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IN TIlE UNITED STATES DISTRICT COURT FOR THE DISTRICT OF COLORADO Civil Action No. SECURITIES AND EXCHANGE COMMlSSION, Plaintiff,
v.
JOHN C. CHARTERS,
Defendant.
COMPLAINT
Plaintiff Securities and Exchange Commission ("Commission"), for its complaint, alleges:
SUMMARY OF THE ACTION
1.
During the second and third quarters of2002, Defendant John C. Charters, a
former executive of Expanets, Inc. ("Expanets"), a former subsidiary of NorthWestern Corporation ("NorthWestern"), and NorthWestern senior executives misled investors about Expanets' financial performance and the nature of Expanets' reported income. 2. First, with the knowledge of Charters and NorthWestern senior executives,
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Expands failed 10 properly adjust its financial statements to account for uncollectible receivables and adjustments to customer bills, causing overstatements of NorthWestem's reported income of 90% and 109% in the second and third quarters of 2002, respectively. 3. Second, while Charters and NorthWestern senior executives publicly
claimed that Expanets had achieved profitability through its operations and cost savings, they failed to properly disclose that Expanets' reported income during 2002 was, in large
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part, derived from the reduction of various rese~e accounts, which helped Expanets reach its earnings targets, and from its receipt of unusual non-compete payments. 4. The conduct of Charters and NorthWestern senior executives helped
facilitate NorthWestern's completion of more than $800 million in securities offerings in September and October 2002, including raising $87.5 million in an equity offering that provided the company with operating capital to improve its liquidity position. 5. Approximately a year after these offerings, and after restating its 2002
quarterly financial results, writing off significant investments in Expanets, and disclosing the true results ofits 2002 operations, NorthWestern declared ~ankruptcy.
II. JURISDICTION AND VENUE
6. The Commission brings this action pursuant to the authority conferred upon
it by Section 20(b) of the Securities Act of 1933 ("Securities Act") [15 U.S.C. § 77t(b)] and Sections 21(d) and (e) of the Securities Exchange Act of 1934 ("Exchange Act") [15 U.S.C. §§ 78u(d) and (e)] for al). oz:de~ penm;nentIy restraining and enjoining Defendant and granting other equitable relief. 7. This Court has jurisdiction over this action pursuant to Section 22(a) of the
Securities Act [IS U.S.C. § 77v(a)] and Sections 21(e) and 27 of the Exchange Act [15 U.S.C. §§ 78u(e) and 78aa]. 8. Venue lies in this Court pursuant to Section 22(a).ofthe Securities Act and
Section 27 of the Exchange Act [15 U.S.C. §§ 77v(a) and 78aa]. 9. In connection with the transactions, acts, practices, and courses of business
described in this Complaint, Charters, directly or indirectly, made use of the means or instrumentalities of interstate commerce, of the mails, of the facilities of a national
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securities exchange, and/or of the ineans and instruments of transportation or communication in interstate commerce. 10. Certain of the transactions, acts, practices and courses ofbusiness constituting the violations of law alleged herein occurred within this judicial district. Moreover, Defendant Charters resides in this judicial district.
III. DEFENDANT
11. John C. Charters, age 45. is a resident of Carbondale, Colorado. Charters was the chief executive officer ("CEO") ofNorthWestern Growth Corporation ("NGC"), the division ofNorthWestern tha~ managed Expanets, from April through August 2002, and CEO ofExpanets from August 2002 through July 2003. From April 2002 through July 2003, Charters was also a member of Expanets' board of directors. Prior to bis position with Expanets, Charters was a member ofNorthWestern's board of directors from February 2000 through April 2002. Through his roles as CEO of both NGC and Expanets, Charters served as the functional head ofExpanets.
IV. RELATED PARTIES
12. NorthWestern Corporation, a Delaware corporation with its· principal executive offices in Sioux Falls, South Dakota, operates a regulated utility business in South Dakota, Nebraska and Montana. During the period described herein, NorthWestern controlled and consolidated the financial results ofExpanets. NorthWestern's common stock was registered with the Commission under Section 12(b) of the Exchange Act and traded on the New York Stock Exchange until it was delisted shortly before NorthWestern declared bankruptcy in September 2003. In November 2004, NorthWestern emerged from bankruptcy. Its common stock is now registered with
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the Commission pursuant to Section l2(b) of the Exchange Act and trades on the NASDAQ Global Select Market. 13. Expanets, Inc., a Delaware corporation formerly headquartered in Englewood, Colorado, provided networked telecommunications equipment and services to medium-sized businesses nationwide. Expanets was comprised of approximately 26 small telecommunications equipment resellers and a former sales division of Lucent Technologies. NorthWestern wrote offsubstantially all ofits investment in Expanets in its 2002 Form
1~-K
and arulOUDced its intent to sell Expanets in April 2003. In the
second quarter of2003, Expanets' operations were discontinued, and in May 2004, Expanets filed for bankruptcy. Proceeds from the sale ofExpanets' assets were distributed in bankruptcy.
v.
SUMMARY OF VIOLATIONS AND RELIEF SOUGHT
14. Defendant Charters violated Section 17(a) of the Securities Act [IS U.S.C. § 77q(a)] and Sections'lO(b) and 13(b)(5) of the Exchange Act [15 U.S.C. §§ 78j(b) and 78m(b)(5)] and Rules IOb-5 and 13b2-1 thereunder [17 C.F.R. §§ 240.l0b-5 and 240.l3b2-IJ, and aided and abetted NorthWestem's violations of Sections 13(a), 13(b)(2)(A), and 13(b)(2)(B) of the Exchange Act [15 U.S.C. §§ 78m(a), 78m(b)(2)(A) and 78m(b)(2)(B)] and Rules 12b-20, 13a-J I and 13a-13 thereunder [17 C.F.R. §§ 240, 12b-20, 240.13a-ll and 240.13a-13], and unless restrained and enjoined will violate or aid and abet violations of such provisions. IS. The Commission also seeks an order requiring Charters to pay a $50,000 civil penalty, pursuant to Section 20(d) of the Securities Act [IS U.S.c. § 77t(d)] and Section 2J(d) of the Exch.ange Act [15 U.S.c. § 78u(d)].
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VI. A.
FACTS
Background - NorthWestern's ExpansIon And The Poor Performance Of Expanets Prior To 2002
16. For more than seventy years, NorthWestern operated a public utility business, providing electricity and natural gas to customers in South Dakota and Nebraska. 11. In the late-1990s, NorthWestern fonned Expanets to diversify into the
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potentially high-growth sector of telecommunications. NorthWestern intended to acquire telecommunications companies and then make the combined businesses more profitable. 18. NorthWestern expected that following an initial growth phase, Expanets would provide substantial additional earnings and cash flow to NorthWestern through dividends on NorthWestern's preferred stock holdings in Expanets. 19. However, despite NorthWestern's investment ofhundreds of millions of dollars in Expanets, it incurred large losses in most years and posted only small profits in other years. By December 31,2001, NorthWestern had invested $314.1 million in Expanets. Despite this sizeable investment, Expanets had not returned significant cash to NorthWestern. 20. Despite the historical poor performance of Expanets and another non-utility subsidiary, in February 2002, NorthWestern quad~pled its customer base for utility operations by acquiring Montana Power Company ("Montana Power") for approximately
$1.1
billion. NorthWestern financed a substantial part oftbis acquisition by issuing $720
million in unregistered notes.
