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SUPREME COURT OF THE STATE OF NEW YORK COUNTY OF NEW YORK
) JEFF KIRKLAND, ANTHONY FIORE, and EMPLOYEES RETIREMENT SYSTEM OF ) ) THE PUERTO RICO ELECTRIC POWER AUTHORITY, Individually and on Behalf of ) All Others Similarly Situated, ) ) Plaintiffs, ) ) -against- Index No. 653248/2018 ) WIDEOPENWEST, INC., STEVEN ) JURY TRIAL DEMANDED COCHRAN, RICHARD E. FISH, JR., ) DAVID BURGSTAHLER, BRIAN ) CASSIDY, DANIEL KILPATRICK, ) JEFFREY MARCUS, PHIL SESKIN, ) JOSHUA TAMAROFF, AVISTA CAPITAL ) PARTNERS, CRESTVIEW PARTNERS, ) UBS SECURITIES LLC, CREDIT SUISSE ) SECURITIES (USA) LLC, RBC CAPITAL ) MARKETS, LLC, SUNTRUST ROBINSON ) HUMPHREY, INC., EVERCORE GROUP ) L.L.C., MACQUARIE CAPITAL (USA) ) INC., LIONTREE ADVISORS LLC, and RAYMOND JAMES & ASSOCIATES, INC., ) ) Defendants. ) )
CORRECTED CONSOLIDATED CLASS ACTION COMPLAINT FOR VIOLATIONS OF THE SECURITIES ACT OF 1933
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TABLE OF CONTENTS
NATURE AND SUMMARY OF THE ACTION ...... 1
JURISDICTION AND VENUE ...... 7
PARTIES ...... 7
A. Plaintiffs ...... 7
B. WOW ...... 8
C. The Individual Defendants ...... 8
D. The Private Equity Defendants ...... 10
E. The Underwriter Defendants...... 12
SUBSTANTIVE ALLEGATIONS ...... 15
A. Company Background ...... 15
B. The Company Goes Public By Means of Its Materially False, Misleading and Incomplete Offering Materials ...... 16
1. The Offering Materials’ Materially False, Misleading and Incomplete Statements Concerning WOW’s Woeful Customer Service ...... 17
a) The Material Adverse and Undisclosed Issues Plaguing the Company’s Customer Service Function ...... 19
2. The Offering Materials’ Materially False, Misleading and Incomplete Statements Concerning the Quality of the Company’s Technology Offerings, Including Its Ultra DVR Product ...... 26
a) The Material Adverse and Undisclosed Problems Plaguing the Company’s Technology-Based Services and Its Ultra DVR Product ...... 26
3. The Offering Materials’ Materially False, Misleading and Incomplete Statements Concerning the Company’s Customer Quality and Credit Risk Management ...... 32
a) The Undisclosed Risk Associated with WOW’s Efforts to Lower Prospective Customer Requirements In Order to Boost Subscription Totals in the IPO ...... 33
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4. The Offering Materials’ Materially False, Misleading and Incomplete Statements Concerning the Chicago Fiber Network ...... 37
a) The Undisclosed Issues with the Chicago Network Buildout, Which Rendered Its Sale to Verizon All But Assured at the Time of the IPO ...... 39
5. The Offering Materials Overstated WOW’s Goodwill ...... 46
6. The Offering Materials Overstated WOW’s Valuation of Franchise Operating Rights ...... 50
7. The Offering Materials Reported Understated Bad Debt Expense and Allowance for Doubtful Accounts ...... 54
C. The Truth Gradually Begins to Emerge and Shareholders Are Left Holding the Bag ...... 56
CLASS ACTION ALLEGATIONS ...... 60
FIRST CAUSE OF ACTION ...... 62
For Violations of §11 of the Securities Act of 1933 Against All Defendants Other Than The Private Equity Defendants ...... 62
SECOND CAUSE OF ACTION ...... 65
For Violation of §12(a)(2) of the Securities Act of 1933 Against WOW, the Officer Defendants, and the Underwriter Defendants ...... 65
THIRD CAUSE OF ACTION ...... 66
For Violation of §15 of the Securities Act of 1933 Against the Individual Defendants and the Private Equity Defendants ...... 66
PRAYER FOR RELIEF ...... 67
JURY DEMAND ...... 69
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Plaintiffs Jeff Kirkland, Anthony Fiore, and Employees’ Retirement System of the Puerto Rico
Electric Power Authority (collectively, “Plaintiffs”), bring this action pursuant to §§11, 12, and 15
of the Securities Act of 1933 (the “Securities Act”) on behalf of themselves and all persons or
entities other than Defendants who purchased common stock issued by WideOpenWest, Inc.
(“WOW” or the “Company”) pursuant to or traceable to the Company’s Initial Public Offering
(the “IPO” or “Offering”) on May 25, 2017.
Plaintiffs allege the following based upon personal knowledge as to themselves and their
own acts, and upon information and belief as to all other matters. Plaintiffs’ information and belief
is based on the investigation of their undersigned Counsel, which included, among other things,
review and analysis of: (i) WOW’s public filings with the U.S. Securities and Exchange
Commission (“SEC”); (ii) WOW’s other public statements, including press releases; (iii) reports
of securities and financial analysts, news articles, and other commentary and analysis concerning
WOW and the industry in which it operates; and (iv) interviews with confidential witnesses
(“CWs”), including former WOW employees as further described below.1 Counsel’s investigation
into the matters alleged herein is continuing, and many relevant facts are known only to, or are
exclusively within the custody or control of, the Defendants. Plaintiffs believe that substantial
additional evidentiary support will exist for the allegations set forth herein after a reasonable
opportunity for discovery.
NATURE AND SUMMARY OF THE ACTION
1. This securities class action is brought under §§11, 12, and/or 15 of the Securities
Act against: (i) WOW; (ii) certain members of WOW’s senior management and the members of
its board of directors who signed the Registration Statement (as defined herein) in connection with
1 Plaintiffs refer to the CWs herein using feminine pronouns, without regard to the CWs’ gender.
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the Company’s IPO (the “Individual Defendants”); (iii) the private equity groups that maintained
control over the majority of the Company’s outstanding common stock and seats on the WOW
Board of Directors (the “Board”), both prior to and after the IPO (the “Private Equity Defendants”);
and (iv) the investment banks that participated in the Offering as underwriters (the “Underwriter
Defendants” and, together with WOW, the Individual Defendants, and the Private Equity
Defendants, the “Defendants”).
2. Plaintiffs allege that the Registration Statement2 and the Prospectus3 incorporated
therein (collectively, the “Offering Materials”) contained untrue statements of material fact or
omitted to state material facts required to be stated therein or necessary to make the statements
therein not misleading. Defendant WOW is strictly liable for any and all materially untrue
statements or omissions in the Offering Materials. The remaining Defendants are also strictly
liable for any and all materially untrue statements or omissions in the Offering Materials, unless
they can establish an affirmative “due diligence” defense. For all claims stated herein, Plaintiffs
expressly disclaim any allegations of fraud or intentional or reckless misconduct, and any intention
for any allegation to suggest or “sound” in fraud.
3. Because this case involves a Registration Statement, Defendants also had an
independent, affirmative duty to ensure that the Offering Materials provided adequate disclosures
concerning material adverse conditions, risks, trends and uncertainties facing WOW. See Item
303 of SEC Reg. S-K, 17 C.F.R. §229.303(a)(3)(ii). Defendants failed to fulfill this obligation.
4. As of the IPO, WOW was an internet service provider (“ISP”) that provided (a)
high-speed data (“HSD”), (b) cable television (“Video”), (c) Voice over IP-based telephony
2 “Registration Statement” refers to the registration statement filed by WOW with the SEC on May 19, 2017, and declared effective by the SEC on May 24, 2017. 3 “Prospectus” refers to the Prospectus filed by WOW on Form 424B4 with the SEC on May 25, 2017. 2
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(“VOIP”), and (d) Business-Class Services4 to an area that included approximately 3.0 million
homes and businesses covering over 300 communities in the states of Alabama, Florida, Georgia,
Illinois, Indiana, Maryland, Michigan, Ohio, South Carolina and Tennessee. Founded in 2012,
WOW was the sixth largest cable operator in the United States ranked by number of customers as
of December 31, 2016. Prospectus at 1, 49, 83.
5. The IPO was conducted on May 25, 2017. Pursuant to the Offering Materials,
20,970,589 WOW shares of common stock (the 18,235,295 shares initially offered plus an
additional 2,735,294 shares issued pursuant to a “greenshoe” over-allotment option held by the
Underwriter Defendants, which was fully exercised) were offered and sold to investors at a price
of $17.00 per share, generating total proceeds of more than $356 million. WOW announced the
closing of the IPO on May 31, 2017.
6. Unbeknownst to investors, however, and in violation of the Securities Act, the
Offering Materials contained untrue statements of material fact and omitted to disclose material
facts required to be stated therein.
7. First, the Offering Materials, while emphasizing that the Company’s “philosophy
is to deliver an employee and customer experience that is consistent with the WOW! name”
(Prospectus at 8, 92), misleadingly represented that its “differentiated customer service
experience” was an essential tool for competing against larger, better known HSD and Video
providers. In fact, at the time of the Offering and unbeknownst to investors, WOW’s customer
service and user experience had deteriorated to a point that WOW was losing significant amounts
of customers and would be forced to invest substantial additional funds into those areas to reduce
4 WOW’s “Business-Class Services” included its provision of traditional and fiber HSD and telephony services, as well as related co-location infrastructure services, cloud computing, managed backup and recovery services, to small, medium and large businesses.
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its customer churn (a metric measuring the total number of existing customers moving away from
the Company’s services) – and the truth concerning the nature and extent of the decay in WOW’s
customer service and ability to provide a (positively) differentiated user experience was nowhere
disclosed in the Offering Materials.
8. Second, the Offering Materials’ statements that described the Company as having
a “technologically advanced platform that underpins [WOW’s] competitive advantage,” and that
referenced in particular the capabilities of its touted “Ultra DVR” product offering, were also
materially false and misleading. In fact – far from giving it a “competitive advantage” – WOW’s
platform-based offerings, including its Ultra DVR system, were riddled with pervasive problems
that constantly required customer service attention, drove up customer dissatisfaction, and
contributed significantly to customer churn and users’ eventual abandonment of WOW. Again,
the Offering Materials failed to disclose the nature and extent of these then-existing problems,
their impact on the Company’s costs, or their serious adverse implications on the Company’s
ability to grow.
9. Third, the Offering Materials gave false comfort to investors by misleadingly
assuring them that the Company maintained visibility into customer quality by using “internal
customer information, identification verification tools and credit bureau data” (Prospectus at F-12)
to manage credit risk. However, such assurances were materially false and misleading because at
the time of the IPO – and at the same time WOW was losing large numbers of customers due to
its deteriorating customer service and technically defective Ultra DVR and other services – WOW
was materially lowering its gating requirements for prospective customers. In particular, in the
period leading up to the IPO, in an effort to bolster the number of its subscribers, WOW did not
even perform customer credit score and fraud check requirements in many of its markets – and
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even in the limited number of markets where the Company had previously employed these checks,
it had relaxed them. This conduct had the effect of generating large numbers of delinquent
customers, who in turn were then offered various credits and other incentives by WOW in order
to retain them as customers. Indeed, WOW’s enforcement of customer credit standards was so
poor that even when it acted to close an account, WOW frequently afforded its delinquent
customers the opportunity to keep their WOW services free of charge because the Company failed
to maintain systems that would allow it to remotely (and thus inexpensively) terminate such
customers. None of these adverse facts were disclosed in the Offering Materials.
10. Fourth, the Offering Materials misrepresented the status of WOW’s build-out of its
fiber network in Chicago (the “Chicago network”) by stating that the Chicago network was an
asset that had “considerable embedded value,” particularly with respect to the Company’s
purportedly burgeoning Business-Class Services segment and WOW’s plans to capture an
“approximately $1.3 billion addressable revenue opportunity” in the HSD segment. However,
despite the Offering Materials’ representations that it would be a driver of future Company growth,
the Offering Materials were materially false, misleading and incomplete because they failed to
disclose that the Chicago network had been plagued by cost overruns and increasing debt service,
had not been properly designed to allow WOW to retain effective usage of its own fiber optic
strands in the network that it had not already committed to provide to another company (Verizon
Communications Inc. (“Verizon”)), and that, as a result, the Company was looking to sell the
network to Verizon immediately after the IPO (thereby effectively foreclosing the prospect of the
network providing a basis for future revenue growth).
11. The truth concerning the nature and extent of the problems at the Company did not
begin to emerge until after the Offering, and did so only gradually. For example, on August 1,
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2017 (barely two months after the IPO), WOW announced that it would be selling a “portion” of
its Chicago fiber network to a subsidiary of Verizon for $225 million in cash. However, because
the Company’s August 1, 2017 announcement failed to disclose that WOW was selling all of the
Chicago network, leaving WOW with effectively little or no ability to generate significant revenue
from its retention of fiber optic strands, the adverse nature and extent of the financial impact of the
Verizon transaction (which was completed in December 2017) remained undisclosed.
12. On March 14, 2018, however, the Company was forced to issue its financial results
for the fourth quarter and full fiscal year ended December 31, 2017. These results revealed a
shocking decline in 2017 in WOW’s total revenue of approximately 4% on a year-on-year basis
compared to 2016. As the Company’s management acknowledged on the subsequent earnings
call, “over the course of 2017, we fell short in some of our key operating and financial metrics and
have not lived up to our long-held reputation of providing exceptional customer experiences,” and
also disclosed that WOW’s failures would necessitate “investments of between $20 million and
$25 million … in customer experience, customer acquisition and retention, products and services
and, of course, our people.” WOW also announced that it had recorded a massive $147.4 million
impairment charge to its indefinite-lived intangible assets and goodwill, which management
claimed was primarily driven by WOW’s stock price decline.5
13. In response to its March 2018 disclosures, WOW’s stock plunged more than 23%
on March 15, 2018 alone, falling to a closing price of $7.04 – nearly 59% below the IPO price.
The March 2018 disclosures also sent shockwaves throughout the financial analyst community,
with multiple analysts significantly cutting their price targets for the Company.
5 Two months later, on May 11, 2018, WOW announced that had taken a further impairment charge of $256.4 million at the end of the 1st quarter of 2018 related to a decline in the value of franchise operating rights and goodwill in certain markets.
