5. Discussion
5.1. The Transfer of Control of AGS
The application should be approved on a prospective basis only. Based on the amendment to the application and the Stipulation, AGS is seeking Commission approval pursuant to Section 854 on a nunc pro tunc basis of DiPasquale's indirect acquisition of control of AGS, by purchasing the shares of AGS Acquisition formerly controlled by Coughlin at public auction in October 2007, after Coughlin defaulted on his loan from Chrysalis.
CPSD has withdrawn its opposition to the transfer of control of AGS to DiPasquale. However, CPSD urges the Commission to impose a fine of $10,000 on AGS based on Coughlin's pledge of shares to Chrysalis in violation of Section 854 and $5,000 for DiPasquale's purchase of the shares of AGS Acquisition at auction, because these transactions occurred without prior Commission approval as required by Section 854. CPSD points out that Coughlin was still chairman of AGS at the time of pledging the shares in AGS Acquisition to Chrysalis.
Advance Commission approval of the transfer of control of AGS is required under Section 854. Section 854 (a) states, in pertinent part:
No person or corporation, whether or not organized under the laws of this state, shall merge, acquire, or control...any public utility organized and doing business in this state without first securing authorization to do so from the commission...Any merger, acquisition, or control without that prior authorization shall be void and of no effect.
However, the first question in this case is when the transfer of control of AGS occurred. As argued by AGS in its reply brief, although Coughlin's pledge of his shares in AGS Acquisition to Chrysalis is the first in a series of events which led up to the indirect transfer of control of AGS to DiPasquale, pledging the shares as collateral for a loan did not result in a transfer of the shares to Chrysalis, until Coughlin defaulted on his loan. The parties have stipulated that the transfer of Coughlin's shares in AGS Acquisition occurred in approximately January 2006,7 after Coughlin defaulted on his loan. At this point, Chrysalis acquired a controlling interest in AGS Acquisition, and thereby indirectly acquired control of AGS.
DiPasquale acquired indirect control of AGS, when he purchased the shares of AGS Acquisition formerly controlled by the Coughlin Family Trust at public auction from Chrysalis in October 2006.
The Commission has broad discretion to determine if it is in the public interest to authorize a transaction pursuant to Section 854(a).8 The primary standard used by the Commission to determine if a transaction should be authorized under Section 854(a) is whether the transaction will adversely affect the public interest.9 The Commission may also consider if the transaction will serve the public interest.10 When necessary and appropriate, the Commission may attach conditions to a transaction in order to protect and promote the public interest.11
For the following reasons, we conclude that it is reasonable to grant this application to the extent it requests prospective authority under Section 854(a) for DiPasquale to acquire control of AGS. First, AGS' customers and the public will benefit from the transfer of control of AGS away from entities controlled by the Coughlin Family Trust and Chrysalis to DiPasquale. Coughlin's actions before and after the adoption of the Settlement Agreement clearly demonstrate that he is not fit to manage or control AGS, and the Settlement Agreement requires the Coughlin Family Trust to be divested of any controlling interest in AGS based on Coughlin's past actions. The application contains no evidence which shows whether or not Chrysalis has any experience in the management of telecommunications companies or meets Commission requirements for acquiring the control of a telecommunications company, such as AGS. Second, DiPasquale, as President and CEO of AGS, has managed the company since late 2004, and he has over 25 years of business management experience. The Commission has previously found that DiPasquale, along with the rest of AGS' management (other than Coughlin), has sufficient experience to manage the company,12 and DiPasquale has met the Commission's financial requirements applicable to this transfer of control. DiPasquale has also demonstrated his commitment to AGS by spending his personal funds to purchase the shares in AGS Acquisition at public auction, rather than allowing the shares to be purchased by a third party that may not have been qualified to operate a telecommunications company. Third, since DiPasquale will continue to manage the company, the transaction will be transparent to customers. Fourth, CPSD no longer objects to DiPasquale's continued management of AGS. For these reasons, we see no reason to withhold authority for the transfer of control on a prospective basis.