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B.
NorthWestern's Planned Equity Offering and Heightened Pressure to Meet Financial Performance Targets During 2002
21. NorthWestern's markedly increased debt used to acquire Montana Power
threatened the company's historically stable liquidity and top-tier credit ratings. Therefore, in early February 2002, NorthWestern publicly announced its intention to conduct an equity offering, and then use the proceeds to pay down a portion of its elevated debt. 22. During the second and third quarters of2002, Charters and NorthWestern senior executives knew that the historical p'oor performance ofExpanets and NorthWestern's expansion of its utility operations together placed enormous pressure on the company's financial perfonnance during those periods. 23. Charters and NorthWestern senior executives also knew that NorthWestern's ability to meet its public earnings per share guidance for 2002 was dependent in part upon achieving markedly increased profitability at Expanets. 24. During the second and third quarters of2002, Charters knew that Expanets' improved profitability was dependent in part on the functionality of Expanels' "EXPERT" information technology system, which had been implemented in late November 2001 to serve as a platform for virtually all ofExpanets' operations, including sales, inventory, project management, billings, collections and financial statement preparation. 25. However, during the second and third quarters of2002, Charters knew that the EXPERT system was unable to perform many of the basic tasks for which it had been designed. The EXPERT system experienced particularly severe problems in generating timely and accurate customer bills and tracking customer payments.
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26. Throughout the second and third quarte~s of2002. Charters and NorthWestern senior executives received detailed information regarding serious, ongoing problems with the EXPERT system and its impacts across Expanets' operations, particularly as to customer billings and collections. At various times during the second and third quarters 0[2002, Charters and NorthWestern senior executives received weekly EXPERT updates. monthly operations reports and numerous candid emails regarding the system status. During this time, Charters and NorthWestern senior executives also participated in regular meetings regarding ongoing system probl~ms and planned repairs. 27. As alleged below. Charters and NorthWestern senior executives also discussed throughout the second and third quarters of 2002 the impact of EXPERT problems on Expanets' accounts receivable collections and adjustments to customer bills. 28. Prior to the completion of more than $800 million in securities offerings by NorthWestern in September and October 2002, Charters and NorthWestern senior executives told the marketplace that Expanets was operating as expected and was achieving its earnings targets. 29. However. just two months later, in December 2002, NorthWestern disclosed that Expanets would take more than $50 million of charges for uncollectible accounts receivable and adjustments to customer bills. 30. In April 2003, NorthWestern restated its Forms JO-Q for the first three quarters of 2002 and erased Expanets' previously reported income. The company also disclosed significant ongoing problems with the EXPERT system, and the impact of various reserve reductions and unusual non-compete payments on Expanets' 2002 financial results.
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31. Also in April 2003, NorthWestern filed.its 2002 Form ID-K, in which it wrote off substantially all of its past investment of hundreds of millions of dollars in Expanets. In that filing, NorthWestern also announced that, despite past assurances, Expanets would not generate future cash flow in sufficient amounts to help service NorthWestern's debt 32. Over the next five months, NorthWestern's liquidity situation continued to deteriorate until the company declared bankruptcy in September 2003.
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c.
Charters' Role at Expanets
33. In Charters' roles as CEO ofNGC and ofExpanets, Charters oversaw and
managed all ofExpanets' operations. 34. Throughout his tenure managing Expanets, Charters knew that Expanets' financial statements were consolidated into NorthWestern's published fmancial statements. Charters also Imew or was reckless in not knowing that NorthWestern's Forms 1O-Q for the periods ended June 30, 2002 and September 30, 2002, and NorthWestern's earnings releases for those periods attached to Fonns 8-K, included the misstated financial results of Expanets as further alleged herein. Charters' further knew or was reckless in not knowing that NorthWestern's Form 10-Q for the period ended June 30,2002 was incorporated by reference into the amended Forms 8-4 filed with the Commission on August 16,2002 and September 9,2002, as well as the equity offering prospectus supplements that NorthWestern filed with the Commission on September 30, 2002 and October 3, 2002. 35. Charters spoke in NorthWestern's analyst conference call on August 8, 2002.
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36. Charters reviewed and approved portions ofNorthWestern's Form I O-Q for· the period ended September 30, 2002 regarding Expanets' operations and results. Charters was a member ofNorthWestem's intemal1y.created disclosure committee that was designed to ensure compliance with the Sarbanes-Oxley Act and to support the certification of NorthWestem's Form I O-Q for the period ended September 30,2002 by NorthWestern's CEO and chief financial officer. D. Expanets' Material Understatement Of Its Bad Debt Reserve 37. In anticipation that some customer accoun!S might prove uncollectible, Expanets maintained a "bad debt" reserve, which had the effect of reducing Expanets' operating income. 38. In the second quarter of 2002, Charters was informed that Expanets had failed to increase its bad debt reserve to account for the markedly increased difficulties with collections that resulted from the EXPERT implementation. For example, Charters knew or was reckless in not knowing that Expanets had not increased reserves to account. for millions of dollars of aged receivables that pre·dated implementation of the EXPERT system in November 2001. Charters also knew or was reckless in not knowing that after EXPERT implementation, a litany of system problems was greatly hampering collection, causing millions of dollars of receivables to becOIl1e badly aged and therefore likely uncollectible. 39. Charters therefore knew or was reckless in not knowing that Expanets improperly failed to increase its bad debt reserve to account for additional uncollectible· accounts receivables in its financial statements for the second quarter of2002.
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40. Charters knew or was reckless in not knowing that serious problems with Expanets' collections of its accounts receivables continued throughout the third quarter of 2002. For example, in mid-September 2002, approximately two weeks before NorthWestern's equity offering, Charters and other Expanets personnel met with NorthWestern senior executives to discuss Expanets' accounts receivables. At that
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meeti.ng, Charters and NorthWestern senior executives were provided a written report and told by Expanets personnel that $52 million of receivables were over 180 days old, including $21 million of receivables that were over 300 days old. 41. Because these severely aged receivables were not likely to be collected, standard collection parameters suggested either writing offExpanets' receivables or increasing its bad debt reserve by $46 million. Because many ofExpanets' aged receivables resulted from billing lapses and delays, Expanets personnel informed Charters and NorthWestern senior executives that the bad debt reserve was understated by a lesser amount, approximately $32 million. However, Charters and NorthWestern senior executives knew that Expanets had not increased its reserve by any amount. 42. On or about October 22, 2002, soon after the completion ofNbrthWestem's debt and equity offerings, Charters and other Expanets personnel met again with NorthWestern senior executives and informed them that Expanets' accounts receivables balance had shown virtually no improvement since the.mid-Seplember meeting. Based upon this data, Expanets personnel recommended a substantial increase in Expanets' bad debt reserve.
