3. Background
3.1. The Previous Settlement between AGS and CPSD in D. 06-09-009
In late 2004, a dispute arose between AGS and CPSD regarding whether AGS is required by Section 1001 to obtain a CPCN in order to provide wholesale telecommunications services in California. In order to resolve this dispute, on December 29, 2004, AGS filed an application for a CPCN, which was docketed as Application (A.) 04-12-029, and simultaneously moved for its dismissal on jurisdictional grounds.
CPSD filed a protest to the application on January 26, 2005, after discovering that Coughlin was one of the owners of AGS, on the grounds that Coughlin is unfit to operate a telecommunications business in this state because of his previous management role in Vista.
On September 7, 2006, in D.06-09-009, the Commission approved the Settlement Agreement between AGS and CPSD, which resolved the issues raised in CPSD's protest. The Settlement Agreement contains three key provisions relevant to this proceeding:
· Divestiture of Coughlin Family Trust Interest in AGS. The Settlement Agreement requires the Coughlin Family Trust to divest itself of the indirect control of AGS by transferring the control of AGS Holdings or causing the transfer of control of one of its subsidiaries to an unrelated third party, so that the Coughlin Family Trust will no longer hold a controlling interest (direct or indirect) in AGS. Under the Settlement Agreement, the Coughlin Family Trust was required to file an application for a transfer of control of AGS by no later than April 12, 2007, which is one year after the date of the Commission's approval of AGS' application for a CPCN. CPSD agreed to grant any reasonable good faith request for an extension of time for divestiture of the Coughlin Family Trust's interest in AGS. AGS agreed not sell or in any way transfer the ownership or control of AGS to any members of the Coughlin Family or Mr. Phillip Bethune, or any companies that they own or operate.
· Non-Involvement of Coughlin in Management of AGS. AGS also agreed that during the period between the Commission's approval of the Settlement Agreement and the date of the divestiture of the Coughlin Family Trust's interests in AGS, Coughlin would play no role in the management of the company, would not serve as an officer or director of the company, and would not receive any compensation as an employee. Coughlin would retain only an indirect passive interest in AGS, based on the interest of the Coughlin Family Trust in AGS Holdings. AGS agreed to provide copies of documentation, such as a termination agreement or severance letter, which eliminate Coughlin's role in the management of AGS.
· AGS' Filing of Status Reports with CPSD. Under the Settlement Agreement, AGS must submit to the Commission's jurisdiction and cooperate with CPSD in preventing non-certificated carriers from operating in California. The Settlement Agreement requires AGS to submit progress reports to CPSD, which: (a) list all of AGS' carrier customers, and (b) verify that each carrier-customer previously identified by CPSD as unlicensed has either (1) verified its certification or (2) had its service terminated by AGS. These status reports must be filed every six months until the divestiture of the Coughlin Family Trust's interests in AGS is completed.
3.2. The Failure of Coughlin to Comply with Divestiture Requirements of Settlement Agreement
As required by the Settlement Agreement, Coughlin formally resigned from his positions at AGS Acquisition. Several days after the Commission approved the Settlement Agreement, AGS forwarded to CPSD copies of (1) a letter from Coughlin resigning as an officer, director and employee of AGS Acquisition, and (2) a resolution by the shareholders of AGS Acquisition, accepting Coughlin's resignation. Coughlin was removed from the AGS payroll in September 2006.
However, Coughlin has not filed, on his own behalf or jointly with another party, an application for authorization to divest the indirect interest of the Coughlin Family Trust in AGS. According to the application, during 2007, it became clear to AGS that Coughlin had no intention of divesting his indirect control of AGS. In fact, according to the application and a subsequent verified informational filing by AGS, Coughlin claimed that he is not bound by the provisions of the Settlement Agreement and hired a series of counsel to advocate this position to AGS and CPSD.
Coughlin has also entered into unauthorized transactions affecting the control of AGS, without the knowledge or consent of the company, as described below.