We deny this application to the extent it requests retroactive or nunc pro tunc authority under Section 854(a) for either Chrysalis or DiPasquale to acquire control of AGS. The purpose of Section 854(a) is to enable the Commission to review a proposed acquisition, before it takes place, in order to take such action as the public interest may require.13 Granting this application on a retroactive or nunc pro tunc basis would thwart the purpose of Section 854(a).
Since we will not grant retroactive authority, the acquisitions of control over AGS by both Chrysalis and DiPasquale are void under Section 854(a) for the period of time before the effective date of this decision. Applicants are at risk for any adverse consequences that may result from their having completed the transfer of control without Commission authority.
5.1.1. Whether AGS should be Fined for Coughlin's Violation of § 854(a) by Transferring Indirect Control of AGS to Chrysalis
As the former AGS chairman, Coughlin violated Section 854 by failing to obtain advance Commission authorization to transfer his shares in AGS Acquisition to Chrysalis. Violations of Section 854(a) are subject to monetary penalties under Section 2107, which states as follows:
Any public utility which violates or fails to comply with any provision of the Constitution of this state or of this part, or which fails or neglects to comply with any part or provision of any order, decision, decree, rule, direction, demand, or requirement of the commission, in a case in which a penalty has not otherwise been provided, is subject to a penalty of not less than five hundred dollars ($500), nor more than twenty thousand dollars ($20,000) for each offense.
Under Section 2108, each date on which a continuing violation remains in effect constitutes a separate violation.
CPSD argues that Coughlin's disregard of Section 854 by transferring the 85 shares in AGS Acquisition to Chrysalis without prior Commission authorization is a serious offense, which merits a $10,000 fine. AGS argues that it did nothing wrong, because AGS had no knowledge that Coughlin had pledged his shares in AGS Acquisition as security for the loan from Chrysalis or had defaulted on his loan until the shares were placed for sale at public auction. AGS also contends that AGS was not a party to the transaction, because Coughlin pledged shares of AGS Acquisition, not AGS, to Chrysalis, and that, as the transferee, Chrysalis should be held responsible for the violation of Section 854. However, Chrysalis is not a party to this action.
We conclude that the AGS should not be fined for the violation of Section 854 resulting from Coughlin's indirect transfer of control of AGS to Chrysalis. Although Coughlin was still chairman of AGS at the time that he pledged his shares in AGS Acquisition to Chrysalis and defaulted on his loan, the parties have stipulated that AGS management had no knowledge of these actions until Chrysalis placed the Coughlin's shares for sale at public auction in October 2007. By pledging his shares in AGS Acquisition to Chrysalis in return for a loan for a business venture unrelated to AGS, and failing to repay his loan, Coughlin was clearly not acting on behalf of AGS, but to promote his personal financial interests. Coughlin had also previously defrauded both AGS and Hogan and Hartson, by falsely representing to Hogan and Hartson that he was incurring legal expenses related to the acquisition of SwissFone on behalf of AGS. Coughlin has a record of previous violations of law and Commission orders, based on his role as a previous owner of Vista. Therefore, we find the stipulated facts credible and believe that Coughlin did not advise AGS' management that he had pledged his shares in AGS Acquisition as security for a loan from Chrysalis or was in danger of defaulting on his loan, so that AGS' management would have had an opportunity to attempt to prevent an unlawful transfer of control or to otherwise protect the company.
In contrast, AGS has cooperated with CPSD and the Commission by entering into the Settlement Agreement, securing Coughlin's resignation as an officer, and director and an employee of AGS, and unsuccessfully attempting to get Coughlin to divest himself of a controlling interest in AGS in an appropriate manner. These actions by AGS show that the company and its management did not condone, did not participate in, and clearly were not responsible for the unlawful acts of Coughlin, including his unauthorized transfer of 85 shares in AGS Acquisition to Chrysalis in violation of Section 854.