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43. Despite his receipt of these documents, Charters and NorthWestern senior executives knew that Expanets did not increase its reserve as a result of the information· exchanged at this meeting. 44. After NorthWestern's securities offerings, the company's third quarter Form 10-Q disclosed in part that the EXPERT billing problems "may cause a need to increase the current reserve for bad debt, which could negatively impact financial performance in future quarters." (Emphases added) Charters knew or was reckless in not knowing that this disclosure was false and misleading because, by that time, Expanets' bad debt reserve was, in fact, already materially understated. 45. In April 2003, NorthWestern filed its 2002 Form lOoK which included fourth quarter 2002 charges of approximately $20 million relating to Expanets' uncollectible accounts receivable, and simultaneously restated its financial results for the second and third quarters 0[2002, increasing Expanets' bad debt reserve for each of these periods by approximately $5.1 million and $6.3 million, respectively. 46. As a result of its improper accounting for uncollectible accounts receivable, NorthWestern overstated its income from continuing operations by approx!!.l1ately 19% and 39% for the second and third quarters of2002, respectively, as reported in its Forms )O-Q and corresponding earnings releases attached to Forms 8-K. Moreover, in its segment reporting for Expanets, NorthWestern overstated Expanets' oper.ating income by approximately 86% and 270%, respectively, for the second and third quarters of2002.
E.
Expanets' Material Understatement Oflts Reserve For Adjustments to Customer Ems 47. As a result of the inaccurate customer bills generated by the EXPERT
system, Expanets issued partial credits to affected customers. Expanets recorded these
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credits as "billing adjustments," which reduced both its revenue and income in the current period. Since Expanets credited customer accounts in periods after it initially recognized revenue from a transaction, Expanets maintained a "billing adjustment reserve" for anticipated credits to customer accounts. 48. In the second and third quarters of2002, Expanets persOJUlel repeatedly informed Charters and NorthWestern senior executives that due to the serious ongoing problems with EXPERT's billing function, actual and forecasted billing adjustments were continuing to outpace even the elevated levels anticipated for 2002. 49. During this time, Charters and NorthWestern senior executives received, among other things, monthly operations reports and other updates describing billing adjustments and their negative impact on Expanets' financial results. For example, during a July 2002 meeting, Expanets personnel warned Charters and NorthWestern senior executives that Expanets' billing adjustment reserve might be understated by as much as $30 million for 2002. Despite his knowledge of the inadequacy of this reserve, Charters approved a $2.3 million adjustment for the second quarter which further reduced the billing adjustment reserve, for the purpose of enhancing Expanets' reported income. 50. In the third quarter of 2002, Expanets personnel informed Charters and NorthWestern senior executives that actual billing adjustments for the quarter had significantly exceeded their original and revised projections. Despite this knowledge, -Charters again approved a reduction in the billing adjustment reserve for the third quarter, this time for $4 million, for the purpose of enhancing Expanets' reported income. 51. As a result of receiving this information throughout 2002, Charters knew or was reckless in not knowing that Expanets improperly failed to increase its billing
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adjustment reserve in the second and third quarters ()f2002. Charters further knew or was reckless in not knowing that NorthWestern had not dis<;losed in its Form 10-Q for the third quarter of 2002 that losses resulting from billing adjustments were probable or reasonably possible. 52. In April 2003, NorthWestern restated its financial results for the first three quarters of 2002, i,ncreasing the billing adjustment reserve by $33 million. For the second and third quarters of2002, NorthWestern's restated financial results corrected the understatement ofExpanets' billing adjustment reserve by reducing reported quarterly revenue by approximately $10.1 million and $5.4 million, respectively. , 53. As a result ofExpanets' improper accounting for billing adjustments, NorthWestern overstated its income from continuing operations by approximately 46% and 31 % for the second and third quarters of2002, respectively, as reported in its Forms 10-Q and corresponding earnings releases attached to Forms 8-K. In its segment reporting for Expanets, NorthWestern overstated Expanets' operating income by approximately 1094% and 164%, respectively, for the second and third quarters of2002. F. Expanets' Reserve Reductions
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54. During the second and third quarters of2002, Expanets reduced amounts recorded in at least fourteen reserve accounts that it maintained on its balance sheet, the effect of which was to materially increase NorthWestern's and Expanets'· reported income over that same period. Charters knew or was reckless in not knowing about these reductions, their material impact on NorthWestern's and Expanets' results of operations, and North Western's failure to properly disclose this information regarding Expanets' quality of earnings.
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55. From at least May 2002 through the filing ofNorthWestem's Form lQ-Q for the second quarter 2002, Charters informed NorthWestern senior executives through various communications, including emails, written reports andlor verbal communications,
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that Expanets planned to or had reduced its reserves during the second quarter, and that the result of such reductions would be used to increase Expanets' reported income. 56. For purposes of the second quarter 2002 alone, approximately $8.8 million
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of Expanets' reported income was derived from reserve reductions. This amount was material in that it represented approximately 80% ofExpanets'
report~d segment
operating income of $] 1 million and approximately 27% ofNorthWestern's income from continuing operations for that quarter. 57. Through his receipt of this information and communications with NorthWestern, Charters knew or was reckless in not knowing that a material portion of NorthWestern's and .Expanets' reported results of operations for the second quarter 2002 was derived from Expanets' reserve reductions. 58. However, during NorthWestern's August 2002 analyst call, Charters mischaracterized Expanets' financial position by stating that Expanets' profitability was based entirely upon permanent cost reduction measures without disclosing the material impacts ofExpanets' reserve reductions. This statement was misleading because Charters knew or was reck] ess in not knowing that Expanets' reported income for the second quarter had been materially impacted by various non-recurring reserve reductions, and thus was not representative of its true run rate. 59. Throughout the third quarter of2002, Charters continued to inform NorthWestern senior executives through emails, written reports andlor verbal
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communications ofE~panets' planned or actual reduction of reserves for the third quarter and the remainder of 2002. 60. For example, during an operations review meeting between Expanets and NorthWestern senior management in October 2002 attended by Charters, Expanets personnel discussed with NorthWestern senior executives the possible reduction of $4.2 million of additional balance sheet reserves during the third quarter of2002. As a result, Expanets reduced its reserves by $4.2 million during the third quarter o£1002, thereby increasing NorthWestern's and Expanets' reported income. 61. Approximately $27 million of Expanets' income was derived from reserve reductions during the third quarter of2002. With this income, Expanets was able to report $8.7 million of operating income rather than a substantial loss. In addition, with this income, NorthWestern was able to report $14.6 million of income from continuing operations for that quarter rather tban a loss. Accordingly, the amount of Expanets' reserve reductions for the third quarter 2002 was material to both NorthWestern's and Expanets' results of operations for that period. 62. Through his receipt of information from Expanets personnel and through his communications with NorthWestern, Charters knew or was reckless in not knowing that a material portion of NorthWestem's and Expanets' reported results of operations for the third quarter 2002 was derived from Expanets' reserve reductions. 63. NorthWestern's Form IO-Q for the third quarter failed to·properly disclose the material impact of Expanets' reserve reductions. Charters knew or was reckless in not knowing about these material omissions from NorthWestern's Form 10-Q.