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14. Since the spring of 2018, WOW’s common stock has continued to trade at
depressed levels that are far below the IPO offering price of $17.00 per share, with the stock trading
as low as $6.25 in May 2018.
15. Plaintiffs, individually and on behalf of similarly situated Class members who
acquired the Company’s common stock pursuant or traceable to the Offering, seek to obtain a
recovery for the damages suffered as a result of Defendants’ violations of the Securities Act.
JURISDICTION AND VENUE
16. The claims asserted herein arise under §§11, 12, and 15 of the Securities Act, 15
U.S.C. §§77k, 77l and 77(o). This Court has subject matter jurisdiction over this action under §22
of the Securities Act (15 U.S.C. §77v). This action is not removable to federal court.
17. Venue is proper in this court as: (i) WOW’s common stock is listed on the New
York Stock Exchange (“NYSE”), whose headquarters are found within New York County; (ii)
each of the Private Equity Defendants is headquartered in New York County; (iii) each of the
Underwriter Defendants has executive offices or sizable practices in this county and maintains
substantial and continuous contact with New York by conducting significant investment banking
operations in New York County and throughout New York State; and (iv) the violations of law
complained of herein occurred in New York State and in large part in New York County, including
the dissemination of the materially false and misleading Offering Materials.
PARTIES
A. Plaintiffs
18. Plaintiff Jeff Kirkland purchased WOW common stock traceable to the Offering
Materials issued in connection with the Company’s IPO and has been damaged thereby.
19. Plaintiff Anthony Fiore purchased WOW common stock traceable to the Offering
Materials issued in connection with the Company’s IPO and has been damaged thereby.
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20. Plaintiff Employees’ Retirement System of the Puerto Rico Electric Power
Authority purchased WOW common stock both pursuant to and traceable to the Offering Materials
issued in connection with the Company’s IPO and has been damaged thereby.
B. WOW
21. Defendant WOW is incorporated in the State of Delaware with principal executive
offices located at 7887 East Belleview Avenue, Suite 1000, Englewood, Colorado 80111. Shares
of WOW’s common stock are traded on the NYSE under the ticker symbol “WOW.”
22. Defendant WOW is strictly liable for the materially untrue and misleading
statements incorporated into the Registration Statement.
C. The Individual Defendants
23. Defendant Steven Cochran was at the time of the IPO the Company’s CEO and a
member of the Board, and signed or authorized the signing of the Company’s Registration
Statement and issuance of the Offering Materials. On December 14, 2017, WOW announced that
Defendant Cochran was retiring from his position as Company CEO and as a member of the Board,
effective December 14, 2017, and that Defendant Cochran would continue to act as an “advisor”
to the Company through June 30, 2018. Despite his supposed retirement, in July 2018 it was
announced that Cochran would join Cable One, Inc., another cable company, as its Senior Vice
President and Chief Financial Officer.
24. Defendant Richard E. Fish, Jr. was at the time of the IPO, WOW’s Chief Financial
Officer (“CFO”) and signed or authorized the signing of the Company’s Registration Statement.
25. Defendants Cochran and Fish are sometimes referred to herein as the “Officer
Defendants.” Each Officer Defendant participated in road shows, investor meetings, and media
interviews in connection with the IPO.
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26. Defendant David Burgstahler signed or authorized the signing of the Company’s
Registration Statement as a Company Director. At all times relevant hereto, Defendant
Burgstahler was also the President and Co-Managing Partner of Avista Capital Partners (“Avista”).
Defendant Burgstahler is a resident of Lawrence, New York.
27. Defendant Brian Cassidy signed or authorized the signing of the Company’s
Registration Statement as a Company Director. At all times relevant hereto, Defendant Cassidy
was also a Partner at Crestview Partners (“Crestview”). Defendant Cassidy maintains an office at
Crestview in New York County.
28. Defendant Daniel Kilpatrick signed or authorized the signing of the Company’s
Registration Statement as a Company Director. At all times relevant hereto, Defendant Kilpatrick
was also a Principal at Crestview. Defendant Kilpatrick is a resident of New York, New York.
29. Defendant Jeffrey Marcus was, at the time of the IPO, the Chairman of WOW’s
Board and signed or authorized the signing of the Company’s Registration Statement as a
Company Director. At all times relevant hereto, Marcus was also a Partner at Crestview.
Defendant Marcus maintains a residence in New York, New York.
30. Defendant Phil Seskin signed or authorized the signing of the Company’s
Registration Statement as a Company Director. At all times relevant hereto, Seskin was also an
Industry Executive at Avista. Defendant Seskin is a resident of Garden City, New York.
31. Defendant Joshua Tamaroff signed or authorized the signing of the Company’s
Registration Statement as a Company Director. At all times relevant hereto, Tamaroff was also a
Vice President at Avista. Defendant Tamaroff is a resident of Suffern, New York.
32. Defendants Cochran, Fish, Burgstahler, Cassidy, Kilpatrick, Marcus, Seskin, and
Tamaroff are referred to herein as the “Individual Defendants.”
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33. Each Individual Defendant (unless he can establish an affirmative due diligence
defense) is strictly liable for the materially untrue and misleading statements contained in the
Offering Materials. By virtue of their positions with the Company, the Individual Defendants also
possessed the power and authority to control the contents of the Offering Materials.
D. The Private Equity Defendants
34. Defendant Avista is a private equity firm that, prior to the Offering, held 56.9% of
WOW’s common stock and, immediately after the Offering, owned 43.3% of the common stock
of the Company. Prospectus at 133.
35. Avista maintains its headquarters at 65 East 55th Street, 18th Floor, New York, NY
10022.
36. Avista acquired its interest in WOW when it purchased WOW’s predecessor
company from Oak Hill Capital in 2006.
37. Defendant Crestview is a private equity firm that, prior to the Offering held 37.3%
of the Company’s common stock, and after the Offering, controlled 28.4% of the common stock
of the Company. Prospectus at 133.
38. Crestview maintains its headquarters at 590 Madison Avenue, 36th Floor, New
York, NY 10022.
39. Crestview made its initial investment in the Company’s predecessor in December
2015, when it purchased units held by Avista and other unitholders and made a $125 million
primary investment in newly-issued units. Prospectus at 79.
40. On April 29, 2016, funds managed by Avista and Crestview made an additional
$40 million investment in newly-issued membership units in WOW’s then-parent company.
41. Defendants Avista and Crestview are collectively referred to herein as the “Private
Equity Defendants.” 10
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42. According to the Prospectus, as of the IPO, WOW pays an annual management fee
of approximately $1,500,000 plus expenses to Avista “to provide certain advisory and consulting
services,” in relation to WOW. See Prospectus at 127. Pursuant to an agreement between Avista
and Crestview, Crestview is entitled to 50% of any management fees or transaction fees actually
received by Avista, plus reasonable expenses incurred. See Prospectus at 127.
43. Additionally, in connection with the Offering, WOW entered into stockholder
agreements with Avista and Crestview providing, among other things, that Avista and Crestview
would each have the right to designate:
• three directors to WOW’s Board for so long as such shareholder owns at least 22.5% of
WOW’s outstanding shares of common stock;
• two directors for so long as such shareholder owns at least 15%, but less than 22.5%, of
WOW’s outstanding shares of common stock; and
• one director to WOW’s Board for so long as such shareholder owns at least 5%, but less
than 15%, of WOW’s outstanding shares of common stock.
Prospectus at 110. 44. At the time of the Offering, Defendants Burgstahler, Seskin and Tambor were
Avista’s designees to the Board.
45. At the time of the Offering, Defendants Cassidy, Kilpatrick, and Marcus were
Crestview’s designees to the Board.
46. Given the Private Equity Defendants’ ownership and control over approximately
94.2% of WOW’s outstanding shares prior to the IPO, 71% of WOW’s outstanding shares after
the IPO, and their resulting ability to appoint six of the seven seats on WOW’s Board, the Offering
Materials unsurprisingly described the Private Equity Defendants as having the ability to “strongly
influence or effectively control [WOW’s] decisions.” Prospectus at 35. The Offering Materials
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further acknowledged that the Private Equity Defendants “will be able to exercise a significant
level of control over all matters requiring stockholder approval, including the election of directors,
amendment of [WOW’s] amended and restated certificate of incorporation and approval of
significant corporate transactions and, through [WOW’s] Board of Directors, the ability to control
decision-making with respect to [its] business direction and policies.” Id.
E. The Underwriter Defendants
47. Defendant UBS Securities LLC (“UBS”) acted as an underwriter for the
Company’s IPO. In the Offering, UBS agreed to purchase 5,105,883 shares of the Company’s
common stock, exclusive of any over-allotment option. Prospectus at 150. UBS maintains
headquarters in the United States at 1285 Avenue of the Americas, New York, NY 10019, and
maintains a registered agent for service at the Corporation Service Company, 80 State Street,
Albany, NY 12207.
48. Defendant Credit Suisse Securities (USA) LLC (“Credit Suisse”) acted as an
underwriter for the Company’s IPO. In the Offering, Credit Suisse agreed to purchase 5,105,883
shares of the Company’s common stock, exclusive of any over-allotment option. Id. Credit Suisse
maintains headquarters in the United States at Eleven Madison Avenue, New York, NY 10010 and
maintains a registered agent for service at the Corporation Service Company, 80 State Street,
Albany, NY 12207.
49. UBS and Credit Suisse acted as joint book-running managers in the Offering and
as representatives of all Underwriter Defendants.
50. Defendant RBC Capital Markets, LLC (“RBC”) acted as an underwriter for the
Company’s IPO. In the Offering, RBC agreed to purchase 2,005,882 shares of the Company’s
common stock, exclusive of any over-allotment option. Id. RBC maintains headquarters in the
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United States at 200 Vesey Street, 9th Floor, New York, NY 10281 and maintains a registered
agent for service at the Corporation Service Company, 80 State Street, Albany, NY 12207.
51. Defendant SunTrust Robinson Humphrey, Inc. (“SunTrust”) acted as an
underwriter for the Company’s IPO. In the Offering, SunTrust agreed to purchase 2,005,882
shares of the Company’s common stock, exclusive of any over-allotment option. Id. SunTrust
maintains offices at 711 Fifth Avenue, New York, NY 10022 and a registered agent for service at
the Corporation Service Company, 80 State Street, Albany, NY 12207.
52. Defendant Evercore Group L.L.C. (“Evercore”) acted as an underwriter for the
Company’s IPO. In the Offering, Evercore agreed to purchase 1,458,823 shares of the Company’s
common stock, exclusive of any over-allotment option. Id. Evercore maintains its headquarters
at 55 East 52nd Street, New York, NY 10055 and an additional office at 666 Fifth Avenue, New
York, NY 10019 and maintains a registered agent for service at CT Corporation System, 111
Eighth Avenue, New York, NY 10011.
53. Defendant Macquarie Capital (USA) Inc. (“Macquarie”) acted as an underwriter
for the Company’s IPO. In the Offering, Macquarie agreed to purchase 1,458,823 shares of the
Company’s common stock, exclusive of any over-allotment option. Id. Macquarie maintains its
headquarters at 125 West 55th Street, Floor 22, New York, NY 10019 and maintains a registered
agent for service at the Corporation Service Company, 80 State Street, Albany, NY 12207.
54. Defendant LionTree Advisors LLC (“LionTree”) acted as an underwriter for the
Company’s IPO. In the Offering, LionTree agreed to purchase 729,412 shares of the Company’s
common stock, exclusive of any over-allotment option. Id. LionTree maintains its headquarters
at 660 Madison Avenue, New York, NY 10065.
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55. Defendant Raymond James & Associates, Inc. (“Raymond James”) acted as an
underwriter for the Company’s IPO. In the Offering, Raymond James agreed to purchase 729,412
shares of the Company’s common stock, exclusive of any over-allotment option. Id. Raymond
James maintains offices at 535 Madison Avenue, New York, New York 10022.
56. Defendants UBS, Credit Suisse, RBC, SunTrust, Evercore, Macquarie, LionTree,
and Raymond James are referred to herein as the “Underwriter Defendants.”
57. The Underwriter Defendants held an over-allotment option, which they exercised
in full, to purchase an additional 2,735,294 shares, apportioned pro rata based on their firm
commitment to the Offering.
58. The Underwriter Defendants received commissions for their participation in the
IPO, receiving $0.8925 for every share sold, totaling approximately $18.7 million (inclusive of the
proceeds from the exercise of the over-allotment option).
59. Pursuant to the Securities Act, each Underwriter Defendant is strictly liable for the
materially untrue and misleading statements in the Offering Materials (unless it is able to establish
an affirmative “due diligence” defense). The Underwriter Defendants assisted WOW and the
Individual Defendants and the Private Equity Defendants in planning the IPO and were required
to conduct an adequate and reasonable investigation into the business and operations of WOW —
a process known as a “due diligence” investigation. During the course of their due diligence
investigation, the Underwriter Defendants had access to confidential corporate information
concerning WOW’s operations and financial prospects.
60. In addition to having virtually unlimited access to internal corporate documents,
agents of the Underwriter Defendants met with WOW’s lawyers, management and top executives
and made joint decisions regarding: (i) the terms of the IPO, including the price at which WOW
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shares would be sold to the public; (ii) the strategy to best accomplish the IPO; (iii) the information
to be included in the Offering Materials; and (iv) what responses would be made to the SEC in
connection with its review of the Offering Materials.
SUBSTANTIVE ALLEGATIONS
A. Company Background
61. WOW commenced operations as a regional cable provider in 2001 under its
predecessor corporate entity, WideOpenWest, LLC. According to the Offering Materials, since
then WOW’s
… focus has been to offer a competitive alternative cable service and establish a brand with a strong market position … through (i) organic subscriber growth and increased penetration within [its] existing markets and footprint, (ii) edge-outs to grow [its] footprint, (iii) upgrades to introduce enhanced broadband services to networks [it has] acquired, (iv) entry into business services, with a broad range of HSD, Video and Telephony products, and (v) acquisitions and integration of cable systems. [Prospectus at 3, 49, 84.]
62. WOW’s status as an “alternative” provider at the time of the IPO was significant,
as WOW was often the second or third option for cable, phone, and internet services in its areas
of operations, behind long-established players, and thus had to offer high-quality HSD services
and a superior, differentiated experience to be able to lure customers away from its better-known
competitors such as Comcast Corporation, Charter Communications, Inc., and Frontier
Communications Corporation. Prospectus at 17, 94, 95.