Under these circumstances, fining AGS based on the Coughlin's unauthorized indirect transfer of control of AGS Acquisition to Chrysalis would serve no useful purpose and would not deter future violations of Section 854. Since AGS had no knowledge of this transaction and was itself a victim of Coughlin's unauthorized acts which threatened the stability of the company, imposing a fine would only unjustly penalize AGS, which has made good faith efforts to comply with the divestiture requirements of the Settlement Agreement. Moreover, since Coughlin was not cooperating with AGS management, it appears that there was little that AGS could have done to prevent Coughlin from pledging the shares of its parent company as security for the loan from Chrysalis.
5.1.2. Whether AGS Should Be Fined for Violation of § 854(a) Based on DiPasquale's Acquisition of Control of AGS Without Prior Commission Authorization
Since DiPasquale's purchase of the shares of AGS Acquisition at public auction without prior Commission approval also violated Section 854, we must determine whether to impose a fine on AGS based on this transaction. AGS argues that the Commission should either impose no fine or a minimum fine, suspended, because DiPasquale's purchase of the shares furthered the intent of the Settlement Agreement by ensuring that Coughlin would be fully divested of control of AGS. AGS also states that since the Commission had already found DiPasquale fit to manage AGS in D.07-04-037, the transfer of control of the company to DiPasquale does not violate the legislative intent behind Section 854, which is to ensure that the Commission has had an opportunity to scrutinize a person or entity acquiring control of a regulated utility. In addition, AGS points out that since Chrysalis had placed the shares of AGS Acquisition for sale at public auction, time was of the essence, and DiPasquale had to act quickly to purchase the shares.
In contrast, CPSD argues that although DiPasquale's purchase of the AGS Acquisition shares at public auction is a less serious violation than Coughlin's previous transfer of the shares to Chrysalis, the Commission should impose a $5,000 fine for this violation of Section 854, because the need for DiPasquale to act quickly was created by AGS, when Coughlin, acting as AGS chairman, pledged his shares to Chrysalis as security for a loan and then defaulted on his loan. CPSD also points out that under prior Commission decisions, the need of a party to act quickly for business reasons does not excuse non-compliance with Section 854.
We agree with CPSD that any violation of Section 854 is serious, and that under our previous decisions, the need of a party to act quickly to effectuate a transfer of control for business reasons does not excuse a violation of Section 854.14
However, this case involves highly unusual circumstances, because of the unauthorized and unlawful actions of Coughlin, which resulted in Chrysalis' decision to place the 85 shares of AGS Acquisition for sale at public auction. Based on the stipulated facts, there is no evidence that AGS or DiPasquale knew that Coughlin had defaulted on his loan or that Chrysalis planned to sell the shares in AGS Acquisition until Chrysalis placed the shares for sale at public auction in early October. AGS and DiPasquale then had to act quickly, apparently within a matter of a few days, in order to purchase the shares and to avoid a potential transfer of control of AGS to a third party which may not have been qualified to manage the company and might not have met Commission requirements for assuming control of a telecommunication company. The purchase of shares by DiPasquale also furthered the intent of the Settlement Agreement by ensuring that Coughlin could not regain control of AGS.
We note that, as pointed out by AGS, the Commission had previously approved the qualifications of DiPasquale to manage AGS in D.07-04-037, and the consumers and the public were not harmed by DiPasquale's acquisition of control of the company. Moreover, even if DiPasquale had been able to very quickly file an application for Commission authorization under Section 854 before purchasing the shares at public auction, as a practical matter, the Commission could not have acted on a Section 854 application before the public auction occurred, because of the requirements of the Commission Rules of Practice and Procedure (Rules), which permit the filing of protests to an application, and the Bagley-Keene Act (Govt. Code Sections 11120-11132), which, with some exceptions, requires the posting of a description of a proposed decision on the agenda of the Commission business meeting in advance of the Commission's consideration of the decision. Although, ideally, DiPasquale would have filed an application for authorization under Section 854 to acquire control of AGS before the public auction occurred in order to at least advise the Commission of the situation, we will not fine AGS for its failure to file an application within a short time after learning of the public auction, based on the unique facts of this case.