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G.
Expanets t Unusual Transactions
64. In conjunction with Expanets' acquisition of certain assets of a competitor,
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Expanets agreed in March 2000 that, in exchange for payments from the competitor, Expanets would not solicit specific business of the competitor's customers. Expanets' competitor was obligated to make these "non-compete" type of payments to Expanets until March 2005. These payments were not characteristic ofExpanets' regular operations and therefore represented unusual transactions. 65. During the
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quarter of 2002, Charters and NorthWestern senior
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executives knew that Expanets would be receiving these non-compete payments. Furthennore, throughout the and third quarter of2002, Expanets personnel informed NorthWestern senior executives through various communications, including emails, written reports and/or verbal communications, about the actual and projected impacts of
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these non-compete payments on Expanets' reported income for 2002. 66. In the third quarter of2002, NorthWestern reported in its segment disclosures that Expanets had operating income of approximately $8.7 million. Approximately $15.3 million ofExpanets' income came from the non-compete payments. The $15.3 million also represented approximately 68% ofNorthWestem's consolidated income from continuing operations for the quarter. Accordingly, the amount of these non-compete payments was material to the operating reSults of both NorthWestern and Expanets for that period.
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67. NorthWestern's Form IO-Q for the third quarter of 2002 failed to properly
disclose Expanets' receipt of these unusual non-compete payments and their material effect on Expanets' and NorthWestern's reported results of operations for that period.
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68. Through his receipt of information from Expanets accounting personnel and through his communications with NorthWestern during the third quarter of2002, Charters knew or was reckless in not knowing about the material impact of these non compete payments, and he knew or was reckless in not knowing that NorthWestern's Commission filing and corresponding earnings press release attached to Form g·K for that period failed to properly disclose the impact to NorthWestern's and Expanets' reported results of operations.
FffiST CLAIM FOR RELIEF
(Violation ofSection 17(a)(1) of the
Securities Act (15 U.S.C. § 779(a)(1)))
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69. Paragraphs 1 through 68 are hereby realleged and incorporated by reference. 70. As a result of the foregoing, Charters directly and indirectly, with scienter, in the offer or sale of NorthWestern securities, by use of the means or instruments of transportation or communication in interstate commerce or by use of the mails, has employed a device, scheme, or artifice to defraud. 71. Charters thereby violated, and unless restrained and enjoined, will violate Section 17(a)(I) of the Securities Act.
SECOND.CLAIM FOR RELIEF
(Violation of Sections 17(3)(2) and 17(a)(3)
of the Securities Act (15 U.S.c. § 779(a)(2) and (3)])
72. Paragraphs I through 68 are hereby realleged and incorporated by reference. 73. Charters directly and indirectly, with scienter, in the offer or sale of NorthWestern securities, by use of the means or instruments of transportation or communication in interstate commerce or by use of the mails, has ohtained money or property by means of untrue statements of material fact or omissions to state material
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facts necessary in order to make the statements made,in light of the circumstances under which they were made, not misleading; or engaged in transactions, practices, or courses
ofbusiness which have been or are operating as a fraud or deceit upon the purchasers of NorthWestern securities. 74. Charters violated, and unless restrained and enjoined, will violate Section
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17(a)(2) and 17(a)(3) of the Securities Act.
THIRD CLAIM FOR RELIEF
(Violation of Section 1O(b) of the Exchange Act and
Rule lO(b)(S) thereunder [15 U.S.C. §§ 78Hb) and §240.10b-SD
75. Paragraphs 1 through 68 are hereby realleged and incorporated by reference. 76. Charters directly and indirectly, with scienter, in connection with the
purchase or sale of NorthWestem securities, by use of the means or instrumentalities of
interstate commerce or by use of the mails, employed devices, schemes, or artifices to
defraud; made untrue statements ofmaterial fact or omitted to state material facts
. necessary in order to make the statements made, in light of the circumstances under which they were made, not misleading; or engaged in acts, practices, or courses of business which had been and are operating as a fraud.or deceit upon the purchasers or sellers of such securities. 77. Charters violated, and unless restrained and enjoined, will violate Section 10(b) of the·Exchange Act and Rule IOb-5 thereunder. FOURTH CLAIM FOR RELIEF
(Violation of Section 13(b)(S) of the Exchange Act 115 U.S.C. § 78m(b)(5)]
and Rule 13b2-1 thereunder [17 C.F.R. § 240.13b2-1D
78. Paragraphs I through 68 are hereby realleged and incorporated by reference.
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79. Charters knowingly failed to implement a system of internal accounting controls, and directly or indirectly falsified or caused to be falsified books, records or accounts described in Section 13(b)(2)(A) of the Exchange Act. 80. Charters violated, and unless restrained and enjoined, will violate Section l3(b)(5) of the Exchange Act [IS U.S.C. § 78m(b)(5)] and Rule 13b2-1 thereunder [17 ., C.F.R. § 240.13b2-1].
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FJFTH CLAIM FOR RELIEF
(Aiding and Abetting NorthWestern's Violation of Section 13(a) of the
Exchange Act [15 U.S.C. § 78m(a)] and Rules 12b-20, 13a~l1 and 138-13 thereunder
II? C.F.R. §§ 240.12b-20, 240.13a-11 and 240.13a-13))
81. Paragraphs 1 through 68 are hereby realleged and incorporated by reference. 82. NorthWestern. an issuer ofa security registered pursuant to Section 12(b) of the Exchange Act, filed materially misleading quarterly and current reports with the Commission. 83. By reason of the foregoing, NorthWestern violated Section 13(a) of the Exchange Act [15 U.S.C. § 78m(a)] and Rules 12b-20, 13a-11 and 13a-13 thereunder [17 C.F.R. §§ 240.I2b-20, 240.13a-l1 and 240.13a-13]. 84. Charters knew of NorthWestem's violations of Section 13(a) of the Exchange Act and Rules 12b-20, 13a-11 and 13a-13 thereunder and substantially assisted NorthWestern in committing these violations. 85. Charters aided and abetted NorthWestern's violations of Section 13(a) of the Exchange Act and Rules 12b-20, 13a-11 and 13a-13 thereunder, and unless restrained and enjoined will continue to aid and abet violations of these provisions.
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SIXTH CLAIM FORRELIEF (Aiding and Abetting NorthWestern's Violation of Section 13(b)(2)(A) of the Exchange Act 115 U.S.C. § 78m(b)(2)(A)l)
86. reference. 87. NorthWestern failed to make and keep books, records, and accounts,
.;
Paragraphs 1 through 68 are hereby realleged and incorporated by .
which, in reasonable detail, accurately and fairly reflected the company's transactions and dispositions of its assets. 88. By reason oftbe foregoing, NorthWestern violated Section 13(b)(2)(A) of
.~
:~.
the Exchange Act (15 U.S.C. § 78m(b)(2)(A)]. 89. Charters knew or was severely reckless in not knowing ofNortbWestem's
violations of Section 13(b)(2)(A) of the Exchange Act and substantially assisted NorthWestern in committing these violations.
90.