63. To do so, according to the Prospectus, WOW focused on providing its customers
with an optimal “customer experience,” and the Prospectus further emphasized that WOW’s
employees constituted the Company’s “greatest strategic asset” and “brand ambassadors.”
Our philosophy is to deliver an employee and customer experience that is consistent with the WOW! name. We are a company comprised of people who derive satisfaction from taking care of each other and our customers. As a result, there is heightened awareness and understanding among our team that it is our employees who ultimately are WOW!’s greatest strategic asset. Our
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approximately 3,000 employees are brand ambassadors across the communities we serve. [Prospectus at 8, 92. 6]
64. At the time of the IPO, the Company’s footprint covered over 300 communities in
the States of Alabama, Florida, Georgia, Illinois, Indiana, Maryland, Michigan, Ohio, South
Carolina and Tennessee, with more than 780,000 customers purportedly subscribed to its services
as of March 31, 2017. Prospectus at 1, 49, 83.
65. On the residential side, the Offering Materials noted that the Company sought to
sell its HSD, Video and Telephone services through bundles, which involved packaging multiple
services for a given customer in an effort to multiply the number of revenue generating units
(“RGUs”) for that customer.7 See Prospectus at 6, 90 (“For customers who value the video
product, our marketing approach is to drive adoption of HSD-Centric bundles”). For business
customers, the Offering Materials further represented that WOW offered “a full suite of products
for small, medium and large businesses within [its] footprint,” supported by the Company’s fiber-
based services. Prospectus at 4, 88.
B. The Company Goes Public By Means of Its Materially False, Misleading and Incomplete Offering Materials
66. Between May 25, 2017 and May 31, 2017, Defendants conducted the IPO, in which
20,970,589 WOW shares were sold to members of the Class at an offering price of $17.00 per
share.
67. The Offering Materials pursuant to which WOW’s IPO was conducted presented a
materially inaccurate, untrue, incomplete, and misleadingly positive picture of WOW’s business,
performance, prospects and assets, while omitting crucial realities. In particular, and as discussed
6 Unless otherwise indicated, all emphasis is added. 7 One customer does not equal one RGU. Instead, one subscriber could subscribe to HSD, Video, and Telephone with WOW and would thus be counted by the Company as three RGUs.
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further below, the Offering Materials materially misrepresented and failed to adequately disclose
the truth concerning: (i) the poor and deteriorating condition of WOW’s customer service function;
(ii) the significant problems that plagued WOW’s purportedly “advanced” products, including its
touted “Ultra DVR” offering; (iii) the poor and declining quality of the Company’s customer base,
including how WOW had, to the extent it imposed minimum credit requirements at all, lowered
its baseline credit requirements for new customers to boost figures in advance of the IPO; and (iv)
the design and cost over-run problems in WOW’s Chicago fiber network, and how as a result
WOW planned to promptly divest itself of the troubled Chicago fiber network (rather than to
develop it as a key driver of WOW’s growth in the Chicago area and in WOW’s Business Services
segment).
1. The Offering Materials’ Materially False, Misleading and Incomplete Statements Concerning WOW’s Woeful Customer Service
68. The Offering Materials repeatedly emphasized the Company’s customer service
capabilities as a “core competitive strength enabl[ing] WOW to differentiate” itself from the
competition. Prospectus at 3, 87.
69. The Offering Materials also emphasized that:
Our philosophy is to deliver an employee and customer experience that is consistent with the WOW! name. We are a company comprised of people who derive satisfaction from taking care of each other and our customers. As a result, there is heightened awareness and understanding among our team that it is our employees who ultimately are WOW!’s greatest strategic asset. Our approximately 3,000 employees are brand ambassadors across the communities we serve. [Prospectus at 8, 92.]
Our purposeful focus on creating a thriving WOW! culture is all for the benefit of our customers. We have established an enduring record of delivering award- winning customer service and satisfaction. Recognition by a variety of independent third parties, including J.D. Power and Associates, Consumer Reports and PC Magazine, has helped create a winning, competitive spirit amongst employees that drives our success. [Prospectus at 8, 92.]
70. Moreover, in addition to touting how the delivery of exceptional customer service
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was purportedly the foundation of WOW’s “operating philosophy,” the Offering Materials also
stressed that WOW’s success in delivering superior customer service was the basis for its ability
to successfully compete in the marketplace. For example, as the Prospectus represented:
Operating Philosophy Founded on a Superior Customer Experience
We compete strategically by adhering to our operating philosophy, which is: “To deliver an employee and customer experience that lives up to our name.” The ongoing pursuit of this philosophy has a strong foundation in the WOW! culture that has been cultivated over time and focuses our organization on four core values: (i) respect: treat others as you wish to be treated; (ii) integrity: choose to do what is right; (iii) servanthood: embracing the attitude and honor of serving others rather than being served; and (iv) ownership: act with thought and a focus on the collective good. [Prospectus at 6, 89-90.]
We believe that servanthood in particular is unique to WOW! and exemplifies our commitment to the customer experience—that “how” we treat our customers is just as important as “what” we provide them and ultimately is how we earn customer loyalty. This mindset is what drives our operating philosophy and we believe compels employees and customers alike to choose WOW!. [Prospectus at 6, 90.]
71. Similarly, the Offering Materials highlighted WOW’s customer service as
providing an essential tool for it to compete against larger data providers, representing that “we
compete against other data service providers by offering high-quality HSD services and a
differentiated customer service experience.” Prospectus at 94; see also id. at 95 (stressing how,
with respect to its provision of video services, “we compete with [other] companies by delivering
a differentiated customer service experience”); id. at 89 (“we have a proven track record of
winning customers from other operators by providing superior HSD product offerings, focusing
on local market efforts, offering competitive pricing and delivering strong customer service
while leveraging our advanced network”).
72. The Offering Materials also stressed the importance of customer service with
respect to the success of the Company’s bundled services offerings and its ability to bring in new
subscribers, stating “We believe that our advanced network, competitive HSD products and
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emphasis on customer service will continue to be a strategic initiative and that the best way to
retain and attract customers is through an additional focus on technology and deployment of
broadband data applications.”
a) The Material Adverse and Undisclosed Issues Plaguing the Company’s Customer Service Function
73. Unbeknownst to investors, however, the foregoing statements at ¶¶68-72 were
materially false, misleading and incomplete because by the time of the IPO WOW’s customer
service was actually “differentiated” from its competitors in ways that were decidedly negative, as
the quality of WOW’s customer service had deteriorated significantly over the prior 18 months.
The foregoing statements were also materially misleading and incomplete because they failed to
disclose the nature and extent of the serious problems, as detailed below in this sub-section, that
were plaguing the Company’s customer service operations as of the IPO. Indeed, as discussed
further below, WOW’s customer service was so poor that, within a year of the IPO, the Company
was forced to announce that it would need to spend roughly $25 million to improve its customer
service in an effort to stem customer defections and declining revenues.
74. As described by CW1,8 WOW’s customer service functions were covered largely
by three call centers, which were located in Managua, Nicaragua, Colorado Springs, CO, and
8 CW1 was employed by WOW in various customer service supervisory capacities from mid-June 2016 through early 2018. CW1’s primary responsibilities concerned interacting with WOW customers, training and supervising customer service representatives, evaluating the WOW customer experience and customer profile, and reporting to senior WOW management, in an effort to best serve the customer. CW1 was responsible for training fifteen employees at a time – a total of 60 employees overall during her tenure. Throughout CW1’s employment, she reported to Ken Kavanah, WOW’s Senior Vice President for Customer Care. Plaintiffs have confirmed CW1’s WOW employment and background through her LinkedIn page. CW1’s work included having direct contact with WOW customers, as well as training and supervising customer personnel at WOW’s call centers in Colorado Springs and elsewhere who had direct contact with customers. CW1 had a technical background in computer hardware, and as a supervisor of customer service representatives, had a detailed understanding of WOW’s various product offerings. As a result, CW1 was very familiar with WOW’s operations from a customer service and technical perspective.
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Hamilton, AL.
75. According to CW2,9 the Company had started offshoring portions of its customer
service functions to call centers in Nicaragua beginning in 2013, based on the concept that such
foreign-based call centers could serve as “backup” facilities to assist WOW’s U.S.-based call
centers when they were overburdened. However, as CW310 described, the scale of WOW’s call
center operations in Nicaragua expanded significantly in 2016 to assume a far larger role, as
WOW’s primary Tier 1 customer service functions (which handled customer issues and complaints
relating to billing and video) were outsourced to Managua. Indeed, as CW1 advised, by the time
of the IPO the Company’s Nicaraguan call operations were handling approximately 70% of
customer calls from the Company’s Northern Region (consisting of Ohio, Illinois, Indiana and
Michigan), whereas the Hamilton and Colorado Springs call centers were handling only about 20%
and 10% of such calls, respectively.
76. Although the Nicaraguan call center operations had been established and then
dramatically expanded to save money (costs for Nicaragua were approximately 1/20th of the cost
compared to WOW’s two call centers in the U.S., on a per call basis), the rapid increase in the
Company’s offshoring of its customer service operations had a significant adverse impact on
WOW’s ability to deliver a superior customer experience. In particular, as CW2 confirmed, the
fact that the Nicaraguan call center employees were not native English speakers led to increased
9 CW2 was employed in a variety of positions at WOW from 2004 to September 2017. During the last three to four years of her employment (spanning the period preceding and immediately after the IPO), she was a Business Sales and Retention Supervisor in charge of overseeing a team of 15 people relating to customer retention efforts. 10 CW3 was a longtime employee of WOW who worked in a variety of positions from 2002 to March 2017, including as a Customer Care Supervisor and a Customer Care manager from March 2008 until her departure overseeing eight customer care supervisors, each of whom oversaw a team comprised of 15 agents.
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levels of dissatisfaction among WOW customers because of communications difficulties, and also
because of customer sensitivity to American jobs being moved abroad. Similarly, CW1, whose
work included calling customers who had recently cancelled their WOW service or that had a
history of generating a relatively high volume of calls, identified customer complaints from
customers who had their calls routed to Nicaragua as a primary cause of growing customer
dissatisfaction. CW1 confirmed that Nicaragua was consistently rated materially worse than the
Company’s U.S. call centers in customer satisfaction based on the Company’s internal analysis –
yet in the 18 months prior to the IPO, the Company had transferred huge volumes of customer
calls from its better performing U.S. locations to its decidedly underperforming Nicaraguan
operations.
77. Compounding the poor performance of WOW’s Nicaraguan customer service
operations was that the average tenure of WOW’s Nicaraguan-based customer service
representatives was significantly shorter than those in its domestic Colorado Springs and Hamilton
locations. As described by CW1 (whose responsibilities included employee training), this problem
was exacerbated by the poor training that WOW’s customer service representatives received in
Nicaragua. Moreover, it was frustrating for both the Company’s Nicaraguan employees and for
the Company’s customers to deal with the fact that personnel from WOW’s Nicaraguan call center
operations had to dial into WOW’s central computers in Evansville, Indiana, to access data needed
to provide adequate technical support advice or respond to customer billing issues – particularly
since it took an average of 15 seconds for each page of data requested from WOW’s central
computers to load on the screens of the Company’s Nicaragua-based call center employees.
78. In addition, WOW’s customer service problems were further exacerbated by its
lack of systems to efficiently prioritize customers in its call center queues. In particular, as CW1
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described, all incoming customer calls were placed into a queue. Certain operators were trained
primarily to handle service and billing questions whereas other operators were primarily trained to
handle technical questions. However, WOW lacked the technology to give preferential treatment
in the queue to customers who were paying for more expensive services, or who had better
payment records. Moreover, the average wait time to speak to an operator ranged between fifteen
minutes to over one hour, with the most heavily weighted volume on the longer side of that range.
As a result, not only were more customers being directed to WOW’s Nicaraguan call centers, but
there was no way to ensure that the Company’s best customers were being pulled out of the
problematic Nicaraguan queue, or that they were given any preferences in whatever queue they
ended up in.
79. In addition, according to CW1, WOW’s ability to efficiently and effectively address
customer issues involving billing questions was adversely affected by its lack of a single consistent
billing system or technology (because the Company, as it acquired other smaller cable companies
that used different billing systems and software, failed to convert those systems to a single
Company-wide system). For example, the southeast region’s billing software operated primarily
using “USHA” software, whereas the northern region used “ICOMs” (which was more user
friendly for WOW’s applications), and that in total WOW had eight other billing systems.
Moreover, neither USHA nor ICOMS worked as well as WOW’s predecessor software (developed
by CSG International Systems), which WOW had jettisoned because it was more expensive. The
result was a host of customer service and related billing problems; for example, WOW customers
experienced problems when they paid their bills, only to discover that they were not being
appropriately credited for their payments. As CW1 added, the introduction of ICOMS in around
2015 marked “the beginning of the end” for WOW when it came to customer service, as ICOMS
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was not intended for telecommunications applications.
80. Moreover, as CW3 confirmed, customer service at the Company had significantly
deteriorated as a result of changes that Defendant Cochran implemented after he became CEO in
2014. Indeed, not only did Cochran fail to give customer service the same kind of “hands on”
attention that his predecessor had, Cochran installed other new members of senior management to
oversee a revamp of WOW’s customer service functions that CW3 viewed as contributing to
WOW’s decline in the period leading up to the IPO. Those changes included not only the
expansion of the Nicaraguan operations described above, but budget cuts to WOW’s previously
most active call center in Colorado Springs. As CW3 stated, these budget cuts also led to a material
decline in the Company’s customer satisfaction, as measured by the Company’s internal metrics.
81. Compounding the budget cuts and offshoring to Nicaragua was the Company’s
distinct shift in focus in the year prior to the IPO from (a) customer service operations that were
empowered to present “win-win” situations that would assuage upset customers, to (b) customer
service operations that required its employees to perform in a “robotic” manner that increasingly
left them without the ability to resolve customer complaints without violating the new directives
of upper management. For example, as CW3 stated, new WOW Senior Vice President Kevin
Kavanah (who joined WOW as SVP of Customer Care in December 2016) and Chief Marketing
and Sales Officer Scott Russell (WOW’s Chief Marketing and Sales Officer from May 2016 to
January 2018) entirely shifted the Company’s customer service focus from (1) a “customer-
centric” department that gave its employees flexibility to resolve customer issues in “grey areas”
to assuage upset customers, to (2) a department that demanded mechanical adherence to rigid
Company policies, with adverse consequences on customer satisfaction.
