EXCLUSIVE REPORT: The Rise Of John de Jongh Meant The Fall Of Jeffrey Prosser And Innovative Communications
SMOKE AND MIRRORS? The Rural Telephone Finance Cooperative building in Dulles, Virginia. When Jeffrey Prosser complained to the RTFC about it changing its accounting practices in mid-stream and costing his company $25 million over four years, the non-profit cooperative immediately moved to foreclose on $520 million in outstanding loans to Innovative Communications Corp (ICC).
The rift between Jeffrey Prosser and the Rural Telephone Finance Cooperative (RTFC) began when his corporation noticed that its dividends had decreased 50 percent between 2003 and 2004 — from $7 million to $3.5 million.
Prosser says today that he first noticed the RTFC had changed its accounting practices in a way that favored the non-profit at the expense of its members in 2001.
The realization that RTFC’s alleged accounting fraud had cost Prosser’s Innovative Communications Corporation (ICC) $25 million over a four-year period, meant that he would have to find a remedy — legal or financial — to stop it right away.
But to understand Innovative’s history, you have to understand how the Virgin Islands Telephone Corporation (VITELCO) came to be.
Prosser and Cornelius Prior bought VITELCO from International Telephone and Telegraph (ITT) for $100 million in 1987 with financing from E.F. Hutton.
When Prosser and Prior split in 1998, Prior took the Guyana Telephone Company and Prosser took VITELCO.
In 1999, Prosser changed the name of VITELCO to “Innovative Communications Corporation” (ICC) — and began an aggressive media acquisitions process in the larger Caribbean.
VITELCO had refinanced the 1987 purchase for $110 million through the non-profit National Rural Utilities Cooperative Finance Corporation (RTFC/CFC).
So in 1999, when ICC asked for $470 million from the RTFC for “new acquisitions” — it agreed.
As a cooperative by law, the RTFC made dividend payments to co-op members on an annual basis, including ICC.
By 2004, Innovative owned: Martinique Cable/Wireless; Guadeloupe Cable/Wireless; British Virgin Islands (BVI) Cable/Wireless; Sint Maarten (Dutch)/St. Martin (French) Cable/Wireless; St. Bart’s Cable/Wireless; the Virgin Islands Daily News; St. Thomas Cable TV; St. Croix Cable TV; Belize Telephone/Wireless and three cable TV systems around Neuchatel Switzerland on the France/Switzerland border.
The new loan balance of $580 million meant that ICC was drawing more water than ever from the rural co-op based in Dulles, Virginia and therefore would receive higher annual dividend payments.
The dividend payments from RTFC were a significant part of ICC’s revenue stream, totaling up to $7 million per year and paid at the end of the co-op’s fiscal year on May 31.
Except in 2001, Prosser and his ICC finance team noticed that CFC — the tax exempt core of the National Rural Utilities Cooperative Finance Corporation was now charging the RTFC “management” and “other fees” which were, of course, passed along to ICC. CFC manages and funds the Rural Telephone Finance Cooperative.
The dividend payments shrunk from $7 million to $3.5 million in just 12 months. ICC did some research and found that all of the rural telephone cooperative’s revenues were being put into the tax-free CFC — and all of its expenses were given to the tax-paying RTFC, thus lowering dividend payments to its members.
As a result, over a four-year period that Prosser’s accountants examined, ICC estimated that CFC gained $250 million in income that it shouldn’t have — and ICC lost about $25 million because of CFC’s new accounting practices over that same time frame.
But the RTFC did not stop there, Prosser said. VITELCO had a $100 million line of credit with the U.S. Department of Agriculture’s Rural Utility Services (RUS).
“RTFC/CFC lobbied the Department of Agriculture to withdraw the line of credit,” he said. “They were successful in getting it suspended. No benefit to the RTFC, just a detriment to VITELCO.”
And most importantly, the former CEO said that RTFC/CFC interfered with ICC’s ability to acquire new revenue streams, such as when it contracted to buy the Belize Telephone company for $100 million in April to May of 2006. Belize Telephone was worth $250 million on paper and was producing at least $45 million in annual revenues.
“We put up $38 million dollars in cash and had a loan commitment from Royal Bank of Trinidad and Tobago (RBC) for $70 million,” Prosser said. “A week before closing RTFC sent their lawyers to RBC to kill the transaction. They threatened to file suit if RBC went through with the commitment. It delayed the loan and we lost the purchase. We had to write off the $38 million we invested. These two examples show how punitive RTFC was. All they wanted to do is hurt ICC.”
By February of 2005, James Meyers, an attorney who used to work for the Securities and Exchange Commission (SEC) was asked by Prosser to write an 11-page letter to the SEC’s Division of Enforcement outlining ICC’s case for securities fraud against the RTFC.
When the RTFC filed for foreclosure on the ICC loans in late 2004, it was just the first step. The rural co-op needed that foundation in order to file for an involuntary bankruptcy proceeding on ICC with the U.S. Bankruptcy Court in Pittsburgh in 2006.