Charters aided and abetted NorthWestern's violations of Section
13(b)(2)(A) of the Exchange Act, and unless restrained and enjoined will continue to aid and abet violations of these provisions.
SEVENTH CLAIM FOR RELIEF (Aiding and Abetting NorthWestern's Violation of Section 13(b)(2)(B) ofthe Exchange Act US U.S.C. § 78m(b)(2)(B)})
91.
reference. 92. NorthWestern failed to devise and maintain a system ofintemal Paragraphs I through 68 are hereby realleged and incorporated by
accounting controls sufficient to provide reasonable assurances that transactions are recorded as necessary to permit preparation of financial statements in conformity with
20
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generally accepted accounting principles or any other criteria applicable to such statements and to maintain accountability for assets. 93. By reason ofthe foregoing, NorthWestern violated Section 13(b)(2)(B) of
the Exchange Act [15 U.S.C. § 78m(b)(2)(B)). 94. Charters knew or was severely reckless in not knowing of NorthWestern's
~,
;.
violations ofSection 13(b)(2)(B) of the Exchange Act and substantially assisted NorthWestern in committing these violations. 95. Charters aided and abetted NorthWestern's viola~ions of Section
.~.
..'
i!
~
..
13(b)(2)(B) of the Exchange Act, and unless restrained and enjoined will continue to aid and abet violations of these provisions.
PRAYER FOR RELIEF
WHEREFORE, the Commission respectfully requests that the Court:
1.
Find that Charters committed tlJe violations alleged.
II.
Enter an Injunction, in a form consistent with Rule 65(d) of the Federal Rules of Civil Procedure, permanently restraining and enjoining Charters from violating, directly or indirectly, the provisions oflaw and rules alleged in this complaint.
III.
Issue an Order requiring Charters to pay a $50,000 civil penalty pursuant to Section 20(d) of the Securities Act [15 U.S.C. § 77t(d)] and Section 21(d) of the Exchange Act [15 U.S.C. § 78u(d)).
21
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IV.
Grant such other relief as this Court may deem just or appropriate. Dated: July 23, 2007 _
Respectfully submitted,
sl Kurt L. Gottschall ELIZABETII ESPINOSA KRUPA KURT L. GOTTSCHALL NOEL M. FRANKLIN Attorneys for Plaintiff
.~
U.s. Securities and Exchange Commission
1801 California Street, Suite 1500 Denver, CO 80202 Phone: (303) 844-1000
Fax: (303) 844-1052
22
)
/
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UNITED STATES DISTRICT COURT DISTRICT OF COLORADO
SECURITIES AND EXCHANGE COMMISSION,
Plaintiff,
Civil Action Number: 07-C..j· oI550-~PM-~+4 CONSENT OF JOHN C. CHARTERS
v. JOHN C. CHARTERS,
Defendant.
1.
Defendant John C. Charters ("Defendant") waives service of a summons and the
complaint in this action, enters a general appearance, and admits the Court's jurisdiction over Defendant and over the subject matter of this action. 2. Without admitting or denying the allegations of the complaint (except as to
personal and subject matter jurisdiction, which Defendant admits), Defendant hereby consents to the entry of the final Ju~gment in the form attached hereto (the "Final Judgment") and incorporated by referenee herein, whi~h, among other things: (a) permanently enjoins and restrains Defendant from violation of Section 17(a) of the Securities Act of 1933 ("Securities Act") [15 U.S.C. § 77q(a)], and Sections 10(b) and 13(b)(5) of the Securities Exchange Act on934 ("Exchange Act'') [15 U.S.C. §§ 78j(b) and 78m(b)(5)] and Rules IOb-5 and 13b2-I thereunder [17 C.F.R. §§ 240.lOb-5
1
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and 240.l3b2-l]; and aiding and abetting violations ofSections l3(a), 13(b)(2)(A) and l3(b)(2)(B) ofthe Exchange Act [15 U.S.C. §§ 78m(a), 78m(b)(2)(A) and 78m(b)(2)(B)] and Rules l2b-20, 13a-ll and 13a-13 thereunder [17 C.F.R. §§ 240.l2b-20,240.l3a-ll, 240.13a-13]; and
(b) orders Defendant to pay a civil penalty in the amount of$50,000 pmsuant to
Section 20(d) of the Securities Act [15 U.S.C. § 77t(d)] and Section 2l(d) of the Exchange Act [15 U.S.C. § 78u(d)]. 3. . Defendanfagrees that he shall not seek or accept, directly or indirectly,
reimbursement or indemnification from any source, including but not limited to payment made pmsuant to any insurance policy, with regard to any civil penalty amounts that Defendant pays .pursuant to the Final Judgment, regardless of whether such penalty amounts or any part thereof are added to a distribution fund or otherwise used for the benefit of investors. Defendant further agrees that he shall not claim, assert, or apply for a tax deduction or tax credit with regard to any
.
.
federal, state, or local tax for any penalty amounts that Defendant pays pursuant to the Final Judgment, regardless of whether such penalty amounts or any part thereof are added to a distribution fund or otherwise used for the benefit ofinvestors. 4. Defendant waives the entry offindings of fact and conclusions of law pursuant to
Rule 52 ofthe Federal Rules ofCivil Procedure. 5. Defendant waives the right, ifany, to ajury trial and to appeal from the entry of
the Final Judgment. 6. Defendant enters into this Consent volWltarily and represents that no threats,
offers, promises, or inducements of any kind have been made by the Commission or any
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·.
member, officer, employee, agent, or representative of the Commission to induce Defendant to enter into this Consent. 7. .. Defendant agrees that this Consent shall be incorporated into the Final Judgment
with the same force and effect as if fully set forth therein. 8. Defendant will not oppose the enforcement of the Final Judgment on the ground,
if any exists, that it fails to comply with Rule 65(d) of the Federal Rules of Civil Procedure, and hereby waives any objection based thereon. 9. Defendant waives service ofthe Final Judgment and agrees that entry of the Final
Judgment by the Court and filing with the Clerk of the Court will constitute notice·to Defendant ofits terms and conditions. Defendant further agrees to provide counsel for the Commission,
within thirty days after the Final Judgment is filed with the Clerk of the Cow1, with an affidavit
or declaration stating that Defendant has received and read a copy of the Final Judgment. 10. Consistent with 17 C.F.R. 202.5(£), this Consent resolves only the claims asserted
against Defendant in this civil proceeding. Defendant acknowledges that no promise or representation has been made by the Coinmission or any II).ember, officer, employee, agent, or representative of the Commission with regard to any criminal liability that may have arisen or may arise from the facts underlying this action or immunity from any such criminal liability. Defendant waives any claim ofDouble Jeopardy based upon the settlement of this proceeding, including the imposition ofany remedy or civil penalty hereiJ.l. Defendant further acknowledges that the Court's entry of a permanent injunction may have collateral consequences under fed.eral or state law and the rules and regulations ofself-regulatory organizations, licensing boards, and other regulatory organizations. Such collateral consequences include, but are not limited to, a statutory disqualification with respect to membership or participation in, or association with a
3
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member of, a self-regulatory organization. This statutory disqualification has consequences that are separate from any sanction imposed in an administrative proceeding. In addition, in any
discip~inary proceeding before the
Commission based on the entry ofthe injunction in this
action, Defendant understands that he shall not be permitted to contest the factual allegations of the complaint in this action.