82. Significantly, CW3 stated that the Company’s internal customer satisfaction
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metrics also showed that the Company’s treatment of its customer service employees directly
correlated with the satisfaction of its customers. And as CW1 confirmed, WOW was experiencing
a high degree of employee turnover at Colorado Springs at the time of the IPO, and customer
service employee compensation was very poor. Similarly, CW411 identified pre-IPO management
changes as being responsible for a dampening of team morale. According to CW4, his experience
also confirmed that the increasing unhappiness of the Company’s employees directly correlated
with greater customer dissatisfaction.
83. CW1 also stated that when Theresa Elder joined the Company as CEO in December
2017 (after 20 years of senior executive experience at a number of leading telecom companies),
she hired Raymond Strusky, who had previously worked at DIRECTV, to take a key role in
WOW’s customer service group. According to CW1, Strusky had been told that with some “tender
loving care,” WOW’s customer service could be “world class.” However, CW1 said that after
Strusky began asking “very pointed questions” on topics such as provisioning and the customer
service software WOW used, he “became frustrated” with WOW as he soon discovered “how
cobbled together” WOW’s network actually was, how WOW had been having problems with its
inventory, and how WOW’s multiple billing systems were frustrating efforts to fix its problems in
that area. For example, according to CW1, WOW’s multiple systems required going through
“multiple layers of emulation” to effectuate changes because many of the systems were “written
in dead languages.”
84. As Strusky “peeled” more layers from “the onion,” Strusky came to realize that
“nothing made sense” and there was no cohesion to WOW’s systems. In short, the situation was
11 CW4 spent eleven years with WOW, including as a Retention Specialist in the Company’s Colorado Springs, Colorado location from 2015 until her departure from the Company in February 2018.
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so bad that the decision was made to develop and implement a web-based “in-house solution” that
would be able to “cobble” the myriad systems together. CW1 noted that this was a time consuming
and expensive solution, especially because WOW lacked a strong existing platform for importing
or transferring data that WOW could build on.
85. At a conference held in Miami in May 2018, the Company also belatedly
acknowledged that it had been plagued by serious customer service problems as of the IPO. As
the Company’s S.V.P for customer care, Mr. Kavanah, stated12:
[W]hat we found is as representatives come in to the new hire training class, … what’s fascinating is when you talked about the inter-personal skills … things like empathy or a collaboration or consultation, we weren’t typically really good at that. … [W]e basically thr[ew] representatives out to the wolves and they would learn the job in a really tough way and we found that attrition was relatively high because they weren’t feeling successful. Over the past year [i.e., in the year since the May 2017 IPO] we changed that model significantly.
[W]e get more calls from customers than we could possibly handle. We think about it for some of you, handling 5 million calls a year, may not be a lot, but for us it is based on the quantity of customers we have. So our customers call frequently. What’s interesting in our journey this year is a really very much [a] breakthrough for us because really we give customers the opportunity to get things done through us by voice. And that’s about it. I mean they can call into the [interactive voice response] and pay their bill or check out their bill balance, but to get anything else done or for us to communicate with them proactively, it just doesn’t exist today, but in the next few months it will…. So what’s fascinating for us, we’re going to have things like chat, believe it or not, I know. [Laughter] Welcome to the 21st century…. [W]e’ll also going to have [text messaging], so [we] will proactively contact our customers when there is, like somebody said earlier, an outage and we’ll let them know what the [restoration time is], what their bill payment is. They’ll be able to, on the wowway.com app be able to do things that they would currently only do through a representative today and in a mobile APP, which we don’t have today, but they’ll be able to change their account. So all of this is so new for us that there’s this great excitement…. So in a word we’re really jazzed about it….
Our stick [retention] rate has improved pretty significantly. We typically, if we were losing people, we lose it in the first 180 days and that’s really been the problem. So we’ve invested quite a bit. A training period a – it’s about eight weeks in length – and that’s two months of full investment and before you know what,
12 A video recording of the presentation is available at https://summit.sitel.com?wvideo=pob4tn397j.
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they might be gone in month four. So since we started our new process, the [customer service rep] attrition rate has gotten much better now. I’d love to say that every person that we bring into the organization is going to stay for a year and a half typically about the length of an agent in an inbound call center. But we’re much better than 180 days today.
2. The Offering Materials’ Materially False, Misleading and Incomplete Statements Concerning the Quality of the Company’s Technology Offerings, Including Its Ultra DVR Product
87. Throughout the Offering Materials, WOW touted its “technologically advanced
platform that underpins [its] competitive advantage,” pointing to WOW’s “full suite of digital
video services, including video-on-demand (‘VOD’), high-definition video and digital video
recording (‘DVR’).” Prospectus at 87. The Offering Materials also specifically touted WOW’s
Ultra DVR product as an example of WOW’s purported technological superiority, stating that:
In approximately 79% of our footprint, we also offer our “Ultra” video product, which is a technologically advanced, Internet protocol (“IP”) enabled, whole- home DVR solution that integrates traditional linear video, an advanced user interface and direct access to OTT content13, such as Netflix and other applications. [Prospectus at 3, 50, 87.]
88. Similarly, the Offering Materials stressed that, because WOW “operate[s] in a
highly competitive, consumer-driven, rapidly changing environment,” the Company’s “success
is, to a large extent, dependent on [its] ability to acquire, develop, adopt and exploit new and
existing technologies to distinguish [its] services from those of [its] competitors.” Id. at 19.
a) The Material Adverse and Undisclosed Problems Plaguing the Company’s Technology-Based Services and Its Ultra DVR Product
89. However, the foregoing statements were materially false and misleading because,
13 “Over-the-top content” or OTT, refers to audio, video, and other media content delivered over the Internet without the involvement of a multiple-system operator in the control or distribution of the content.
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contrary to the Offering Materials’ representations that WOW’s “technologically advanced
platform” – including its “technologically advanced” Ultra DVR product – and its “ability to adopt
and exploit new and existing technologies” were hallmarks of the Company’s competitive
advantage, the Offering Materials failed to disclose that in reality WOW relied on outdated
technology and highly problematic product offerings that regularly failed and generated
significant customer dissatisfaction.
90. The Company’s conspicuous failure to keep up with technology was particularly
evident in the Company’s Ultra DVR product. As CW1 described, WOW’s Ultra DVR had been
developed by a company called Arris International Plc (“Arris”), a telecommunications equipment
manufacturer. However, the product was based on “first-generation DVR” technology, and was
constantly plagued by technological quality issues that regularly caused the product to not function
properly or to entirely fail. Accordingly, the Ultra DVR “box” that was at the core of the product
was hardly “technologically advanced,” and indeed was already several generations old by the
time of the IPO.
91. According to both CW1 and CW3, the Ultra DVR product had been problematic
since 2013, which CW3 attributed in part to WOW’s decision to roll out the product before its
underlying software had been fully tested, and in part to a lack of organizational cohesion and
consensus among WOW’s marketing, engineering, and customer service groups as to how to try
to solve and deal with the Ultra DVR problems.
92. As CW1 described, the Company succeeded in sufficiently addressing enough of
the problems with the Ultra DVR system (which included “customer-side hardware,” “network
hardware,” and “firmware” problems) to make it at least “somewhat functional” during the 2013
to 2015 timeframe, but the product “began to crater” in 2016 such that by the time of the IPO it
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was clear that the product was in major trouble.
93. Most significantly, according to CW1, by 2016 it was becoming increasingly clear
that the Ultra DVR suffered from fundamental design flaws. In particular, the product’s hardware
generated significant heat and was poorly ventilated, which caused overheating problems that
caused the product to fail within three years of its installation. Neither WOW nor Arris was able
to develop a fix for this problem, or to otherwise effectively extend the average three-year lifespan
of the Ultra DVR product.
94. Instead, as the Company’s DVR boxes began to fail at its customer’s premises with
increasing frequency in 2016, WOW’s “solution” was to simply swap the DVR box with another
box from WOW’s inventory. However, the boxes in WOW’s inventory were subject to the same
design defects and problems – indeed, because WOW had purchased little or no new product
inventory in the prior year or two, in the year leading up to the IPO WOW’s “inventory” of Ultra
DVR boxes consisted overwhelmingly of boxes that had previously been used and returned by
other customers. According to CW1, WOW’s “solution” to its burgeoning customer relations
problem with its failing Ultra DVR boxes was only a temporary stopgap measure, which involved
swapping out existing customers’ non-functioning Ultra DVR boxes with previously used Ultra
DVR boxes that were also likely to fail in the immediately foreseeable future. The likelihood of
failure in the immediate future was particularly acute by the time of the IPO, as by that date every,
or almost every, Ultra DVR box in the field or in WOW’s inventory (which by then consisted
almost entirely of recycled old boxes, as WOW was unable to get new replacement boxes from
Arris) had reached the end of its expected three-year lifecycle.
95. CW1 also recalls the Ultra DVR system to have been much maligned by WOW
customers. While this product was purportedly able to provide a whole-home solution by
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connecting the user’s home to the internet (and transmitting a Wi-Fi signal to be accessed by the
end user) and allow for DVR media recordings, CW1 stated that invariably, if one of these
functions was working correctly, the other likely was not.
96. Compounding these problems in the period prior to the IPO, according to CW1,
was WOW’s decision in 2016 to fire the Company’s entire US-based customer service staff that
had been working on the Ultra DVR, which it replaced with an outsourcing company based in a
non-native English speaking country outside of the Americas.
97. The end result, as CW1 confirmed, was that WOW’s domestic customer service
employees were left scrambling to assuage angry customers to avoid attrition and churn. One
method for doing so, according to CW1, was for WOW customer service personnel to go outside
the Company’s official protocols and “downgrade” customer accounts, which involved swapping
out the problematic and “destined-to-fail” components needed to operate WOW’s Ultra DVR
media gateway (which was the Company’s highest volume subscription product), and replacing
them with different devices that, while able to support at least some services, generated less
revenue. Tellingly, in some cases, these swap-out “solutions” involved replacing the
“technologically advanced” Ultra DVR product by rigging together a replacement DVR that was
roughly ten years old with a modem that was roughly five years old, which would apparently
perform better than the much newer Ultra DVR box.
98. According to CW1, the ongoing problems with Ultra DVR caused large numbers
of WOW’s most valuable customers to migrate to WOW’s competitors, and that more particularly
WOW was “hemorrhaging customers” in early 2017. WOW’s problems were “quality of the
product, customer care, and pricing.” As CW1 confirmed, however, in terms of the order of
severity it was “quality of the product” first, and “customer care” second – and with respect to
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pricing it was primarily a matter of WOW customers “not [being] willing to pay Comcast pricing
[i.e., the prices of WOW’s established and comparatively reliable competitors] for [WOW’s]
mediocre product.”
99. Ultimately, the nature and widespread extent of the problems with WOW’s Ultra
DVR product became so significant that it was one of the driving forces behind the Company’s
creation of its so-called “call-ahead” specialist customer service team, which was tasked with
proactively calling new customers to try to address their problems. As CW3 estimated, if WOW
had not established this specialized team to contact new customers first, a substantial majority of
customers (if not close to 100%) who had the Ultra DVR product installed would have been calling
the Company’s customer service centers within a week of installation to complain. However, no
amount of work by customer service could ever more than temporarily address the fundamental
and pervasive problems that plagued the product as of the time of the IPO. Indeed, CW1 estimated
that “over half” of WOW’s customers who signed up for the Ultra DVR in 2016 ended up
disconnecting it within the first 30 days, a trend which continued in 2017. Such installation and
disconnections (often including intermediate technical service calls) were not only damaging to
the WOW brand, but meant that upfront costs on the initial install and subsequent technician calls
were routinely more expensive than what WOW booked on the initial sale.
100. CW1 also noted that he had access to and had reviewed “a lot of product
performance data” that showed the multiple problems with the Ultra DVR product were well
known throughout the Company. In addition, CW1 stated that he had personally tried to discuss
possible solutions with upper management, including S.V.P. Ken Kavanah, but was told that the
Company had concluded – after consultations with representatives from Arris – that trying to fix
the ongoing issues with the Ultra DVR product would simply be too expensive. Accordingly, the
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problems were allowed to continue without any solution in sight – aside from internal discussions
about the possibility of simply replacing the defective Ultra DVR product with a rival offering
from TIVO (which was rejected as too expensive).
101. Further, as confirmed by CW1, the only application that the Ultra DVR product
supported at the time of the IPO was Netflix; for example, the product did not provide access to
the Pandora music service until a full six months after the IPO. Indeed, CW1 recalled reading
language in the Offering Materials that, in substance, described Ultra as a leading product that
offered premium content through Netflix and other applications,14 but as of the IPO the Offering
Materials’ positive descriptions of the Ultra DVR product and its capabilities were simply not true.
102. In addition, CW1 described similarly severe problems with the Company’s Ultra
TV app for smartphones and iPads. As CW1 put it, these products simply did not work – and also
became a big contributor to customer churn.
103. As CW1 also confirmed, WOW’s wireless internet product and ability to deliver
high-speed data were “not developed well.” For example, as noted above, although WOW’s Ultra
DVR boxes had a wireless modem that provided internet connectivity for WOW’s customers (in
addition to the DVR function), the wireless signal from the modem was “so abysmal” that
invariably if a customer’s DVR function was working, then the internet function was not working
(and vice-versa). Such issues were another major source of customer complaints. Indeed,
according to CW1, the problems with WOW’s wireless internet product were so great that, in front
of a large Colorado Springs “company town hall” meeting with 300 Company employees on
14 CW1 appears to have recalled the Prospectus language quoted above that represented that WOW “offer[ed] a full suite of digital video services” and described its Ultra DVR product as “a technologically advanced, IP enabled, whole-home DVR solution that integrates traditional linear video, an advanced user interface and direct access to OTT content, such as Netflix and other applications.”
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February 22, 2017, senior members of WOW management (including S.V.P. Kavanah and then
Chief Marketing and Sales Officer Scott Russell) were told that WOW’s wireless internet product
simply did not work. In response, employees were told that “no resolution to the problem was
available,” and that employees should instead try to be “nicer than nice” when speaking to
customers who complained about the service.