3.3. Stipulated Facts4 Regarding Unauthorized Transaction by Coughlin Which Resulted in an Indirect Transfer of Control of AGS
In March 2005, Coughlin borrowed between $900,000 and $1 million from Chrysalis in order to finance his acquisition of a company known as SwissFone, a business venture unrelated to AGS. Without the knowledge of AGS management, Coughlin pledged the 85 shares of AGS Acquisition (which amounts to an 85 percent ownership interest in the company) held by the Coughlin Family Trust to Chrysalis as security for the loan. In January 2006, SwissFone ceased operations, and Chrysalis demanded payment of Coughlin's loan. Unfortunately, Coughlin was either unable or unwilling to pay this debt. Over a period of approximately one year, Chrysalis continued to demand payment, but Coughlin did not honor his debt. AGS and CPSD have stipulated that, in approximately January 2006, the shares in AGS Acquisition that were controlled by Coughlin were transferred to Chrysalis, without the knowledge of AGS management or prior Commission authorization, after Coughlin defaulted on his loan from Chrysalis.
Chrysalis then sought to liquidate the shares in AGS Acquisition which were acquired from Coughlin. In October 2007, Chrysalis placed the shares for sale at a public auction. A copy of the notice of the public auction appeared in the New York Times on October 4, 2007. The public auction was held on October 8, 2007. DiPasquale participated in the auction through a representative and, as the successful bidder, obtained the 85 shares of AGS Acquisition previously held by the Coughlin Family Trust. Since DiPasquale already held a 15 percent ownership interest in AGS Acquisition, he thereby acquired a 100 percent ownership interest in AGS Acquisition and complete indirect control of AGS.
Coughlin did not seek prior Commission authorization of his transfer of the Coughlin Family Trust's shares in AGS Acquisition to Chrysalis at any time. DiPasquale did not seek advance Commission approval under Section 851 for the transfer of control of AGS from Chrysalis to himself through his purchase of the 85 shares of AGS Acquisition at the auction. However, AGS filed an amendment of this application, which disclosed DiPasquale's purchase of the shares at the public auction, on October 25, 2007, approximately two weeks after DiPasquale's purchase of the shares.5
3.4. Filing of Status Reports by AGS As Required by Settlement Agreement - Protest of CPSD
Under the Settlement Agreement, AGS was required to file two status reports, which were due on March 7, 2007 and September 7, 2007.
AGS contends that a series of communications with CPSD met the requirements for the March 7, 2007 status report. CPSD disagrees. AGS and CPSD have stipulated that the following communications took place between them:
On November 17, 2006, CPSD submitted Data Request No. Alliance 11172006 seeking a list of AGS' carrier customers.
On December 8, 2006, AGS responded to CPSD's data request by e-mail and attached a spreadsheet of its carrier customers for the period from October 2006 to November 2006.
On January 29, 2007, CPSD advised AGS by letter that eight of its carrier-customers listed on the spreadsheet appeared not to have valid CPCNs authorizing their operation in California, and that under the Settlement Agreement, AGS was required to contact these carrier customers and advise them that unless they provide proof that they are properly certificated in this state or apply for a CPCN with the Commission within 30 days, AGS will terminate service. CPSD's letter also stated that by responding to the November 17, 2006 data request, AGS had met the requirement for providing a status report that includes a list of its carrier-customers, but that AGS must also provide documentation to CPSD by March 7, 2007 to show that each carrier-customer previously identified by CPSD as unlicensed has either verified that it has a current CPCN or has had its service terminated by AGS.
On February 1, 2007, AGS sent an e-mail to CPSD which stated that, based on a letter from CPSD, AGS understood that it was to contact carrier-customers identified by CPSD as non-certificated and to ask these carrier-customers to contact CPSD directly regarding their certifications status. AGS's e-mail expressed concern that CPSD had changed its approach so that AGS was required to get back to CPSD on behalf of these carrier-customers regarding the status of their certifications.
AGS asked CPSD to follow its previous direction and contact any carrier-customers identified as non-certificated itself.
On February 2, 2007, CPSD responded to AGS's e-mail dated February 1, 2007 by a letter which stated that under the Settlement Agreement, AGS was responsible for contacting the eight carrier-customers identified by CPSD as unlicensed. This letter also stated that AGS's status report was due on March 7, 2007, but that under the circumstances, AGS was encouraged to submit the report as soon as possible.
On February 6, 2007, AGS sent an e-mail to CPSD, which stated that AGS had contacted the eight carrier-customers that CPSD had identified as non-certificated, and reported on the status of these eight companies.
CPSD responded to the above e-mail from AGS, and advised AGS that two of its carrier-customers appeared to be switchless resellers that must be certified in order to operate in California.
On February 8, 2007, AGS responded to the above e-mail from CPSD and provided clarifying information regarding one of its carrier-customers.