However, AGS will be subject to monetary penalties under Sections 2107 and 2108 for any future violations of Section 854.
We emphasize that the Commission does not condone the transfer of any regulated utility without our prior authorization as required by Section 854. The purpose of Section 854 is to ensure that the Commission has an opportunity to review the transaction and the person or entity acquiring control of the utility, and to place conditions on the transfer, in order to ensure that customers and the public will not be harmed by the transfer of control. The Commission takes its responsibilities under Section 854 very seriously, and any transfer of control of a regulated utility without prior Commission authorization harms the regulatory process and places the public and customers at risk. We have not changed our policy in favor of imposing monetary penalties on parties that violate Section 854 in order to deter future violations, even in situations involving business reasons for carrying out a transfer of control quickly.
5.1.3. The Filing of Status Reports by AGS As Required by the Settlement Agreement
AGS characterizes itself as a "wholesale" company because it purchases telephone access from local exchange carriers (LECs) and sells that service to other long distance companies, which AGS refers to as its "carrier-customers". In A.04-12-029, CPSD discovered that some of AGS' carrier-customers were providing telephone service in California without having first acquired a CPCN, in violation of state law. The Settlement Agreement therefore includes the requirement for AGS to file status reports regarding its carrier-customers in order to assist CPSD in preventing non-certificated carriers from operating in California.
Paragraphs 18 and 19 of the Settlement Agreement require AGS to file status reports with CPSD regarding the status of its carrier-customers as follows:
18. Within six months of the Commission approval of this agreement, and continuing every six months until divestiture is complete, AGS will provide CPSD with a status report which (1) lists the of [sic] AGS' carrier-customers, and (2) provides verification that each carrier-customer of AGS previously identified by CPSD to AGS as unlicensed has either (a) verified its certification or (b) been terminated by AGS.
19. If CPSD advises AGS that a carrier-customer does not have valid operating authority, AGS will request verification of the certification from the carrier-customer. If CPSD is not satisfied that the subject carrier-customer is validly certified, the Director of CPSD will so inform AGS, and AGS will provide to the subject carrier-customer 30 days notice of termination.
The two status reports in question were due on March 7, 2007 and September 7, 2007. CPSD contends that AGS failed to meet the requirements for filing both status reports and asks the Commission to fine AGS $5,000 for these violations.
CPSD argues that AGS failed to file this status report as required by the Settlement Agreement because the list of carrier-customers provided by AGS on December 8, 2006 was current as of November 2006, but not as of March 7, 2007, the deadline for filing the status report. AGS contends that it substantially complied with the requirement for filing this status report, and that CPSD had previously advised AGS by e-mail that the carrier-customer list provided on December 8, 2006 met the requirement for a customer list in the March 7, 2007 status report.
On December 8, 2006, AGS forwarded to CPSD by e-mail a list of its carrier-customers, including some carriers which were not operating in California. On January 29, 2007, CPSD responded to the letter, notifying AGS that some of its carrier-customers appeared not to be certificated in California and directing AGS to immediately contact these customers and advise them that unless they either provide proof of their certification in California or apply for a CPCN within 30 days, AGS would terminate their service.
In addition, as pointed out by AGS, CPSD's January 29, 2007 letter states:
Finally, the Settlement Agreement (Section D. Termination of Service to AGS Carrier-Customers that Do Not Have Proper Operating Authority) states: "Within six months of the effective date of this order and continuing every six months until the completion of the Coughlin family interests in AGS, AGS will provide CPSD with a status report that: (1) lists AGS carrier-customers, and (2) provides certification for each carrier previously identified by CPSD as unlicensed has either verified that it has a valid CPCN or has had its service terminated by AGS. "AGS has complied with item (1) by responding to data request Alliance -11172006. Please provide the information specified in item (2) above no later than March 7, 2007. (Emphasis added.)