3. The Offering Materials’ Materially False, Misleading and Incomplete Statements Concerning the Company’s Customer Quality and Credit Risk Management
104. The Offering Materials misrepresented the Company’s assessment of prospective
customers to manage credit risk, claiming that:
The Company’s trade receivables are subject to credit risk, as customer deposits are generally not required. The Company’s credit risk is limited due to the large number of customers, individually small balances and short payment terms. We manage credit risk by screening applicants through the use of internal customer information, identification verification tools and credit bureau data. If a customer account is delinquent, various measures are used to collect amounts owed, including termination of the customer’s service. [Prospectus at F-12.] 105. These statements were materially false and misleading because, as discussed below,
the Company used identification verification tools and credit bureau data in only a fraction of its
markets and, even then, it eschewed these tools to mitigate risk, in favor of adding to its customer
base in advance of the IPO to give the appearance of greater market penetration than actually
existed at the time.
106. Further, the Prospectus misrepresented the ability of the Company to manage risk,
claiming that, “[t]he Company manages credit risk by disconnecting services to customers who
are delinquent, generally after sixty days of delinquency.” Prospectus at F-8.
107. This statement was also materially false, misleading and incomplete because, as
further detailed below, the Offering Materials failed to disclose that prior to the IPO, the Company
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was virtually powerless to terminate the services to many of its customers because the WOW
system was not “encrypted” (and non-paying customers therefore needed to be cut-off manually
from the system), resulting in a large number of non-paying customers continuing to receive
service even after they were supposedly disconnected. WOW’s system remained unencrypted
when CW1 left the Company in 2018. In addition, the Offering Materials were materially
misleading and incomplete as they failed to disclose a significant decline in the overall quality of
the Company’s customer base.
a) The Undisclosed Risk Associated with WOW’s Efforts to Lower Prospective Customer Requirements In Order to Boost Subscription Totals in the IPO
108. As detailed below, at the time of its IPO, the Company was facing a number of
adverse conditions such as increasing credit risk due to aggressive pursuit of new customers with
little regard for their credit worthiness and the limited ability to force collection because WOW
lacked the ability to remotely terminate service to non-paying customers.
109. According to CW1, prior to the IPO there was a marked shift in customer
acquisition efforts at WOW, as management “really opened the gates” and directed its sales people
to sign up new accounts by any means necessary, even if it ultimately cost the Company more
money than the account was worth. For example, beginning in September or October 2016, sales
people were given leeway to waive or offer reduced installation costs in order to bring additional
customers under the WOW umbrella. The effect was the Company immediately taking a loss on
a new customer, as installation costs typically ran upwards of $170, but WOW was giving them
away for free or for $50 to entice a change. A further effect of this promotion was that many of
these new customers would cancel their service within 30 days, as there was no stickiness or brand
loyalty to WOW given the minimal (if any) costs associated with switching either to or from
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110. Additionally, CW1 recalled an effort to retain WOW customers who were seeking
to disconnect, with WOW management newly empowering its customer service agents to extend
a $50 account credit to displeased customers, even if those customers were in non-payment status.
In fact, the amount that a customer service agent could apply to a customer account rose with the
agent’s rank of seniority, with CW1 authorized to provide up to $500 in bill credits in order to
curtail a potential cancellation.
111. The newly-adopted relaxation of policies related to these groups of customers
exacerbated existing issues with WOW’s customer management processes that were already ripe
for exploitation.
112. For example, CW1 stated that, at the time of the IPO, it was WOW’s policy that
only those customers in the southeastern region of the United States (including Florida, South
Carolina, Alabama, and Georgia) were subject to credit checks prior to opening an account. This
policy had the positive effect of reducing WOW’s exposure to losses by flagging certain customers
who were unlikely to pay their bill in that region, but totally ignored the other half of WOW’s
customer base.
113. Compounding the problem was the fact that the Company made no efforts in
WOW’s northern markets, outside of the Chicago market, to conduct fraud prevention screenings
of prospective new customers to determine whether a previously-defaulting customer continued to
reside at the address seeking service. This, according to CW1, had the effect of allowing customers
who were poor credit risks to manipulate the WOW system outside of Chicago. Moreover,
according to CW1, within the Chicago region, certain supervisors knowingly approved new
customers even if they had failed the fraud screening, so that supervisors could boost subscription
numbers.
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114. Additionally, CW1 confirmed that prior to the IPO, the Company had a widespread
problem with terminated customers who would continue to receive service even after the supposed
cancellation of services.
115. More specifically, according to CW1, it was “50/50” whether WOW’s attempts to
terminate such customers would actually be successful, because WOW’s service offerings were
not encrypted and could not be remotely disconnected, but instead required a physical
disconnection of the customer.
116. According to CW1, in an effort to raise customer satisfaction in the run up to the
IPO, the Company also engaged an outside advertising and marketing agency named TDA Boulder
(“TDA”) to conduct customer surveys. TDA’s affiliation with the Company is corroborated
through WOW’s own June 2017 press release announcing TDA as its advertising agency of record,
which states that “[i]n addition to consulting on advertising and media strategy, TDA Boulder led
the launch of WOW!’s new brand identity in Spring 2017.”
117. The survey data that TDA collected, according to CW1, showed a correlation
between customer satisfaction ratings and the amount of credits a customer service representative
provided to the surveyed customer.
118. The end result of the customer’s newfound reliance on bill credits for positive
reviews was a spike in customer service calls from subscribers seeking a cost reduction, with CW1
stating that upwards of 60% of all customer service calls pertained to customers who had not paid
their bills, resulting in a major portion of WOW’s purported RGUs being in a “non-payment
cycle.”
119. This confluence of lack of adequate (or nonexistent) credit and fraud detection
checks, faulty product and poor customer service, and an effort by the Company to engage and
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retain new customers at any cost prior to the IPO, even by essentially buying customer satisfaction
to give the illusion of more customers, led CW1 to conclude that there was a customer service
“churn bubble” that was inflated for purposes of the IPO, but would pop following the Offering.
120. CW1 left WOW in early 2018 because it was “very clear” that WOW was a
“financial sinkhole.” High employee turnover caused difficulty in solving engineering and
software problems, resulting in increased customer dissatisfaction.
121. In addition, in regards to WOW’s client base, CW1 described how up through about
2014, the majority of WOW’s client base could be categorized as “middle class.” But the majority
of these middle class customers then began leaving WOW because of dissatisfaction with WOW
(and many of these departing customers were willing to go to service providers that were more
expensive than WOW but offered superior service). The departures of the middle class clientele
meant that by the time of the IPO well over 2/3rd of WOW’s client base were “lower class…
almost at the poverty level.” CW1 emphasized that WOW’s most profitable customers – i.e., those
middle class customers – were “the first to go” and that WOW’s new customers had much greater
“needs” from WOW which made them less profitable and desirable as customers. CW1
characterized the client base situation after 2014 as “terrible and getting worse.” In regards to the
client base, she described how WOW’s customer information was aggregated into a system that
would allow marketing firms retained by WOW to pull the data to analyze WOW’s customers to
“figure out who they [were].” WOW’s marketing personnel were therefore able to identify “a
marked change” in WOW’s client base. For example, “over half” of the calls from WOW’s client
base had nothing to do with WOW’s products or performance, but were instead efforts on the part
of the customers to not have to pay their bills on time, which had not been the case with WOW’s
earlier, middle class clientele prior to 2015. The material adverse downward trend in the quality
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of WOW’s customer base was not disclosed in the Offering Materials, thereby further rendering
them materially misleading.
4. The Offering Materials’ Materially False, Misleading and Incomplete Statements Concerning the Chicago Fiber Network
122. The Offering Materials also materially misled investors as to the value associated
with the build-out of the Company’s Chicago fiber network. As the Offering Materials stated:
We have also made significant investments in our fiber network in the Chicago area. Since 2014, we have constructed approximately 1,200 miles of fiber in this market, providing connectivity to more than 500 macro and small cell sites as part of a fiber construction project for a leading wireless carrier. While a meaningful portion of the fiber network in this area is under a long-term contract to this carrier, there is significant capacity on the network that we expect will support future growth. As a result, we believe there is considerable embedded value in this asset. [Prospectus at 4, 88.]
123. In addition, the Prospectus touted WOW’s “business service capabilities” – which
the Chicago fiber network was critical to – as a growth driver for the Company:
We believe that business services represent a substantial growth area for WOW! and we have made significant investments in our network and product capabilities to address these opportunities. We believe that we have a significant market penetration growth opportunity in several of our markets, including those in the Midwest and Florida, and that our advanced network positions us to capitalize on the substantial business services opportunity within our footprint. We believe we have developed the product suite and sales expertise to continue to gain share with the small, medium and large businesses we target within our footprint. We estimate there is an approximately $1.3 billion addressable revenue opportunity across our markets. We believe that a substantial part of our target customer base is served by legacy DSL technologies, creating a clear competitive advantage and market opportunity for our HFC-based cable HSD services. [Prospectus at 7, 91.]
124. The Company echoed the misleading notion that it was positioned to increase its
business service capabilities (on the back of its new fiber network build-outs) throughout the
Offering Materials, claiming:
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• “Through organic growth, normalization of capital expenditures, de-levering and
interest cost reduction, we have increased free cash flow generation and renewed our
focus on edge-outs and business services” [Prospectus at 4]; and
• “Strong execution has supported our business services expansion to date and will enable
us to execute on our growth strategy.” [Prospectus at 5].
125. However, Defendants’ representations that, among other things (i) “there is
significant capacity on the [Chicago] network that we expect will support future growth,” (ii) “we
believe there is considerable embedded value in this asset,” (iii) “[w]e estimate there is an
approximately $1.3 billion addressable revenue opportunity across our markets,” and (iv) business
services expansion “will enable [WOW] to executive on its [growth] strategy” were materially
false, misleading and incomplete because they omitted that WOW was pursuing the sale of the
Chicago assets at the time of the IPO, and the sale was inevitable given the high cost of
construction, debt service and WOW’s capital structure, and thus any Company growth driven by
the fiber network (particularly in WOW’s the Other Business Services segment) would necessarily
stall.
126. Further, the Company’s statements as to the risk associated with its growth-
through-business-services strategy were materially misleading and inadequate when the Offering
Materials stated:
Our future growth is partially dependent upon a business services strategy, which may or may not be successful.
One of the elements of our growth strategy is to execute upon a meaningful expansion in the business services market. To accommodate this growth, we may commit significant capital investments to technology, equipment and personnel focused on our business services. If we are unable to sufficiently build the necessary infrastructure and internal support functions to scale and expand our customer base, the potential growth of business services would be limited. In many cases, business services customers have service level agreements that
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require us to provide higher standards of service and reliability that may prove difficult to meet. In addition, there is significant competition in business services including significantly larger and better capitalized competitors with greater geographic reach. We may not be able to successfully compete with these competitors or be able to make the operational or financial investments necessary to successfully serve the targeted customer base. [Prospectus at 18].
127. These statements were materially false and misleading because they failed to
disclose that the “risk” of a significant decline in the Company’s ability to grow its Business
Services segment had already materialized (or was imminent) at the time of the IPO: namely, the
decision to sell the Chicago network, which was a key to WOW’s ability to expand its Business
Services segment.
a) The Undisclosed Issues with the Chicago Network Buildout, Which Rendered Its Sale to Verizon All But Assured at the Time of the IPO
128. During 2013, Verizon sought out a partner to build a fiber optic network in the
Chicago area, predominately to create more connectivity to the downtown Chicago business
district. As fiber sites were constructed and came on line, Verizon would lease a portion of the
newly laid fiber network, while allowing its strategic partner (WOW) to retain the usage of the
fiber capacity that Verizon did not need – a significant coup for WOW as Verizon would be leasing
no more than 48 strands at any given point, or just 11% of the 432 fibers available in the cable.
129. According to CW5,15 Verizon had agreed to pay WOW $80 million in non-
recurring revenue for the construction of what amounted to two separate networks. One of these
networks was to include approximately 600 fiber macro sites, and the second was to be comprised
of approximately 600 additional small cell sites, including the construction of more than 1900
15 CW5 was an employee in the construction division of WOW for approximately fourteen years prior to her departure from the Company in June 2018. For the last three years of her employment, CW5 was a member of the team tasked with building the fiber network subject to the lease agreement with Verizon.
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miles of 432-count fiber rings. Verizon would then lease each macro site as they were connected
to the network for $800 per site in monthly recurring revenue. For the small cell sites, Verizon
would lease each site upon construction and connectivity for a monthly recurring revenue of $400
per site.
130. In exchange, according to CW5, because Verizon would have access to just 48 (or
fewer) of the 432 fibers in the cable laid by WOW, WOW retained significant unleased capacity
that it could monetize, in addition to its recurring revenue from the lease agreement.
131. According to CW6,16 the Company actively bid for the project in 2013 and agreed
to terms in 2014 even though WOW had little history with similar build-outs, particularly in the
Chicago area where contractors faced heightened permitting and engineering problems.
According to CW6, prior to the Verizon agreement, the Company had focused mainly on
residential and small business buildouts, and that this deal presented the largest contract in the
history of WOW (aside from its 2012 acquisition of a different cable company). However, CW6
confirmed that problems would ultimately cause the project to drag out well beyond the originally
forecasted two year completion schedule, and result in a many-fold increase in project costs as the
WOW construction team was forced to work around several permitting issues with municipalities.
Among other problems, WOW had to incur increased costs with having to cut and trench the fiber
conduit because they were not allowed to bore underground in Chicago.
132. According to CW5, by the time construction began in January 2016, WOW had
internally expected the project to take a minimum of three years (if not more) to complete because
of the expanse of the build and the unique hurdles involved with building in Chicago, including
16 CW6 was employed by WOW for fifteen years until her departure from the Company in March 2017. Immediately prior to her departure, CW6 had been the Director of Construction and Project Management for WOW’s Chicago-Illinois region overseeing the fiber network buildout.
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permitting and licensing issues. Verizon, however, insisted on a two year timeline. CW6
confirmed that WOW had internal concerns about meeting the construction timeline promised to
Verizon, believing that the breadth of the project and difficulty in getting needed funds or financing
to complete the construction were likely to drag the finish date past even the three-year mark, to
as long as five years. In fact, as of the filing of this Complaint, construction of the project is still
ongoing.
133. Prior to the sale of the network to Verizon, any delay in construction completion
would ultimately hit the Company in its pocket (making the project even more unprofitable)
because, according to CW6, the Master Services Agreement entered into with Verizon that
governed the project construction contained provisions providing for heavy financial penalties in
the event the Company failed to meet its expected milestones. (Verizon was then leasing fiber from
AT&T and would be forced to extend those contracts on a short-term basis at exorbitant rates,
which is why Verizon insisted on the penalty provisions if WOW fell behind schedule).
