Jan. 21, 2007 — Some new financial data on Innovative Communications Corp. owner Jeffrey Prosser and his companies emerged from recent bankruptcy hearings in Pittsburgh, but no interim or final decisions were handed down by the judge.
The hearings, which took place Jan. 12 and 19 in the U.S. Bankruptcy Court, dealt largely with the question of whether Prosser (as the creditors charged) was in a conflict of interest. How could he evenhandedly, they asked, seek to protect the interests of the creditors and the debtors, as the "debtor-in-possession" is supposed to do, while he received various benefits, personally, from the debtors?
The creditors, mainland investors of various kinds, have joined the U.S. Department of Justice in seeking the appointment of an outsider as the case trustee; Prosser's camp wants the bankruptcy judge to appoint a V.I.-savvy "responsible officer" — from a list prepared by Prosser — to handle the companies during the rest of the bankruptcy.
The investors have sued for about $650 million, but at one time, accepted a proposed settlement at the $402-million level. The settlement never happened because Prosser was unable to secure financing. (The creditors in the case are Rural Telephone Finance Cooperative, Prosser's longtime bankers, and the Greenlight Companies, representing the former minority stockholders of a predecessor company to ICC – a group that has won a civil suit in Delaware against the Prosser faction saying that the Greenlight people had been shortchanged when the earlier company went private.)
Prosser, who was present in the courtroom, said that if a case trustee displaced him in the companies' management, it would cause anxiety and disruptions within the operating companies and set back the interests of all concerned.
The presiding U.S. Bankruptcy judge, Judith K. Fitzgerald, has made it very clear that she wants someone other than Prosser to be in charge but has made it equally clear that she has not decided between concepts of a case trustee and that of responsible officer. She may make a decision on this point on Feb. 5, when the hearings, for the first time, move to St. Thomas.
The questions before the Pittsburgh court ranged from the simple ("How many houses do you own, Mr. Prosser?") to the ultra-complex. Some were answered; others were not.
Prosser answered "three" to the houses question (He has residences in Florida and Lake Placid, N.Y., as well as a house under construction on St. Croix.) In answer to another question, he said the house in the Virgin Islands is about "10,000 square feet."
He was then asked about a $1.5 million advance from ICC for another V.I. dwelling. "That's our guest house," he said. He estimated it was about 4,000 square feet in size.
Earlier, Layne Kruse, a lawyer for the creditors, had questioned Prosser on a loan he received from ICC for his Florida mansion.
Kruse: " …Originally … you took out that loan in 1999, isn't that right, for $5.65 million from ICC to buy a Palm Beach residential property?"
Prosser: "I don't recall the year, but the amount … I had borrowed the money from ICC."
Kruse: "And they had given you a note in 1999 that only required, I guess, the first payment in 2007?"
Prosser: "I don't recall the terms of the note."
Prosser later paid off that note and refinanced through the Bank of America.
The court spent a great deal of time on how (and how much) ICC paid its owner and the impending tax implications. The answers were both complex and incomplete.
ICC does not simply pay a salary to Prosser, its CEO, nor does it pay him dividends as other companies pay their owners. Since ICC is deeply in debt, and because, as one of the lawyers explained, companies in debt can not, by V.I. law, pay dividends, it uses another technique called contra-equity.
These are payments made up the corporate ladder from Innovative Communications Corp. (ICC), a Prosser-owned company that runs the subsidiaries, like Vitelco. Payments are made to two other Prosser firms (Emerging Communications and Innovative Communication Co. (ICC LLC)) and ultimately to Prosser himself.
The payments — now regarded by the Prosser forces as "nonrepayable loans" and by the Prosser adversaries as drawdowns on the assets of the debtors — have become a cause for concern.
In addition to funding Prosser at the rate of $120,000 a month, the contra-equity payments also support some substantial aircraft and legal expenses.
A few years ago these payments, formerly regarded as payable loans, were changed to nonrepayable loans in the company's financial reports. This was the testimony of the creditors' expert witness, James Carroll, a Massachusetts-based certified public accountant (CPA). (Although Prosser's attorneys attacked his credentials — arguing that he had not worked as an active CPA for 15 years and had never signed off on a corporate audit — the judge allowed him to testify.)
Carroll said that if an asset is written off by one party, it becomes a capital gain for the other party (i.e., Prosser personally.) Carroll then was asked if Prosser had reported this capital gain – it would have been many millions of dollars – and he said that the income tax returns provided by Prosser's people had all the numbers blocked out (redacted), so he could not answer the question.
Other items that emerged from the hearings:
— Two major overseas financial institutions, mentioned in the past but never named, turned out to be the Merchant Bank of Australia and Rothschild, Inc., of France. Both were supposed to put together financial rescue packages for Prosser, both, however, failed.
— Prosser said that his telecommunications interests in Guadeloupe and Martinique were worth $100 million and that he had an interested buyer.
— One of the creditors' lawyers said that V.I. statutes made it clear that the V.I. Government Employees Retirement System could not purchase ICC or Vitelco because GERS was blocked from investing in stocks and bonds not listed on the major exchanges. (Prosser's companies are not so listed.)
Carroll's testimony will continue on Wednesday in Pittsburgh and is expected to conclude there. Other related matters will be heard Feb. 5 on St. Thomas.
As soon as the Source secures an agenda for that hearing we will publish it.
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