A series of e-mails and correspondence between the parties, which focused on whether AGS or CPSD should contact the carrier-customers that appeared not to be certificated in California and the status of certain carrier-customers, followed this letter. However, none of the subsequent letters or e-mails from CPSD notified AGS of the need to file an updated list of carrier-customers by March 7, 2007.
CPSD argues that in its February 2, 2007 letter to AGS, CPSD informed AGS of the need to file its status report by no later than March 7, 2007. However, this letter relates to the requirement under the Settlement Agreement for AGS to provide a status report which verifies that carrier-customers previously identified by CPSD as unlicensed had either verified that the company has a valid CPCN or has had its service terminated by AGS. This letter does not clarify CPSD's January 29, 2007 letter by directing AGS to file an updated customer-carrier list by March 7, 2007.14 Subsequent e-mails and letters between CPSD and AGS related solely to the certification status of certain carrier-customers.
Based on these facts, we find that AGS substantially complied with the requirement to file a status report by March 7, 2007. Although a strict reading of the Settlement Agreement suggests that AGS should have provided a current list of customer-carriers as of March 7, 2007, AGS reasonably relied on CPSD's statement in its January 29, 2007 letter that AGS had already met this requirement by providing a list of carrier-customers on December 8, 2006. Although the language of CPSD's February 2, 2007 letter does state that AGS had not been relieved from compliance with the Settlement Agreement except for the requirement of terminating service to uncertified or unregistered carrier-customers within 30 days, this language is ambiguous in view of CPSD's previous statement that AGS had already met the requirement for submitting a list of carrier-customers. CPSD did not clearly direct AGS to file an updated list that was current as of March 7, 2007 in any of the correspondence or e-mails following CPSD's January 29, 2007 letter. Therefore, AGS had no notice that CPSD would later claim that AGS had failed to meet the requirements for the March 7, 2007 status report. Under these circumstances, we will not fine AGS for failing to file an updated customer-carrier list with CPSD by March 7, 2007, because CPSD never clearly requested one.
In the future, CPSD is advised to maintain clear and unambiguous communications with regulated utilities regarding requirements for compliance with the law and Commission orders.
AGS admits that it simply forgot to file this status report, which was due because the divestiture of Coughlin from any role in the management of AGS was not yet completed. After CPSD filed its protest, along with an attached data request asking for a current list of AGS' carrier-customers on October 12, 2007. AGS responded on October 18, 2007, over a month after the second status report was due. All of the carrier-customers on AGS' list were certificated. CPSD has stipulated that this list met the requirements of the Settlement Agreement.
CPSD argues that, although AGS' failure to timely file the second status report is not a serious offense, the Commission should impose a fine because AGS was responsible for complying with the Settlement Agreement and AGS's failure to file the status report on time caused CPSD to expend additional time on this matter, rather than focus on other priorities. AGS argues that, after sending an e-mail regarding the status of one of its carrier-customers to CPSD on February 8, 2008, AGS had not heard from CPSD for many months. In addition, AGS points out that its failure to provide the customer-carrier list to CPSD on time did not deprive CPSD of useful information regarding non-certificated carriers, because all carrier-customers on the list were certificated.
We agree with CPSD that AGS violated the Settlement Agreement by filing the second status report late and only after CPSD requested it, and that AGS was responsible for filing the report, whether or not it had received recent communications from CPSD. We believe that a fine is appropriate because AGS caused an unnecessary consumption of CPSD's resources by failing to file the report on time and in order to deter future violations.