134. Further, WOW’s inability to keep to its promised schedule to Verizon under the
terms of the contract also resulted in additional losses for the Company, according to CW7.17 CW7
stated that WOW had originally been engaged by Verizon to construct an entirely new fiber
network, separate and apart from the smaller scale legacy fiber network that WOW then
maintained in the Chicago area (and which was confined to the suburbs north of Chicago, and did
not include downtown Chicago where the large businesses that represented the primary candidates
for fiber services were located). However, according to CW7, because WOW was so far behind
in completing the build-out, when WOW built new towers as part of its Verizon network
17 CW7 was employed by WOW from 2013 until June 2018, first as a business account executive and then, from June 2015 until her departure, as a Sales Manager for commercial sales for all of Illinois.
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construction, it began connecting them to its preexisting fiber network (not the new network that
was still under construction), so that it could claim the tower as operational to Verizon in order to
meet its contractual terms. As WOW fell further behind on its milestone requirements, the contract
triggered a sale of the leased network to Verizon, according to CW7. Although it would not be
revealed until well after the IPO, WOW’s sale of the Chicago network would ultimately include
not just the newly built network that WOW had originally been contracted for, but also those
portions of WOW’s pre-existing fiber network that had been connected to the newly-built towers
in order to give the appearance of further functionality and progress than actually existed.
135. There existed another major problem with the construction of the network itself, as
confirmed by CW7 and CW8.18 Specifically, rather than lay the fiber to be used by Verizon
alongside the fiber that WOW was to maintain for its own use in the Chicago area, WOW placed
all of the fiber in the same “sheath,” which meant, according to CW7, that it was practically
impossible to distinguish between individual fiber lines. As a result, any forced sale of the network
to Verizon would effectively require WOW to turn over the entire network, not just the fibers
subject to the lease agreement with Verizon.
136. In addition to falling behind schedule by the middle of 2016, CW5 confirmed that
the Chicago build-out went drastically over budget – far outstripping the $80 million that Verizon
had agreed to pay at the outset. According to CW5, WOW internally justified any cost overrun on
the basis that WOW would be able to use that portion of the extra fiber laid, i.e. that portion that
Verizon would not be leasing, for its own financial gain, which would allow WOW to boost its
18 CW8 is a former Business Account Executive II, Fiber, from April to December 2017, assigned to selling fiber opportunities to enterprise-level customers in Chicago.
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presence in the Chicago area and provide it with a valuable asset that WOW could use to expand
its business services and HSD offerings.
137. Despite the increasing costs, WOW had always viewed the construction as a break-
even endeavor, according to CW5, because of the valuable fiber asset that WOW would
supposedly gain by piggy-backing its own network cables onto the construction that Verizon was
paying WOW to carry out.
138. These rising costs also caused WOW to exceed the $35 million budgeted for the
construction in 2016, as it actually incurred costs of more than $70 million in 2016 alone. This
was not unexpected by WOW, as CW6 had, during the second quarter of 2016, projected a $70
million construction cost for the year and reported that amount to Floyd Armstead, the executive
in charge of all construction for WOW. However, because of the Board’s under budgeting and the
rising costs, WOW management was forced to go to its Board for additional funds as 2016
progressed – something the Board was not happy about.
139. This massive overrun for 2016 also led to WOW budgeting $70 million for
construction in 2017, but even that amount would not be enough to finish the project, as confirmed
by CW5 and supported by the fact that WOW later included an additional $50 million construction-
related payment in the deal it ultimately struck to sell the assets to Verizon.
140. As CW5, CW6 and CW7 all confirmed, the profitability of the Chicago network
build-out hinged on the Company’s ability to sell the fiber not being used by Verizon to its own
customers, so that WOW could expand its own footprint in the downtown Chicago business district
and surrounding markets, while simultaneously building Verizon’s network.
141. An important aspect of leveraging this fiber for revenue would be through WOW’s
Business Services offerings, defined in the Prospectus as “including Direct Internet Access,
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Ethernet over fiber and HFC, hosted and on-premise VOIP solutions, metro Ethernet services,
wholesale fiber connectivity, cell backhaul solutions and SIP and PRI trucking services.”
142. To this end, according to CW6, prior to the IPO former WOW Senior Vice
President of Business Services Brad Cheedle had begun trying to build the Business Services
segment through the use of the Chicago fiber network by seeking to leverage the additional
capacity on the fiber network to generate revenues from other wireless carriers. For example,
according to CW6, soon after word of the new network reached the telecommunications industry,
WOW struck a deal with Sprint to connect a dozen sites in the Chicago area using just 6 or fewer
fibers (from the remaining nearly-400 in the sheath) as part of a 10 to 15 year deal, with the option
to connect dozens more.
143. Yet, CW6 stated, just as Mr. Cheedle’s efforts were beginning to bear fruit, in early
2016 an email was circulated stating that Cheedle was resigning from the Company. CW6 stated
that after this, less emphasis was placed on monetizing the network through business sales.
144. The Company’s post-IPO financial statements corroborate this de-emphasis, as the
Company’s revenue from “Other Business Services” declined in every quarter following the IPO
when compared to the same period the prior year – even though the sale of the Chicago network
was not completed until late in the fourth quarter of 2017:
Other Business Services Revenue Q2 Q3 Q4 FY Q1 Q2 Q3 2017 2017 2017 2017 2018 2018 2018 Revenue 10.6 9.6 8.6 39.9 7.2 6.8 6.6 % Change Over Same Period Prior Year -22% -4% -38% -13% -35% -36% -31%
145. CW7 stated that by February 2017, it had become clear that Verizon would acquire
the Chicago network because of WOW’s failure to meet its contract terms, given that by January
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2017 WOW had completed just 186 of the 487 towers it was required to build under the contract,
thereby exposing WOW to significant financial penalties going forward.
146. In the face of the project’s skyrocketing costs, by the spring of 2017 WOW’s senior
management had already decided to try to sell its much touted Chicago network, even though
WOW continued its work on constructing it. For example, as CW5 stated, she learned from
WOW’s VP of Backhaul Construction, Jerry Leiby, in April 2017 that the network had been placed
“on the block,” and that there were three potential acquirers (including Verizon). Further, as shown
in the chart above (¶144), WOW’s decision to sell the network was consistent with WOW’s
diminishing efforts to monetize the value of the fibers that WOW had retained the rights to, with
the Company reporting a 35% quarter over quarter growth for the first quarter of 2017 in the
Prospectus before seeing those revenues nosedive following the undisclosed decision to shed the
asset.
147. According to CW7, once the network was placed “out for bid,” it was a fait
accompli that Verizon would be the acquirer, given the contract provisions allowing for Verizon
to force a sale of the leased portions of the network in the event of WOW’s construction timeline
defaults, an outcome further supported by the heavy fines in the Master Services Agreement
associated with any delay, as identified by CW6.
148. According to CW7, individuals within WOW had resigned themselves to the
outcome, particularly as they viewed the Company as lacking the legal strength to go toe-to-toe
with Verizon to prevent any forced sale.
149. CW1 said that she too considered the Prospectus for the IPO describing the Verizon
deal to be misleading. The Prospectus said that although “a meaningful portion of the fiber
network in this [Chicago] area is under a long-term contract to [a wireless] carrier, there is
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significant capacity on the network that we expect will support future growth. As a result, we
believe there is considerable embedded value in this asset.” However, CW1 was told during
training in 2016 that Verizon had “hired WOW to build out the network” and would not retain an
interest in the network. CW1 was told this by her trainer Timothy Bradley.
150. Thus, at the same time WOW was touting the Chicago network in its IPO to
investors as a vital asset to lead to growth of its Business Services segment, and as having
“considerable embedded value,” WOW’s management knew that the project was subject to
massive cost overruns, delays, and an encumbrance in the form of the forced sale option held by
Verizon. Indeed, the exercise of that option, as WOW management understood, would ultimately
result in WOW losing not just the Chicago network because of the impracticality of seeking to
divide and sell just the leased fibers, but also the parts of the legacy fiber network that had been
connected to the Chicago network as an engineering stopgap to offset the Company’s construction
progress failures.
5. The Offering Materials Overstated WOW’s Goodwill
151. WOW’s Offering Materials included the Company’s latest financial statements,
which showed goodwill balances of $517.5 million and $568.0 million as of March 31, 2017 and
December 31, 2016, respectively. Prospectus at F-37. Included in the Company’s disclosure of
its critical accounting policies and estimates was the description of WOW’s policy for evaluating
goodwill for impairment:
We also, at least annually on October 1, evaluate our goodwill for impairment for each reporting unit (which generally are represented by geographical operations of cable systems managed by us), utilizing both quantitative and qualitative methods. Qualitative analysis is performed for franchise assets in the event the previous analysis indicates that there is a significant margin between carrying value of franchise operating rights and estimated fair value of those rights, and that it is more likely than not that the estimated fair value equals or exceeds carrying value. For our quantitative evaluation of our goodwill, we utilize both an income approach as well as a market approach. The income approach utilizes a discounted cash flow 46
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analysis to estimate the fair value of each reporting unit, while the market approach utilizes multiples derived from actual precedent transactions of similar businesses and market valuations of guideline public companies. In the event that the carrying amount exceeds the fair value, we would be required to estimate the fair value of the assets and liabilities of the reporting unit as if the unit was acquired in a business combination, thereby revaluing goodwill. Any excess of the carrying value of goodwill over the revalued goodwill would be expensed as an impairment loss. From a qualitative standpoint, we concluded that the goodwill of each reporting unit has not been impaired. From those reporting units where we performed a quantitative assessment, the percentages by which fair value exceeded carrying value are as follows:
Panama City, FL 38% Montgomery, AL 18% Huntsville, AL 19% Dothan, AL 55%
Prospectus at 56-57.
152. The Company’s policy was consistent with GAAP related to accounting for
goodwill. ASC 350-20-35. However, WOW failed to follow those GAAP principles and its own
accounting policy, resulting in significant overstatement of goodwill presented in the Offering
Materials.
153. The most recent impairment testing prior to the Company’s IPO was undertaken on
October 1, 2016, during WOW’s annual impairment test. WOW was required by GAAP and its
own accounting policy to assess whether there were events or changes in the circumstances
subsequent to the October 1, 2016 valuation date that would make it more likely than not that its
goodwill was impaired. ASC 350-20-35-30. GAAP lists the following factors to consider when
evaluating whether an event or a change in the circumstances would trigger an interim goodwill
impairment test, although this list is not all-inclusive:
• Cost factors such as increases in raw materials, labor, or other costs that have a negative effect on earnings and cash flows.
• Overall financial performance such as negative or declining cash flows or a decline in actual or planned revenue or earnings compared with actual and projected results of relevant prior periods.
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• Other relevant entity-specific events such as changes in management, key personnel, strategy, or customers; contemplation of bankruptcy or litigation.
• Events affecting a reporting unit such as a change in the composition or carrying amount of its net assets, a more-likely-than-not expectation of selling or disposing of all, or a portion, of a reporting unit. [ASC 350-20-35-3C.]
154. As detailed elsewhere in this complaint, at the time of its IPO, the Company was
facing a number of adverse conditions such as increasing credit risk due to aggressive pursuit of
new customers with little regard for their credit worthiness, and limited ability to force collection
because WOW lacked the ability to remotely terminate service to non-paying customers.
Moreover, the company was operating with outdated and problematic equipment, which required
increased customer service attention and drove up customer dissatisfaction and, consequently,
attrition.
155. All of these conditions, if properly considered, would have led the Company to
conclude that it had to evaluate its goodwill for impairment before the next annual impairment
testing date. Such an evaluation would have required the Company to recognize a goodwill
impairment because WOW would have had to reflect the aforementioned adverse conditions in its
impairment analysis when (1) estimating the fair value of each reporting unit based on the
discounted cash flow approach and (2) when performing a hypothetical purchase price allocation
for each reporting unit as if it was acquired in a business combination.
156. The Company failed to reasonably consider the above adverse conditions and “to
connect the dots,” such that it effectively avoided performing an impairment analysis and
recording an impairment. The Offering Materials stated that WOW was in the process of
evaluating the impact of adopting the recently issued accounting standard – ASU 2017-04,
Intangibles—Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment.
Prospectus at F-42. It is impossible that such an evaluation could have been reasonably conducted
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under GAAP without considering whether the judgments, forecasts, and projections utilized during
the October 1, 2016 impairment test were significantly different seven months later, at the time of
the Company’s IPO, given the adverse conditions that the Company was then facing. Yet, none
of these negative factors led the Company to conclude that it was necessary to evaluate its
Goodwill for impairment prior to the next annual impairment test date. This was not disclosed in
the Offering Materials.
157. WOW finally belatedly recognized a $133.3 million goodwill impairment in its
2017 Annual Report filed with the SEC on Form 10-K on March 14, 2018, followed by another
$113.2 million goodwill impairment for the same operating units disclosed in WOW’s 1Q2018
quarterly report filed with the SEC on Form 10-Q on May 11, 2018. The total goodwill impairment
disclosed in March and May 2018 represented more than 50% of the Company’s goodwill value
disclosed in its Offering Materials. The lack of a material intervening event between May 19,
2017 and March and May 2018 strongly corroborates that all or substantially all these goodwill
charges should have been taken at the time of the IPO.
2017 1Q'2018 Total Reporting Unit Form 10-K Form 10-Q Impairment
Panama City, FL $ 2.2 $ 3.2 $ 5.4 Montgomery, AL 48.3 47.5 95.8 Huntsville, AL 71.2 77.5 148.7 Dothan, AL 10.0 15.0 25.0 Tampa, FL Data Center 1.6 - 1.6
$ 133.3 $ 143.2 $ 276.5
March 31, 2017 goodwill balance $ 517.5
Percentage declined 25.8% 27.7% 53.4%
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6. The Offering Materials Overstated WOW’s Valuation of Franchise Operating Rights
158. WOW’s May 19, 2017 Offering Materials also included the Company’s latest
financial statements, which showed franchise operating rights balances of $966.5 million and
$1,066.6 million as of March 31, 2017 and December 31, 2016, respectively. Prospectus at F-37.