AGS admits in its opening brief that AGS simply forgot to file the September 7, 2007 status report.6 AGS states that by September 2007, it had heard nothing from CPSD for approximately six months, and it had been over a year since the Settlement Agreement was executed. On September 13, 2007, CPSD filed a protest to this application and attached, as Appendix A, a data request that asked for the current list of AGS' carrier-customers. AGS responded on October 18, 2007, over a month after the deadline for filing the status report. CPSD and AGS agree that the list of AGS carrier-customers submitted by AGS on October 18, 2007 met the requirements for a status report pursuant to the Settlement Agreement, except for the late submission of the report.
4 On January 16, 2008, after meeting and conferring as directed by the assigned ALJ, AGS and CPSD filed a Joint Stipulation of Facts (Stipulation). The Stipulation states that the parties have agreed to a set of stipulated facts which form the factual basis for the disputed legal issues in this proceeding.
5 According to the application, Coughlin also participated in two other unauthorized transactions without the knowledge of AGS, which affected the control of AGS. In at least one instance, Coughlin's actions appear to have resulted in the transfer of the control of AGS to a third party without prior Commission authorization, but the parties did not include these facts in the Stipulation. These transactions were described in the application, as follows:
A. Hogan and Hartson Transaction/Payment of AGS Debt by DiPasquale
In 2005, Coughlin retained Hogan and Hartson, a Washington D. C. law firm, to assist him with the acquisition of SwissFone, without the knowledge or authorization of AGS. Coughlin falsely represented to Hogan and Hartson that he was entering into the retainer agreement with the law firm on behalf of AGS. When Hogan and Hartson billed AGS for the legal services rendered to Coughlin, AGS challenged the invoices and advised Hogan and Hartson that Coughlin had incurred these bills for services unrelated to AGS. However, Coughlin did not pay his debt to the law firm, and Hogan and Hartson obtained an arbitration award against AGS for approximately $600,000. AGS management asked Coughlin to pay the arbitration award, but Coughlin refused to do so.
Unfortunately, AGS was unable to pay the $600,000 arbitration award. Hogan and Hartson then threatened to bring a creditor's action against AGS and to place liens on the accounts receivables associated with AGS' largest customers, which would have effectively rendered AGS without sufficient funds to operate.
According to the application, on approximately June 12, 2007, DiPasquale was notified that Hogan and Hartson was prepared to proceed against the customers' accounts receivables unless AGS made a satisfactory arrangement for immediate payment. AGS was in a distressed financial condition, because the company had no realistic basis for believing that it would have sufficient cash flow to continue operations even in the short term.
In order to protect the financial viability of AGS, on June 25, 2007, DiPasquale entered into a settlement agreement with Hogan and Hartson and paid $600,000 to the law firm out of his personal funds. Hogan and Hartson then relinquished its claim against Coughlin by assigning it to DiPasquale.
In order to repay DiPasquale, AGS amended its Certificate of Incorporation to authorize the issuance of additional shares of stock and, on June 25, 2007, issued 1300 shares of its common stock to DiPasquale. As a result of this transaction, DiPasquale acquired a 61 percent interest in AGS. Since DiPasquale had obtained a majority interest in AGS, the issuance of stock to DiPasquale also effectively removed control of AGS from Coughlin.
Neither AGS nor DiPasquale applied for prior Commission authorization, as required by Section 854, to transfer these shares in AGS to DiPasquale.
B. Possible Unverified Transfer of Shares of AGS Holdings to Sinking Ship LLC
According to the application, at some point, Coughlin may also have transferred the shares of AGS Holdings owned by the Coughlin Family Trust, to a company known as Sinking Ship, LLC., (Sinking Ship) without the knowledge of AGS. Neither Coughlin nor AGS sought prior Commission approval of this transaction. In an informational filing, AGS stated that in an arbitration held in connection with the Hogan and Hartson matter, Coughlin testified that he had caused 85 shares of AGS Acquisition to be transferred to Sinking Ship. However, Coughlin's testimony is the only evidence that the transfer of shares to Sinking Ship may have occurred, and Coughlin recanted this statement after a creditor threatened to assert that this transfer was fraudulent as to creditors and other shareholders in AGS Holdings. In addition, AGS management has never received any documentation to prove that the transfer of shares to Sinking Ship took place.
To date, AGS remains unable to verify whether the transfer of these shares in AGS Acquisition to Sinking Ship actually occurred or whether Sinking Ship still exists.
6 Applicant's Opening Brief, page 8.