CPSD has asked the Commission to fine AGS $5,000 based on its claim that AGS failed to file both status reports on time. However, since we found that AGS substantially complied with the requirement for filing the first status report, we will impose a smaller fine. In determining the size of the fine, we relied on the criteria adopted in D.98-12-075, as follows:
Criterion 1: Severity of the Offense
In D.98-12-075, the Commission held that the size of a fine should be proportionate to the severity of the offense. To determine the severity of the offense, the Commission stated that it would consider the following factors:15
7 Stipulation, page 6.
8 D.95-10-045, 1995 Cal. PUC LEXIS 901, *18-19; and D.91-05-026, 40 CPUC 2d 159, 171.
9 D.00-06-079, p. 13; D.00-06-057, p. 7; D.00-05-047, p. 11 and Conclusion of Law (COL) 2; D.00-05-023, p. 18; D.99-03-019, p. 14; D.98-08-068, p. 22; D.98-05-022, p. 17; D.97-07-060, 73 CPUC 2d 601, 609; D.70829, 65 CPUC 637, 637; and D.65634, 61 CPUC 160, 161.
10 D.00-06-005, 2000 Cal. PUC LEXIS 281, *4; D.99-04-066, p. 5; D.99-02-036, p. 9; D.97-06-066, 72 CPUC 2d 851, 861; D.95-10-045, 62 CPUC 2d 160, 167; D.94-01-041, 53 CPUC 2d 116, 119; D.93-04-019, 48 CPUC 2d 601, 603; D.86-03-090, 1986 Cal. PUC LEXIS 198 *28 and COL 3; and D.8491, 19 CRC 199, 200.
11 D.95-10-045, 62 CPUC 2d 160, 167-68; D.94-01-041, 53 CPUC 2d 116, 119; D.90-07-030, 1990 Cal. PUC LEXIS 612 *5; D.89-07-016, 32 CPUC 2d 233, 242; D.86-03-090, 1986 Cal. PUC LEXIS 198 *84-85 and COL 16; and D.3320, 10 CRC 56, 63.
12 D.07-04-037, Finding of Fact No. 8 at p. 13.
13 D.99-02-061, 1999 Cal. PUC LEXIS 56 *12; D.98-07-015, 1998 Cal. PUC LEXIS 526 *7; D.98-02-005, 1998 Cal. PUC LEXIS 320 *8; D.97-12-086, 1997 Cal. PUC LEXIS 1168 *8; and San Jose Water Co. (1916) 10 CRC 56, 63.
14 See D.07-05-040 (Yak)
14 CPSD's February 2, 2007 letter to AGS states in pertinent part:
On February 7, 2007, I received an email (copy attached) from Ms. Carol Plofkin, Controller/Director of Finance for Alliance Group Services (AGS), stating my concerns related to my January 29, 2007 letter addressed to you. I'm afraid Ms. Plofkin may have misconstrued the content and intent of this letter. Nowhere in this letter do I indicate that the carriers are to respond only to me. In fact, I had specifically stated: Please ALSO advise the carriers to send a copy of their filing to me at the address posted below." Further, I provided a direct quote from the Settlement Agreement (SA), Decision (D.06-09-009) that states, in pertinent part: "AGS will provide CPSD with a status report that ... provides verification that each carrier-customer of AGS previously identified by CPSD as unlicensed has either verified that it has a valid CPCN or has had its service terminated by AGS". This is also stated, using essentially the same language, in paragraph 18 of the SA. With the exception of not requiring AGS to terminate service with these carrier-customers after 30 days notice, as specified in the SA, nowhere in this letter have I relieved AGS from performing to the specifications of the SA. This report is due, according to the terms of the SA, no later than March 7, 2007. However, under the present circumstances I would encourage AGS to provide this report as soon as possible. (Emphasis added.)
The remainder of this letter addresses the certification status of eight carrier-customers and CPSD's view that it was AGS' responsibility to contact the carrier-customers and notify them that they must either produce verification of registration or certification or have their service terminated by AGS.
15 1998 Cal. PUC LEXIS 1016, *71 - *73.