Included in the Company’s disclosure of its critical accounting policies and estimates was the
description of WOW’s policy for evaluating franchise operating rights for impairment:
We evaluate the recoverability of our franchise operating rights at least annually on October 1, or more frequently whenever events or substantive changes in circumstances indicate that the assets might be impaired. Franchise operating rights are evaluated for impairment by comparing the carrying value of the intangible asset to its estimated fair value, utilizing both quantitative and qualitative methods. Qualitative analysis is performed for franchise assets in the event the previous analysis indicates that there is a significant margin between carrying value of franchise operating rights and estimated fair value of those rights, and that it is more likely than not that the estimated fair values equal or exceed carrying value. For franchise assets that undergo quantitative analysis, we calculate the fair value of franchise operating rights using the multi-period excess earnings method, an income approach, which calculates the value of an intangible asset by discounting its future cash flows. The fair value is determined based on estimated discrete discounted future cash flows attributable to each franchise operating right intangible asset using assumptions consistent with internal forecasts. Assumptions key in estimating fair value under this method include, but are not limited to, revenue and subscriber growth rates (less anticipated customer churn), operating expenditures, capital expenditures (including any build out), market share achieved, contributory asset charge rates, tax rates and discount rate. The discount rate used in the model represents a weighted average cost of capital and the perceived risk associated with an intangible asset such as our franchise operating rights. The estimates and assumptions made in our valuations are inherently subject to significant uncertainties, many of which are beyond our control, and there is no assurance that these results can be achieved. The primary assumptions for which there is a reasonable possibility of the occurrence of a variation that would significantly affect the measurement value include the assumptions regarding revenue growth, programming expense growth rates, the amount and timing of capital expenditures and the discount rate utilized. From a qualitative standpoint, we do not believe that any of our material franchise operating rights is at risk of impairment. Quantitatively, the percentages by which fair value exceeded carrying value are as follows:
Panama City, FL 45% Montgomery, AL 17%
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Huntsville, AL 13% Dothan, AL 18%
Prospectus at 55-56.
159. The Company’s policy was consistent with GAAP related to accounting for
indefinite lived intangible assets. ASC 350-30-35. However, WOW failed to follow the relevant
GAAP provisions and its own accounting policy, resulting in significant overstatement of franchise
operating rights presented in the Offering Materials.
160. The most recent impairment testing prior to the Company’s IPO was undertaken on
October 1, 2016, during WOW’s annual impairment test. WOW was required by GAAP and its
own accounting policy to assess whether there were events or a changes in the circumstances
subsequent to the October 1, 2016 valuation date that would make it more likely than not that its
franchise operating rights were impaired. ASC 350-30-35-18. GAAP lists the following factors
to consider when evaluating whether an event or a change in the circumstances would trigger an
interim indefinite-lived intangible asset impairment test, although this list is not all-inclusive:
• Cost factors such as increases in raw materials, labor, or other costs that have a negative effect on future expected earnings and cash flows that could affect significant inputs used to determine the fair value of the indefinite-lived intangible asset
• Financial performance such as negative or declining cash flows or a decline in actual or planned revenue or earnings compared with actual and projected results of relevant prior periods that could affect significant inputs used to determine the fair value of the indefinite-lived intangible asset
• Legal, regulatory, contractual, political, business, or other factors, including asset- specific factors that could affect significant inputs used to determine the fair value of the indefinite-lived intangible asset
• Other relevant entity-specific events such as changes in management, key personnel, strategy, or customers; contemplation of bankruptcy; or litigation that could affect significant inputs used to determine the fair value of the indefinite- lived intangible asset
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• Industry and market considerations such as a deterioration in the environment in which an entity operates, an increased competitive environment, a decline in market-dependent multiples or metrics (in both absolute terms and relative to peers), or a change in the market for an entity’s products or services due to the effects of obsolescence, demand, competition, or other economic factors (such as the stability of the industry, known technological advances, legislative action that results in an uncertain or changing business environment, and expected changes in distribution channels) that could affect significant inputs used to determine the fair value of the indefinite-lived intangible asset
• Macroeconomic conditions such as deterioration in general economic conditions, limitations on accessing capital, fluctuations in foreign exchange rates, or other developments in equity and credit markets that could affect significant inputs used to determine the fair value of the indefinite-lived intangible asset. [ASC 350-20- 35-18B].
161. As detailed elsewhere in this complaint, at the time of its IPO, the Company was
facing a number of adverse conditions such as increasing credit risk due to aggressive pursuit of
new customers with little regard for their credit worthiness and limited ability to force collection
because WOW lacked the ability to remotely terminate service to non-paying customers.
Moreover, the company was operating with outdated and problematic equipment, which required
increased customer service attention and drove up customer dissatisfaction and, consequently,
attrition.
162. All of these conditions, if properly considered, would have led the Company to
conclude that it had to evaluate its franchise operating rights for impairment before the next annual
impairment testing date. Such an evaluation would have required the Company to recognize an
impairment of its franchise operating rights because WOW would have had to reflect the
aforementioned adverse conditions in its qualitative impairment analysis (an optional first step in
an impairment analysis) or quantitative impairment analyses, which involves estimating the fair
value of the franchise operating rights in each reporting unit based on the discounted cash flow
approach.
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163. The Company’s disclosure in its Offering Materials that from a qualitative
standpoint it did not believe that any of its material franchise operating rights were at risk of
impairment was false and misleading because it did not consider all relevant events and
circumstances that could affect the significant inputs used to determine the fair value of the
Company’s franchise operating rights. ASC 350-20-35-18B.
164. WOW finally recognized a $14.1 million franchise operating rights impairment in
its 2017 Annual Report filed with the SEC on Form 10-K on March 14, 2018, followed by an even
larger $143.2 million franchise operating rights impairment for the same reporting units in the
Company’s 1Q2018 quarterly report filed with the SEC on Form 10-Q on May 11, 2018. All four
of the franchise operating units for which the Company chose to disclose the excess of fair value
over their carried value in its Offering Materials were subsequently determined to be impaired:
May-17 Franchise Registration Operating Right (Fair Value Excess 2017 1Q’2018 (Reporting Unit) Over Carrying Value) Form 10-K Form 10-Q Panama City, FL 45% $3.20 Montgomery, AL 17% $6.20 $ 47.50 Huntsville, AL 13% $0.90 $77.50 Dothan, AL 18% $7.00 $15.00
Impairment $14.10 $143.20
165. The magnitude of the impairment strongly suggests that the Company did not
consider all relative factors in its qualitative analysis to determine whether its franchise operating
rights were likely impaired at the time of its IPO and consequently failed to test them for
impairment. The lack of a material intervening event between May 19, 2017 and March and May
2018 strongly corroborates that all or substantially all these impairment charges should have been
taken at the time of the IPO.
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7. The Offering Materials Reported Understated Bad Debt Expense and Allowance for Doubtful Accounts
166. GAAP required the Company to establish an allowance for doubtful accounts by
recording a charge to income in the form of a bad debt expense when information available before
the financial statements were issued indicates that it is probable that its receivables have been
impaired and the amount of such impairment can be reasonably estimated. ASC 310-10-35-34
and ASC 450-20–25-1. Subsequent credit losses would then be deducted from the allowance for
doubtful accounts without any impact on the Company’s earnings. ASC 310-10-35-41.
167. In its Offering Materials, the Company represented that its bad debt expense and
the allowance for doubtful accounts were based on historical trends. However, during the first
quarter 2017, the Company did not follow GAAP or its own accounting policy and understated its
first quarter 2017 bad debt expense and its allowance for doubtful accounts at March 31, 2017 in
order to keep the poor credit characteristics of its newly acquired customer base from negatively
impacting its pre-IPO earnings.
168. As discussed above and corroborated by CW1, in advance of the IPO, the Company
undertook several steps to add to its customer base at the expense of the quality of the customer,
including relaxing credit requirements and handing out bill credits to keep non-paying customers
on the rolls as active accounts. When told that WOW took only a $4 million quarterly provision
for doubtful accounts for the first quarter of 2017 (the quarter just before the IPO), CW1 said that
“was not possible.”
169. On December 31, 2016, WOW’s reported $9.4 million allowance for doubtful
accounts represented 9.7% of its gross accounts receivable; however, at the end of the first quarter
2017 (immediately prior to the IPO), the allowance for doubtful accounts dropped almost in half
to $5.0 million, such that it represented only 6.5% of its gross receivables. Such an impressive
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“improvement” in the credit quality of the Company’s receivables was an illusion, as the Company
did not take any significant steps to improve the credit quality of its new customers or its ability
to collect delinquent balances until after the IPO.
170. According to CW1, it was only after the IPO that the credit standards for signing
up new customers were “tightened up.” Further, in an effort to address those free-riding customers
who continued to receive services even after termination, after the IPO WOW instituted an internet
routing switch initiative called “Walled Garden” that routed any web traffic from a cancelled
customer to a page encouraging that customer to make a payment. Company employees informally
referred to this large crop of free-riding customers as the “non-paid pumpkin patch.” However,
Video customers continued to receive services without interruption. Therefore, these initiatives
could not justify the aforementioned reduction of the Company’s bad debt expense and the
allowance for doubtful accounts in the first quarter 2017.
171. Although the Company represented that it managed its credit risk by disconnecting
service to delinquent customers, generally within sixty days of delinquency, as previously
discussed it was in fact unable and/or unwilling to cancel service to delinquent customers because
WOW did not have the capability to terminate service remotely. This deficiency did not change
during the first quarter 2017. Thus, there were no new events, conditions, or circumstances that
occurred during the first quarter 2017 that would have enabled the Company to genuinely lower
its bad debt expense or its allowance for doubtful accounts.
172. Historical trends, the very same trends upon which the Company purportedly based
its first quarter 2017 bad debt expense and the allowance for doubtful accounts estimates, provide
further evidence that the Company’s provision for bad debt expense and the allowance for doubtful
accounts were understated. The Company’s provision for bad debts in the first quarter 2017 was
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only 1.4% of its revenues for the same period. However, historically, it averaged 2.0% during the
preceding two quarters (2.1% in the fourth and 1.9% in the third quarter 2016. 1.7%, 2.0% and
1.9% for 2016, 2015 and 2014, respectively).
C. The Truth Gradually Begins to Emerge and Shareholders Are Left Holding the Bag
173. Unfortunately for investors, however, the truth concerning WOW’s actual
condition and prospects did not begin to emerge until after the IPO.
174. On August 1, 2017, the Company announced that it had entered into “a definitive
agreement to sell a portion of its fiber network in the Company’s Chicago market to a subsidiary
of Verizon” for $225 million in cash, and also announced that it had separately agreed to complete
the build-out of the Chicago network in exchange for Verizon’s payment of roughly an additional
$50 million.
175. However, these disclosures were only partial and incomplete, as they failed to
disclose that WOW was actually going to sell the entirety of the Chicago network (including all
fiber assets in downtown Chicago, the very area that the Company sought to enter), as well as
portions of WOW’s own pre-existing legacy fiber network in the Chicago suburbs that WOW had
connected to the new network. Indeed, according to CW7, in addition to losing all fiber assets in
downtown Chicago, as a result of the sale WOW would actually have 28% less capacity on its pre-
existing legacy fiber network – which in turn led to a 70% to 75% decrease in WOW’s fiber sales
in the Chicago area (now entirely confined to its diminished legacy fiber sales in the Chicago
suburbs), shrinking average annual fiber sales from $4.5 million prior to the sale of the network to
$1 million afterwards. Similarly, CW9, who recalled reviewing a map of the Company’s legacy
network after the sale to Verizon was announced, confirmed that the sale of the Chicago fiber
network would have a dramatic adverse impact on WOW’s revenues, as a traditional customer
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who used older coaxial lines typically generated just $50 to $200 per month in recurring monthly
revenue, whereas a fiber customer would generate $400 to $2,500 per month in recurring monthly
revenue. But such facts continued to be withheld from the investing public.
176. On December 14, 2017, the Company announced that its transactions with Verizon
had closed, but still did not fully disclose their terms. Accordingly, the extent of the adverse impact
of WOW’s sale of the Chicago network remained hidden. Notably, that same day, WOW
announced that Defendant Cochran would be retiring from his position as CEO, and Teresa Elder
would be replacing him and joining the WOW Board.
177. After announcing on February 15, 2018 that the Company would be presenting its
fourth quarter and full year 2017 results on March 8, 2018, the Company announced on March 7,
2018 that it would need to delay the reporting of its financial results “to allow additional time for
our independent auditors to complete their review of the valuation analysis of indefinite lived
intangible assets.”
178. On March 14, 2018, WOW stunned financial markets by announcing that the
company had suffered a shocking revenue decline in 2017 of approximately 4% on a year-on-year
basis compared to 2016. On the conference call discussing these results, CEO Elder did not mince
words, belatedly admitting that “over the course of 2017, we fell short in some of our key operating
and financial metrics, and have not lived up to our long-held reputation of providing exceptional
customer experiences. Missing such critical targets is very disappointing.” Moreover, to address
these issues, Elder conceded that WOW would need to significantly increase its expenditures:
These investments of between $20 million and $25 million are being made in customer experience, customer acquisition and retention, products and services and, of course, our people. Specifically, in 2018, we are investing in tools to transform how we deliver the WOW! experience, so that we are viewed by our customers as reliable, easy and pleasantly surprising. We treat our customers as neighbors, not numbers, and relate to them on a personal level. You’ll hear me talk
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about being reliable, easy and pleasantly surprising repeatedly because it’s central to how we intend to win and retain customers and position WOW! for growth.
179. In addition to announcing this customer service expense, the Company also
announced on March 14, 2018 a $147.4 million impairment charge to goodwill and franchise
operation rights, purportedly driven by the decline in WOW’s common stock price following the
IPO. As set forth in the Annual Report for 2017 filed on Form 10-K with the SEC on March 14,
2018, $133.3 million of this $147.4 million charge was a goodwill write-down, with the remaining
$14.1 million related to franchise operating rights.
180. The shift in focus from edge-out expansion and overall Company growth to
customer care and retention reverberated through the investment community.
181. On March 15, 2018, analysts from UBS lowered their recommendation from “Buy”
to “Neutral” and their twelve-month price target from $19.00 to $10.00. The reason was the
analysts’ lowered EBITDA estimates to reflect slower unit growth and higher operating expenses,
specifically the “greater spend on customer care/sales and other initiatives to lower churn.”
182. In their March 15, 2018 note, analysts from Macquarie identified that “customer
experience deteriorated leading to higher churn,” resulting in the Company falling well short of
expectations.