11.
Defendant understands and agrees to comply with the Commission's policy ''not
to pennit a defendant or respondent to consent to a judgment or order that imposes a sanction while denying the allegation in the complaint or order for proceedings." 17 C.F.R § 202.5. In compliance with this policy, Defendant agrees: (i) not to take any action or to make or pennit to be made any public statement denying, directly or indirectly, any allegation in the complaint or creating the impression that the complaint is without factual basis; and (il) that upon the filing of this Consent, Defendant hereby withdraws any papers filed in this action to the extent that they deny any allegation in the complaint. If Defendant breaches this agreement, the Commission may petition the Court to vacate the Final Judgment and restore this action to its active docket. Nothing in this paragraph affects Defendant's: (i) testimonial obligations; or (ii) right to take legal or factual positions in litigation or other legal proceedings in which the Commission is not
a party.
12. Defendant hereby waives any rights under the Equal Access to Justice Act, the
Small Business Regulatory Enforcement Fairness Act of 1996, or any other provision of law to seek from the United States, or any agency, or any official of the United States acting in his or her official capacity, directly or indirectly, reimbursement ofattorney's fees or other fees, expenses, or costs expended by Defendant to defend against this action. For these purposes,
4
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Defendant agrees that Defendant is not the prevailing party in this action since the parties have reached a good faith settlement. 13.
In conrl.ection with this action and any related judicial or ad.nllnistrative
. proceeding or investigation commenced by the Commission or to which the Commission is a party, Defendant: (i) agrees to appear and be interviewed by Commission staff at such times and places as the staff requests upon reasonable notice; (ii) will accept service by mail or f~csimile . transmission ofnotices or subpoenas issued by the Commission for documents or testimony at
~epositioDS, hearings,
or trials, or in connection with any related investigation by Commission
staff; (iii) appoints Defendant's undersign~ attorney as agent to receive service of such notices and subpoenas; (iv) with respect to such notices and subpoenas, waives the territorial limits on service contained in Rule 45 of the Federal Rules of Civil Procedure and any applicable local rules, provided that the party requesting the testimony reimburses Defendant's travel, lodging, and subsistence expenses at the then-prevailing U.S. Government per diem rates; and (v) consents to pers0nal jurisdiction over Defendant in any United States District Court for purposes of enforcing any such subpoena. 14. Defendant agrees that the Commission may present the Final Judgment to the
Court for signature and entry without further notice.
5
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15.
Defendant a~ that this Court shall retain jUrisdiction over this matter for the·
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P'UIP9se ofenforcing the terms ofthe Final Judgment
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: . .On ~ 2007~ . a person known to me, personally appeared before me andilcknow~edged executing the foregoing Cons~t ..
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UNlTED STATES DISTRlCT COURT
DISTRICT OF COLORADO
SECURITIES AND EXCHANGE COMMISSION, PlaintitT,
v.
JOHN C. CHARTERS,
Defendant.
I
j
! i
I i
FINAL JUDGMENT AS TO DEFENDANT
JOHN C. CHARTERS
I.
I
f
I
i
i i
i
;
The Securities and Exchange Commission having filed a Complaint and Defendant John C. Charters ("Defendant") having entered a general appearance; consented to the Court's jurisdiction over Defendant and the subject matter oftms action; consented to entry of this Final Judgment without admitting or denying the allegations of the Complaint (except as to jurisdiction); waived findings of fact and conclusions oflaw; and waived any right to appeal from this Final Judgment:
1.
IT IS HEREBY ORDERED, ADJUDGED, AND DECREED that Defendant and Defendant's agents, servants, employees, attorneys, and all persons in active concert or participation with them who receive actual notice ofthis Final Judgment by personal service or
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otherwise are pennanently restrained and enjoined from violating, directly or indirectly, Section 17(a) of the Securities Act of 1933 ("Securities Act'') [15 U.S.C. § 77q(a)), by using any means or instruments oftransportation or communication in interstate commerce or by using the mails, directly or indirectly: (a) (b) to employ any device, scheme, or artifice to defraud, or to obtain money or property by means of any untrue statement of a material fact or
any omission to state a material fact necessary in order to make the statements made, in light of the circumstances under which they were made, not misleading; or (c) to engage in any transaction, practice, or course of business which operates or
would operate as a fraud or deceit upon the purchaser.
II.
IT IS HEREBY ORDERED, ADJUDGED, AND DECREED that Defendant and Defendant's agents, servants, employees, attorneys, and all persons in active concert or participation with them who receive actual notice of this Final Judgment by personal service or otherwise are pennanently restrained and enjoined from violating, directly or indirectly, Section 10(b) of the Securities Exchange Act of 1934 (the "Exchange Act") [15 U.S.C. § 78j(b)) and Rule lOb-5 promulgated thereWlder [17 C.F.R. § 240.l0b-5), by using any means or instrumentality of interstate commerce, or of the mails, or of any facility of any national securities exchange, in connection with the purchase or sale of any security: (a) to employ any device, scheme, or artifice to defraud;
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(b)
to make any untrue statement of a material fact or to omit to state a material fact necessary in order to make the statements made, in the light of the circumstances under which they were made, not misleading; or
(c)
to engage in any act, practice, or course of business which operates or would operate as a fraud or deceit upon any person.
m.
IT IS HEREBY ORDERED, ADJUDGED, AND DECREED that Defendant and Defendant's agents, servants, employees, attorneys, and all persons in active concert or participation with them who receive actual notice of this Final Judgment by personal service or otherwise are permanently restrained and enjoined from violating, directly or indirectly, Section. 13(b)(5) ofthe Exchange Act [15 U.S.c. § 78m(b)(5)] and Rule 13b2-1 promulgated thereunder [17 C.F.R. § 240.l3b2-1] by: (a) falsifYing or causing to be falsified any book, record or account subject to Section 13(b)(2)(A) ofthe Exchange Act; or (b) knowingly circumventing or knowingly failing to implement a system of internal accounting controls.
N.
