’s Office has publicly stated that Charter is not a terminals even though their television sets were ‘‘cable ready.’’ A
target of the investigation. Charter was also advised by the substantively identical case was filed in the Superior Court of
U.S. Attorney’s Office that no current officer or member of its Athens — Clarke County, Georgia by Emma S. Tobar on
board of directors is a target of the investigation. On July 24, March 26, 2002 (the ‘‘Georgia Class Action’’), alleging a
2003, a federal grand jury charged four former officers of nationwide class for these claims. Charter Holdco removed the
Charter with conspiracy and mail and wire fraud, alleging South Carolina Class Action to the United States District Court
improper accounting and reporting practices focusing on reve- for the District of South Carolina in November 2001, and
nue from digital set-top terminal suppliers and inflated customer moved to dismiss the suit in December 2001. The federal judge
account numbers. Trial was set for February 7, 2005. Subse- remanded the case to the South Carolina Court of Common
quently, each of the indicted former officers pled guilty to single Pleas in August 2002 without ruling on the motion to dismiss.
conspiracy counts related to the original mail and wire fraud The plaintiffs subsequently moved for a default judgment,
charges and are awaiting sentencing. The Company is fully arguing that upon return to state court, Charter Holdco should
cooperating with the investigation. have, but did not file a new motion to dismiss. The state court
On November 4, 2002, Charter received an informal, non- judge granted the plaintiff’s motion over Charter Holdco’s
public inquiry from the staff of the Securities and Exchange objection in September 2002. Charter Holdco immediately
Commission (‘‘SEC’’). The SEC issued a formal order of appealed that decision to the South Carolina Court of Appeals
investigation dated January 23, 2003, and subsequently served and the South Carolina Supreme Court, but those courts ruled
document and testimony subpoenas on Charter and a number that until a final judgment was entered against Charter Holdco,
of its former employees. The investigation and subpoenas they lacked jurisdiction to hear the appeal.
generally concerned Charter’s prior reports with respect to its In January 2003, the Court of Common Pleas granted the
determination of the number of customers, and various of its plaintiffs’ motion for class certification. In October and Novem-
accounting policies and practices including its capitalization of ber 2003, Charter Holdco filed motions (a) asking that court to
certain expenses and dealings with certain vendors, including set aside the default judgment, and (b) seeking dismissal of
programmers and digital set-top terminal suppliers. On July 27, plaintiffs’ suit for failure to state a claim. In January 2004, the
2004, the SEC and Charter reached a final agreement to settle Court of Common Pleas granted in part and denied in part
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