group response by six LFAs. On that date, the County's special counsel,
Mr. Marticorena, met with Charter on behalf of the County and five other
franchising authorities in California represented by him. No other County
representative was present. Charter was represented by Ms. Foushee.
31. It must be emphasized that this meeting and subsequent negotiations
until December 1998 proceeded on a "group LFA" basis, i.e., Mr. Marticorena
acted for six California local franchising authorities with respect to the
parallel change-of-control requests pending before each on the acquisition.
At no time before December 1998 were there any specific communications
limited to Santa Cruz County (except, of course, the initial Form 394
filing). Neither party ever objected to proceeding in this manner. Both
sides evidently felt it was more efficient to proceed on a "group LFA"
basis. For this reason, plaintiffs' argument that the County should have,
on its own, pored over the earlier Charter/Sonic transaction filings in
order to find answers to its CCI/Allen questions is simply unfair. Mr.
Marticorena was acting for a group of LFAs. The entire group did not have
the Charter/Sonic information. Prior to December, Charter never made
reference to any Sonic filings as having the information requested.
32. During the August 26 meeting, Ms. Foushee explained the CCI/Allen
transaction. She asserted that the CCI/Allen transaction would not affect
rates. She further explained that, unlike many other transactions, because
the transaction was required to close by year-end 1998, Charter and CCI
could not agree to extensions of the time for the franchising authorities
to complete their review of the consent requests. She stated that the Form
394 was complete and provided more than sufficient information.
33. During the meeting, Mr. Marticorena requested that Charter and Mr.
Allen agree to pre-fund (i.e., pay in advance) the costs of a "due
diligence study" to be performed by a consultant hired by him to address
the financial feasibility of the proposed transaction and the impact of the
transaction on future rates. The consultant was William Morgan of Diehl,
Evans & Co., LLP. He had performed at least one prior due diligence study
for Mr. Marticorena.
34. At no time did Charter ever affirmatively agree, either at the
meeting or thereafter, to provide or to fund such a report, or that it
would be necessary, reasonable or lawful to require Charter to perform or
fund such a report as a condition for its consent. Ms. Foushee, however,
said she would "consider" the request. In follow-up conversations, Ms.
Foushee equivocated. Although she told Mr. Marticorena that such a study
was unnecessary, she also said that if one was going to be done, it
should be done by someone other than Mr. Morgan, who she said was biased
in favor of Mr. Marticorena. Asked to submit the resume of an alternate
candidate, she said she would but never did.
35. Prior to Mr. Marticorena's request, neither Charter nor CCI had
ever been asked to pay for a consultant to review its books and business
plan to see if a transaction was economically viable, or even to
participate in or cooperate with such a study. Such a request was
inconsistent with the practice and custom in the cable industry for
transfers or changes of control.
36. Under the terms of its franchise, Charter was (and remains)
required to pay a five-percent franchise fee to the County, the maximum
fee permitted by federal law (TX 3 at 1798). The County could have used the
franchise fee paid by Charter to fund a due diligence study if it had
chosen to do so.
37. These findings will return to the story of the proposed due
diligence study but, to maintain events in approximate chronological
order, we must now turn to the so-called first information request.
The First Information Request (September 1)
38. On September 1, Mr. Marticorena mailed Ms. Foushee a massive
information request, sometimes referred to herein and by all parties as
the "first information request" (TX 8).
39. The letter was nine pages long, single spaced. It requested
seventy items, including subparts. The specifics show that Mr. Marticorena
spent little or no time actually reviewing the Form 394 submissions before
sending the letter (TX 6) or trying to determine the applicability of the
questions to the actual deal. Instead, he printed out admittedly
boiler-plate information demands. For instance:
(a) The first fifteen standardized questions (TX
8 at ~~ 2-5) related to the impact of the
transaction on future cable rates and whether
plaintiffs would seek to use the acquisition costs
to justify future rate increases. Even the County
concedes these were form inquiries with little or no
application to the problem at hand.
(b) Many of the other questions referred to
"lenders" and "credit facilities" despite the fact
that the Form 394 submissions and Ms. Foushee's
August 26 meeting with the County's special counsel
made clear that no such loan agreements were to be
40. Beyond this, the request was broad and burdensome, asking, for
example, for "any and all agreements . . . or any other document which
exists in the hands of Charter, Paul Allen, or any related entity, or
both, regarding the System or Transfer" (TX 8 at 6), i.e., asking for every
sliver of data on the deal. The letter stated that the LFAs were "concerned
whether the Transfer, considering its totality of its economic impacts,
will preclude or impede Charter from realizing a reasonable return . . ."
(TX 8 at 1).
Charter's Supplemental Information
41. On September 17, 1998, Charter responded with a two-inch thick,
written response with back-up documents (TX 10). These materials included
financial statements, ten-year projected income statements, information
on the cable systems in which Mr. Allen then owned a controlling
interest, an explanation of Mr. Allen's anticipated role in the company,
and information on the calculation of the acquisition price (TX 10).
These materials included, among other things, (a) further assurance that
no new debt would be incurred by the Charter corporate entities in order
to finance the transaction, (b) information that Charter's debt would, in
fact, be reduced by approximately $38 million, and (c) a reassurance that
the purchase price would not and could not, under federal rate
regulations, be used to justify a later increase in regulated rates.
Regarding the latter, the submission stated:
Finally, as noted above, as Charter understands
the applicable FCC rules, the recording of
acquisition-related intangible assets for accounting
purposes in connection with the pending acquisition
will not have any impact whatsoever on the Form 1220
maximum permitted rate for the franchises at issue
here, for the simple reason that the pending
acquisition is taking place after May 1994. (TX 10 at
42. During the trial, plaintiffs further contended that the County
should not have been concerned over rate increases because of the rate
order (from the Sonic deal). During the communications at issue,
however, plaintiffs never so asserted. The reason seems clear. As
stated, the parties proceeded to deal with one another on a "group LFA"
basis. It would have been pointless to refer the other LFAs to
information solely in the files of Santa Cruz County.