IT IS HEREBY FURTHER ORDERED, ADJUDGED, AND DECREED that Defendant and Defendant's agents, servants, employees, attorneys, and all persons in active concert or participation with them who receive actual notice of this Final Judgment by personal service or otherwise are permanently restrained and enjoined from aiding and abetting any violations of Sections 13(a), 13(b)(2)(A) and 13(b)(2)(B) of the Exchange Act [15 U.S.C. §§ 78m(a),
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78m(b)(2)(A) and 78m(b)(2)(B)] and Rules 12b-20, 13a-11 and 13a-13 thereunder [17 C.F.R. §§ 240.12b-20, 240.13a-l1 and 240.13a-13], by lmowingly providing substantial assistance to an issuer that: (a) fails to file with the Commission any report or statement required to be filed with the Commission pursuant to Section 13(a) of the Exchange Act and the rules and regulations promulgated thereunder, or infonnation and documents required by the Commission to keep reasonably current the infonnation and documents required to be included in or filed with an application or registration statement filed pursuant to Section 12 of the Exchange Act; (b) fails, in addition to the information expressly required to be included in a statement or report, to add such further material information as is necessary to make the required statements, in the light of the circumstances under which they were made not misleading; (c) fails to make and keep books, records, and accounts, which, in reasonable detail, accurately and fairly reflect the transactions and dispositions of assets of the issuer; or (d) fails to devise and maintain a system ofintemal accounting controls sufficient to provide reasonable assurances that: transactions are executed in accordance with management's general or specific authorization; transactions are recorded as necessary to permit preparation of financial statements in conformity with generally accepted aCCOl.Ulting principles or any other criteria applicable to such statements, and to maintain accountability for assets; access to
4
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assets is pennitted only in accordance with management's general or specific authorization; and the recorded accountability for assets is compared with the existing assets at reasonable intervals and appropriate action is taken with respect to any differences.
v.
IT IS FURTHER ORDERED, ADJUDGED, AND DECREED that Defendant shall pay a civil penalty in the amount of $50,000 pursuant to Section 20(d) of the Securities Act [15 U.S.c.
§ 77t(d)] and Section 21 (d) of the Exchange Act [15 U.S.C. § 78u(d)]. Defendant shall make this
payment within ten (10) business days after entry oftbis Final Judgment by certified check, bank cashier's check, or United States postal money order payable to the Securities and Exchange Commission. The payment shall be delivered or mailed to the Office of Financial Management, Securities and Exchange Commission, Operations Center, 6432 General Green Way, Mail Stop 0-3, Alexandria, Virginia 22312, and shall be accompanied by a letter identifying John C. Charters as a defendant in this action; setting forth the title and civil action number of this action and the name of this Court; and specifying that payment is made pursuant to this Final Judgment. Defendant shall pay post-judgment interest on any delinquent amounts pursuant to 28 U.S.c.
§ 1961.
VI.
IT IS FURTHER ORDERED, ADruDGED, AND DECREED that the Consent is incorporated herein with the same force and effect as if fully set forth herein, and that Defendant shall comply with all of the undertakings and agreements set forth therein.
5
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VII.
IT IS FURTHER ORDERED, ADJUDGED, AND DECREED that this Court shall retain jurisdiction of this matter for the purposes of enforcing the tenns of this Final Judgment.
Vill.
There being no just reason for delay, pursuant to Rule 54(b) of the Federal Rules of Civil Procedure, the Clerk is ordered to enter this Final Judgment forthwith and without further notice.
Dated:
_
UNITED STATES DISTRICT JUDGE
6
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EXHIBIT 19
REDACTED IN ITS ENTIRETY
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Page 1
IN THE UNITED STATES DISTRICT COURT FOR THE DISTRICT OF DELAWARE
2
Civil Action No. C.A. No. 04-1494
3
(JJF)
MAGTEN ASSET MANAGEMENT CORPORATION and 4 5 6 7 8
9
LAW DEBENTURE TRUST COMPANY OF NEW YORK, Plaintiffs,
v.
NORTHWESTERN CORPORATION, Defendant.
---------------------------------------------
10
Civil Action No. C.A. No. 05-499 MAGTEN ASSET MANAGEMENT CORP., Plaintiff, v.
(JJF)
11
12 13 14 15
MICHAEL J. HANSON and ERNIE J. KINDT, Defendants.
16
17 18 19 20
21 22
---------------------------------------------
DEPOSITION OF MICHAEL NIEMAN ----------------------------------------------
23
"24
25
TAKEN ON:
6/29/2007
BY:
DANA ANDERSON
Elisa Dreier Reporting Corp. (212) 557-5558 780 Third Avenue, New York, NY 10017
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PageZ
I APPEARANCES: 2 FRIED, FRANK, HARRJS, SHRIVER & JACOBSON, UP One New York Plaza
3 New York, New York 10004-1980 By: Gary 1.. Kaplan, Esq.
Philip Kimball, Esq.
4 5 For the Plaintiffs 6 7
8 9 CURTIS, MALLET-PREVOST, COLT & MOSLE LLP 101 Park Avenue 10 New York, New York 10178-0061 By: Nancy E. Delaney, Esq. 11 For NorthWestern Corporation 12 13 14 15 BROWNING, KALECZYC, BERRY & HOVEN, PC 139 North Last Chaoce Gulch 16 Helena, MT 59601 By: Stanley T. Kaleczyc, Esq. Kimberly A. Beatty, Esq. 17 18 For Michael J. Hanson and Ernie J.lGndt 19 20 21
Page 4
1 2 3
4
5
6
7
INDEX OF EXHIBITS (continued) Exhibit Number 11, October 30, 2002 Memorandum
from Kipp Orme to NorthWestern Board of Directors regarding Revised Proposed 2003 Operating Plan, page 101
8
9 10 11 12 13 14 15 16 17 18 19
20
21 22 23 24 25
22
23 24 25
Page 3
I
Page 5
INDEX
2 3
4 5 7
8
9
Examination by Mr. Kaplan, page S
INDEX OF EXHIBITS
Exlu"bit Number 1, Notice ofDcpositial1 or
1
2 3 4 5 6
7
6
NonhW"'tem Corporation Pwsuant 10 Rule 30(b)(6l, page 5
Exhibit Nwnber 2, Manasement Financial and
Informadon Report Meeting 2002 Calendar, page
II
THE DEPOSITION OF MICHAEL NIEMAN is taken on this 29th day of June, 2007, at the Holiday
Inn Sioux FaJl~City Centre Hotel in Sioux Falls, South Dakota, conunencing at the
hour of3:46 p.m., pursuant to Notice.