183. On March 21, 2018, RBC lowered its recommendation for the Company to “Sector
Perform” from “outperform” and cut its price target from $17.00 to $10.00. In its research note,
RBC specifically cited the “increased investment in care and marketing initiatives in 2018” as
slowing EBITDA growth and keeping the bank “on the sidelines” with respect to WOW:
However, the short-term need for increased investment in customer care, IT, and marketing services to better position the company competitively versus Charter and Comcast, and the potential negative impact of these additional investments on network edge-outs keep us on the sidelines.
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184. Investors felt similarly, as the market reacted negatively to the news that the
Company that prided itself on “customer experience” was being forced to invest tens of millions
into the area rather than focusing on expansion, as the Company’s stock price dropped from $9.18
on March 14, 2018 to $7.04 on March 15, 2018 – a loss of more than 23% – and nearly 60% below
the IPO price.
185. On May 11, 2018, the Company announced its results for the first quarter of 2017.
Therein, the Company announced a further impairment “due to the decline in the Company’s stock
price” of $256.4 million related to franchise operating rights and goodwill.
186. Taken together, the fourth quarter 2017 and first quarter 2018 impairment charges
totaled a 24% decrease in the value of WOW’s franchise operating rights and a more than 52%
decline in the value of WOW’s goodwill.
187. Moreover, by the May 2018 announcement of the Company’s financial results, the
extent to which WOW’s sale of the Chicago fiber network had adversely affected the Company’s
business, including by dragging down WOW’s “Other Business Services” revenue, was finally
becoming clear. The decline in the Company’s reported revenue in its “Other Business Services”
segment is set forth in the chart below:
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WideOpenWest Other Business Services (in millions)
FULL Quarter Ended Quarter Ended YEAR 3/31/2017 6/30/2017 9/30/2017 12/31/2017 2017 3/31/2018 6/30/2018 Revenue $11.10 $10.60 $9.60 $8.60 $39.90 $7.10 $6.80 Dollar Change Over Same $2.90 ($3.00) ($0.40) ($5.20) ($5.70) ($4.00) ($3.80) Period, Prior Year Percentage Change Over 35% -22.06% -4% -37.68% -13.00% -36.04% -35.85% Same Period, Prior Year
188. Moreover, as the Company acknowledged at page 27 of its Form 10-Q, filed May
11, 2018, for its fiscal quarter ended March 31, 2018, the reported decrease was “primarily due to
decreased revenue generated by network construction activities and the sale of the Chicago fiber
assets and associated wholesale customers.”
189. Since the IPO, the Company’s common stock has continued to trade well below the
Offering price.
CLASS ACTION ALLEGATIONS
190. Plaintiffs bring this action as a class action pursuant to Article 9 of the CPLR on
behalf of a class consisting of all persons or entities who purchased the common stock issued by
WOW pursuant to or traceable to the Company’s IPO that commenced on May 25, 2017 and closed
on May 31, 2017 (the “Class,” as previously defined herein). Excluded from the Class are
Defendants and their families, the officers, directors and affiliates of Defendants, members of their
immediate families and their legal representatives, heirs, successors or assigns, and any entity in
which Defendants have or had a controlling interest.
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191. The members of the Class are so numerous that joinder of all members is
impracticable. During the relevant time period, WOW’s securities were actively traded on the
NYSE under the symbol “WOW.” While the exact number of Class members is unknown to
Plaintiffs at this time and can only be ascertained through appropriate discovery, Plaintiffs believe
that there are hundreds, if not thousands of members in the proposed Class. Record owners and
other members of the Class may be identified from records maintained by WOW or its transfer
agent and may be notified of the pendency of this action by mail, using the form of notice similar
to that customarily used in securities class actions.
192. Plaintiffs’ claims are typical of the claims of the members of the Class as all
members of the Class are similarly affected by Defendants’ wrongful conduct in violation of
federal law that is complained of herein.
193. Plaintiffs will fairly and adequately protect the interests of the members of the Class
and have retained counsel competent and experienced in class and securities litigation.
194. Common questions of law and fact exist as to all members of the Class and
predominate over any questions solely affecting individual members of the Class. Among the
questions of law and fact common to the Class are:
(a) whether Defendants violated the Securities Act;
(b) whether statements made by Defendants to the investing public in the Registration
Statement and Prospectus were inaccurate and misleading, contained untrue
statements of material facts, omitted to state other facts necessary to make the
statements made not misleading, or omitted to state material facts required to be
stated therein, concerning the business and operations of WOW; and
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(c) to what extent members of the Class have sustained damages, and if so, the proper
measure of damages.
195. A class action is superior to all other available methods for the fair and efficient
adjudication of this controversy since joinder of all members is impracticable. Furthermore, as the
damages suffered by individual Class members may be relatively small, the expense and burden
of individual litigation make it impossible for members of the Class to individually redress the
wrongs done to them. There will be no difficulty in the management of this action as a class action.
FIRST CAUSE OF ACTION
For Violations of §11 of the Securities Act of 1933 Against All Defendants Other Than The Private Equity Defendants
196. Plaintiffs incorporate each preceding paragraph by reference.
197. This Cause of Action is brought by Plaintiffs pursuant to §11 of the Securities Act,
15 U.S.C. §77k, on behalf of the Class, against all Defendants, other than the Private Equity
Defendants.
198. The Registration Statement for the IPO was inaccurate and misleading, contained
untrue statements of material facts, omitted to state other facts necessary to make the statements
made not misleading, and omitted to state material facts required to be stated therein.
199. The Company is the issuer of the securities purchased by Plaintiffs and the Class.
As such, the Company is strictly liable for the materially untrue statements contained in the
Registration Statement and the failure of the Registration Statement to be complete and accurate.
200. The Individual Defendants each signed the Registration Statement or authorized
the signing of the Registration Statement on their behalf. As such, each is strictly liable for the
materially inaccurate statements contained therein and the failure of the Registration Statement to
be complete and accurate, unless they are able to carry their burden of establishing an affirmative
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“due diligence” defense. The Individual Defendants each had a duty to make a reasonable and
diligent investigation of the truthfulness and accuracy of the statements contained in the
Registration Statement, and to ensure that they were true and accurate, that there were no omissions
of material facts that would make the Registration Statement misleading, and that the document
contained all facts required to be stated therein. In the exercise of reasonable care, the Individual
Defendants should have known of the material misstatements and omissions contained in the
Registration Statement and also should have known of the omissions of material fact necessary to
make the statements made therein not misleading. Accordingly, the Individual Defendants are
liable to Plaintiffs and the Class.
201. The Underwriter Defendants each served as underwriters in connection with the
IPO, which was conducted pursuant to the Registration Statement (including the incorporated
Prospectus). As such, each is strictly liable for the materially inaccurate statements contained in
the Registration Statement and the failure of the Registration Statement to be complete and
accurate, unless they are able to carry their burden of establishing an affirmative “due diligence”
defense. These defendants each had a duty to make a reasonable and diligent investigation of the
truthfulness and accuracy of the statements contained in the Registration Statement. They had a
duty to ensure that they were true and accurate, that there were no omissions of material facts that
would make the Registration Statement misleading, and that the documents contained all facts
required to be stated therein. In the exercise of reasonable care, the Underwriter Defendants should
have known of the material misstatements and omissions contained in the Registration Statement
and also should have known of the omissions of material facts necessary to make the statements
made therein not misleading. Accordingly, each of the Underwriter Defendants is liable to
Plaintiffs and the Class.
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202. Moreover, the SEC has created specific rules governing the content of disclosures
made by public companies in their filings with the SEC that are incorporated by reference in
connection with a public offering of stock. Item 303(A)(3)(II) of Regulation S-K (“Item 303”)
provides guidance on what should be included in the registration statement for a public offering of
the type that was conducted here.
203. Item 303 requires a registrant to disclose “any known trends or uncertainties that
have had or that the registrant reasonably expects will have a material favorable or unfavorable
impact on net sales or revenues or income from continuing operations.” 17 C.F.R.
§229.303(a)(3)(ii). An omission of fact required to be stated under Item 303 renders the registrant
liable under §11.
204. By reason of the conduct herein alleged, each defendant named herein violated §11
of the Securities Act.
205. Plaintiffs acquired WOW common stock pursuant or traceable to the Registration
Statement used for the IPO and without knowledge of the material omissions or misrepresentations
alleged herein.
206. Plaintiffs and the Class have sustained damages, as the value of WOW common
stock has declined substantially subsequent to and due to these Defendants’ violations.
207. This claim was brought within one year after the discovery of the untrue statements
and omissions and within three years of the date of the Offering.
208. By virtue of the foregoing, Plaintiffs and the other members of the Class are entitled
to damages under §11, as measured by the provisions of §11(e), from the Defendants and each of
them, jointly and severally.
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SECOND CAUSE OF ACTION
For Violation of §12(a)(2) of the Securities Act of 1933 Against WOW, the Officer Defendants, and the Underwriter Defendants
209. Plaintiffs incorporate each preceding paragraph by reference.
210. This Cause of Action is brought by the Employees’ Retirement System of the
Puerto Rico Electric Power Authority pursuant to §12(a)(2) of the Securities Act against WOW,
the Officer Defendants, and the Underwriter Defendants.
211. By means of the defective Offering Materials, WOW, the Officer Defendants, and
the Underwriter Defendants promoted and sold WOW stock to Plaintiffs and other members of the
Class. WOW is liable as an issuer and was motivated by its financial interest in selling
approximately 21 million shares of stock for gross proceeds totaling approximately $356 million.
It directed the Offering Materials to the investing public, and the Underwriter Defendants and
Officer Defendants sold and solicited sales of WOW stock to the investing public at the behest of
WOW.
212. The Officer Defendants are liable for solicitation and were motivated by their
personal financial interests, as well as the financial interests of WOW. They reviewed, approved,
and signed the Offering Materials and reviewed, approved, and made the statements in road shows
to encourage investors, including Plaintiffs, to purchase WOW stock.
213. The Underwriter Defendants are liable for selling and soliciting the sale of WOW
stock to investors and were motivated by their fees and commission in doing so. They directed
and distributed the Offering Materials to investors. Each of the Underwriter Defendants pitched
and sold WOW stock to investors, through their approval and distribution of the Offering
Materials, their approval and use of road shows, and through direct communications with
investors, including their own clients.
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214. The Offering Materials contained untrue statements of material fact and concealed
or failed to disclose material facts, as detailed above. The Defendants named in this Cause of
Action owed Plaintiffs and the members of the Class, who purchased WOW common stock
pursuant to the Offering Materials, the duty to make a reasonable and diligent investigation of the
statements contained in the Offering Materials to ensure that such statements were true and that
there was no omission to state a material fact required to be stated in order to make the statements
contained therein not misleading.
215. Plaintiffs did not know, nor in the exercise of reasonable diligence could have
known, of the untruths and omissions contained in the Offering Materials at the time Plaintiffs
acquired WOW common stock.
216. By reason of the conduct alleged herein, these Defendants violated §12(a)(2) of the
Securities Act. As a direct and proximate result of such violations, Plaintiffs and other members
of the Class who purchased WOW common stock pursuant to the Offering Materials sustained
substantial damaged in connection with their purchases. Accordingly, Plaintiffs and the members
of the Class, who hold the common stock issued pursuant to the Offering Materials, have the right
to rescind and recover the consideration paid for their shares, or to recover rescissory or other
damages to the maximum extent permitted by law, and hereby tender (to the extent tender is
required) their common stock to the Defendants sued herein. Class members who have sold their
common stock seek damages to the maximum extent permitted by law.
THIRD CAUSE OF ACTION
For Violation of §15 of the Securities Act of 1933 Against the Individual Defendants and the Private Equity Defendants
217. Plaintiffs incorporate each preceding paragraph by reference.
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218. This Cause of Action is brought by Plaintiffs pursuant to §15 of the Securities Act
against the Individual Defendants and the Private Equity Defendants.
219. The Company controlled the Individual Defendants and all of its employees.
220. The Individual Defendants each were control persons of WOW by virtue of their
positions as directors or senior officers of WOW. Each of the Individual Defendants had a series
of direct or indirect business or personal relationships with other directors or officers or major
shareholders of WOW. Each of the Individual Defendants had a financial interest in taking the
Company’s stock public in order to increase the holding value and marketability of their holdings,
as alleged herein.
221. The Private Equity Defendants were control persons of the Individual Defendants
and the Company by virtue of their majority stock ownership in the Company and majority
designee control over the Board. Each of the Private Equity Defendants had the ability to influence
the policies and management of WOW.
222. The Private Equity Defendants had a financial interest in taking the Company’s
stock public in order to increase the holding value and marketability of the Private Equity
Defendants’ investment in WOW.
223. WOW and the Individual Defendants each were culpable participants in the
violations of §§11 and 12 of the Securities Act alleged in Counts One and Two above, based on
their having signed or authorized the signing of the Registration Statement and having otherwise
participated in the process that allowed the IPO to be successfully completed.
PRAYER FOR RELIEF
WHEREFORE, Plaintiffs demand judgment as follows:
(A) Declaring this action to be a class action pursuant and certifying Plaintiffs as
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(B) Awarding Plaintiffs and the members of the Class damages, including interest,
rescission, or recessionary damages;
(C) Awarding Plaintiffs and the Class their reasonable costs and expenses incurred in
this action, including attorneys’ fees; and
(D) Awarding such equitable/injunctive or other relief as the Court may deem just and
proper.
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JURY DEMAND
Plaintiffs demand a trial by jury.
Dated: November 19, 2018 RESPECTFULLY SUBMITTED,
LEVI & KORSINSKY LLP
/s/ Shannon L. Hopkins Shannon L. Hopkins Sebastiano Tornatore 55 Broadway, 10th Floor New York, NY 10006 T. 212-363-7500 [email protected] [email protected]
Attorneys for Plaintiff Jeff Kirkland and the Proposed Class
WOLF POPPER LLP SCOTT+SCOTT ATTORNEYS AT LAW LLP
/s/ Robert C. Finkel /s/ William C. Fredericks Robert C. Finkel William C. Fredericks Andrew E. Lencyk Thomas L. Laughlin Joshua W. Ruthizer Lauren McCabe Fei-Lu Qian The Helmsley Building 845 Third Avenue 230 Park Avenue New York, N.Y. 10022 New York, New York 10169 T: 212.759.4600 (212) 223 6444 [email protected] [email protected] [email protected] [email protected] [email protected] [email protected] [email protected] Attorneys for Plaintiff Anthony Fiore and Attorneys for Plaintiff The Employees’ the Proposed Class Retirement System of the Puerto Rico Electric Power Authority and the Proposed Class
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