aaa
Exhibit Number 3. NonhWerrem COfJ'OMltion Finance Swnmit s..sion Febl1lllry 2002, page 31 Exlubil Number 4, M.y 28, 2002 Memorandum from Kipp Onnelo Merle Lewis, Dick Hyll,nd and Eric J.cobsen Illganling Financing Plans and COJISld...tiona, page 38 exhibit Number 5, NonhWeslem Corporation'. Fint Quart.,. 2002 Earnings Confe~ce Call April 30, 2002 Transcrip~ page 46 Exhibit Number 6, July 30, 2002 Memorandum flOm Mil
10
II
8 9
10 II 12 13 14
15
MICHAEL NIEMAN, called as a witness, being first duly sworn, was examined and testified as follows:
a.a
'1
12
13 14
EXAMINATION (Deposition Exhibit Number I marked for identification.) BY MR. KAPLAN: Q. Good afternoon, Mr. Nieman. My name is Gary Kaplan. I'm from Fried, Frank, Harris, Sluiver and Jacobson, counse!to Magten Asset Management in this action. I'll hand 10 you what we've marked as Nieman Exhibit I. A. (Reviews document.) Q. That is the Notice of
16 17 IS
19
"
16 17 18
20 21 22 23
24
19
20
21
22
25
Exhibit Number 10, July 31, 2002 Memorandum from Eric Jacobsen to NonhWestem Board of Di""'lO" Illgarding Going Fla' Resolution. pageSI
23 24 25
2 (Pages 2 to 5)
Elisa Dreier Reporting
Corp. (212) 557-5558 780 Third Avenue, New York, NY 10017
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Page 14
Page 16
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18
19
20 21 22 23 24 25
that occur each month potentially that might change the numbers from month to month. Q. What kind of accounting adjustments? A. I don't recall what specific accounting adjustments would have been made. Q. Was there something specific to Expanets that it would have accounting adjustments versus the other segments of NorthWestern's business? A I don't believe there was anything necessarily specific. In any business there might be accounting adjustments that are made to the fmaneial results particular in an interim month such as January. Q. Now, we are going to look at a couple of them. I want to flip through some pages, just want to show you some things and see if you can help me out understanding them. A. Okay. Q. If we go to the May MFlR. See there on NOR 458111. Do you see there is a chart on the bottom of NorthWestem
1 2 3 4 5 6 7 8
9
10 11 12 13 14 15 16 17
18
19 20 21 22 23 24 25
specific in May. There are different charts and different graphs and infonnation that are provided. This was kind of a dynamic document that was intended to provide the information that was pertinent at the time to executive management. And this presumably was a chart that senior management wanted to start tracking at that time frame. Q. SO senior management didn't want to track incremental borrowings prior to May 2002? MS. DELANEY: Objection. MR. KALECZYC: Objection. THE WITNESS: Can you repeat the question? BY MR. KAPLAN: Q. I asked if NorthWestern senior management did not want to track the incremental borrowings prior to May of 2002? A I'm sure that they wanted to track it. I believe by putting it in this report, it put a little more emphasis on it. And it was shared with the partner entities'
Page 15
Page 17
1 2 3 4 5 6 7 8 9 10
11
12 13 14 15 16 17
18
19 20 21 22 23
24
25
Incremental Borrowings? A. Yes. Q. Do you know why that chart was included in May of 2002? A I believe that chart was included to reflect and track the borrowings that Expanets had needed from NorthWestern that were incremental to the preferred stock and the debt prior to December of2001 that was ftmded to Expanets. Q. What I am asking, though, is if you look in the prior months, that chart wasn't there. Do you know why in May it was determined to include this chart? MS. DELANEY: I believe it's been asked and answered. THE WITNESS: Can you clarify your question? BY MR. KAPLAN: Q. Since that chart was not here in prior months, I want to understand if there was something that happened in May that somebody decided to include this chart? A. I don't recall anything
1 2 3 4 5 6 7 8 9
10
11 12 13 14 15 16 17
18
19 20 21 22 23 24 25
CEOs, CFOs and I think it was an attempt to put some emphasis and focus that Expanets was to pay back that incremental borrowings as soon as possible. Q. Well, if you look in August of 2002, on the Expanets section which is on page 8 of 14. A. (Reviews document.) Q. See that the chart is no longer there? A. I do not see the chart on that page, no. Q. Is there a reason that in August, no longer wanted to highlight the issue of the intercompany advances to Expanets? A. I do not know what that reason would be, no. Q. If you look in the July MFIR. A (Reviews document.) Q. Do you know who who made the decision to include that chart that we were just looking at the May, June and July MFIR? A. I don't recall who specifically
5 (Pages 14 to 17) Elisa Dreier Reporting Corp. (212) 557-5558 780 Third Avenue, New York, NY 10017
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Page 18
Page 20
1
2
3
4
S 6 7 8 9 10
I1
12
13
14 15 16 17 18 19 20 21 22
23
24 25
would have made that decision. Q. Would you have been involved in the decision-making? A. Not necessarily the decision. I was involved in preparing this report. Q. Do you know who made the decision to exclude the chart beginning in August? MS. DELANEY: Objection. THE WITNESS: I do not. BY MR. KAPLAN: Q. If you look at the July MFIR, the page 13 of 14, you see there is a summary of other investments towards the bottom of the page? A (Reviews document.) Yes. Q. And it lists Blue Dot preferred stock, Expanets preferred stock and Expanets loan? A Yes. Q. And the total for the three of those is approximately $783 million? A Yes, I see that on the page. Q. Why were those numbers included?
impaired and therefore it should no longer be shown on this financial statistic? MS. DELANEY: Objection. 4 THE WITNESS: Not that I'm aware 5 of. 6 BY MR. KAPLAN: .7 Q. Do you know who made the 8 decision not to continue to show those 9 other investments on this page of the MFIR? 10 A I do not. 11 MR. KALECZYC: Objection. 12 BY MR. KAPLAN: 1 3 Q . The projected net funds 14 available, which is right above the summary 15 of other investments, what is that intended 16 to show? 17 A I believe it's intended to show 18 just as it says, the funds available - this 19 is a NorthWestern Corporation consolidated 20 report, that's the net funds available after 21 factoring in all the items above. 22 Q. And funds available through 23 when? 24 A. I believe it's at that point in 25 time.
1 2 3
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A. I believe those numbers were reported here just to show the amount of the investment that NorthWestern had invested in Blue Dot and Expanets. 5 Q. If you tum to the August MFIR, 6 it's on the same page, 13 of 14. 7 A (Complies.) 8 Q. See those investments have 9 disappeared? l O A I do not see them on the page, 11 if that's what you mean by "disappeared." 12 Q. Do you know why those 13 investments are no longer being reflected 14 on the MFIR? 15 A I do not. 16 Q. Was there any decision that the 17 valuation of those -- that the value of 18 those was impaired such that they should 19 not be shown on this report? 20 MS. DELANEY: Objection. 21 THE WITNESS: Repeat the question, 22 please. 23 BY MR. KAPLAN: Q. Sure. Was there a decision 24 25 that the value of those investments was
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Q. But they are subtracting, if I'm reading this right, you subtract future cash needs, right? A. That's correct. Q. What is the future, is that through to year end? A. Irs not clear from this page what time period it was intended to reflect. As I recal1, it was intended to demonstrate the known future cash inflows and outflows that were anticipated by the company. And it wasn't over any specific time period. Q. And you see in the August MFIR they have projected net funds available of $90 million, correct? A. That's what this page says, yes. Q. Okay. Ifyou look up on the future cash inflows - A. Yes. Q. - net proceeds from equity offering, $82 million? A. I see that, yes. Q. SO ifl'm reading this right, if you were to have excluded the proceeds
6 (Pages 1g to 21) Elisa Dreier Reporting Corp. (212) 557-5558 780 Third Avenue, New York, NY 100\7
Case 1:04-cv-01494-JJF
Document 262-7
Filed 01/04/2008
Page 42 of 58
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of the equity offering, by August NorthWestern is projecting that it would only have $8 million of cash available? MS. DELANEY: If you exclude it? BY MR. KAPLAN: Q. Uyou excluded the net proceeds from the equity offering, this is projecting that -- would show that in August you were projecting you would only have $8 million of cash? MS. DELANEY: Objection. MR. KALECZYC; Join. MS. DELANEY; You can answer. THE WITNESS: Doing the math here, that's what this schedule would suggest, yes. Can I add to thllt? MS. DELANEY: If you need to,
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sure.
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