BY TUX TURKEL

Portland Press Herald

Creditors who are owed more than $550 million by FairPoint Communications are asking a U.S. Bankruptcy Court judge to appoint an examiner to investigate whether top managers misrepresented the company's prospects for recovery, and are trying to profit from the proposed reorganization.

The creditors also question management's decision to enter into a financial settlement with a consulting firm that installed FairPoint's trouble-plagued computer system.

And they wonder why a $23 million dividend was paid to shareholders early last year, just as financial problems were mounting.

These and other issues are contained in a motion filed in FairPoint's Chapter 11 bankruptcy case in New York City. A hearing on the motion is set for Nov. 18; parties in the case must respond by Nov. 13. The judge has until Dec. 10 to act on FairPoint's restructuring proposal.

FairPoint declined to specifically address any charges at this time. It issued this statement: "We adamantly dispute the allegations in the motion filed by the ad hoc committee of bondholders and we will deal with the allegations in due course through the bankruptcy court process."

Attempts last week to reach lawyers representing the creditors were unsuccessful.

At the heart of the motion is a high-stakes tussle between private equity firms and other unsecured creditors -- referred to in the motion as FairPoint noteholders -- and the banks that loaned the company money. The noteholders complain that FairPoint's proposed reorganization plan squeezes them out. The public may have little sympathy for angry, private investors who stand to lose money in a high-risk venture. But the concerns raised in the motion are of interest to state officials. They offer a behind-the-scenes look into management decisions at a company that borrowed heavily to buy Verizon's landline network, stumbled during the technical takeover and is now seeking a court-ordered restructuring to restore and expand the telecommunications backbone for northern New England.

"It raises a number of issues, some that we've been aware of but were not able to act on," said Richard Davies, Maine's Public Advocate.

Appointing a court-ordered examiner would be a good way to investigate the charges in open view, Davies said. The dispute may form the crux of the case, he added, and help define whether FairPoint has the resources to emerge from bankruptcy and competently run the region's phone system.

FairPoint's plan would wipe $1.7 billion of debt owed to creditors from its balance sheet. It would convert $1.1 billion in debt held by banks and other lenders into equity, and transfer 98 percent of the ownership to them. At the same time, the deal would give up to 10 percent of the equity to top management, in the form of restricted stock, incentive programs and stock options.

Just how much money top managers would receive under this plan would depend on how the company is ultimately valued and the price at which stock and options are set. But assuming a value of $2 billion -- a figure the noteholders say is too low -- top management could end up with roughly $100 million, based in part on long-term incentive plan documents filed by the company.

Additionally, the documents show the company is proposing a 10-year term for the options. That could make the package worth twice as much over time, noteholders contend, if the company is successful.

"It is incredible," lawyers representing the noteholders wrote in the motion, "that the very same management team that has brought the debtors to this point could now seek to so richly reward themselves while wiping out unsecured creditors."

In the motion, the noteholders summarize months of private negotiations over the summer between them and FairPoint, as the company sought to reduce debt on its balance sheet and stay out of bankruptcy. Those talks broke down in late August, the noteholders say, partly over FairPoint's request for an additional $25 million.

FairPoint then went on to negotiate a deal with bank lenders, based on what the noteholders cite as a more-dire outlook for the company's recovery and a lower value. This deal forms the basis for last month's reorganization filing.

The motion also provides a new understanding of the widely-publicized operational troubles FairPoint has had with its customer billing and service, following the "cutover" from Verizon's network. FairPoint has been the target of public anger. But the motion also highlights the role of Capgemini Group, the international consulting firm hired to build a new back-office computer system and integrate computer software.

The motion reads: "Defective back-office systems provided by Capgemini, which have been widely acknowledged by the debtors (FairPoint) and regulators alike as the source of the debtor's system integration problems, have resulted in significant operational and customer service issues for the debtors. As a result of Capgemini's numerous failures, the debtors withheld payments of approximately $50 million of invoiced amounts under their agreements with Capgemini ..."

According to the motion, FairPoint entered into a settlement agreement with Capgemini on Oct. 9, for Capgemini's continued services. It agreed to pay $30 million of what it owed, plus ongoing fees. It then gave the company half of the money, and agreed to pay the other half on Dec. 31.

FairPoint's management shouldn't have made this obligation, two weeks before filing for bankruptcy, to a firm that has been unable to rectify the cutover issues for nearly a year, the noteholders complain.

Davies said the noteholders may have a good point, and he thinks Capgemini has to bear more responsibility for the systems failures. But it's possible, Davies said, that FairPoint may have been handcuffed into sticking with Capgemini by a legal agreement. The noteholders allude to this possibility in their filing.

FairPoint, meanwhile, has hired another consultant to help fix the problems.

The motion also raises questions about a $23 million dividend payment FairPoint made to shareholders last January, when it was facing severe operational and financial difficulties. This payment substantially benefited directors and officers of the company, the noteholders say, who also are significant shareholders.

In March, with troubles mounting, FairPoint suspended its quarterly dividend.

The noteholders also question the June appointment of David Hauser, a FairPoint director, as the new chairman and chief executive officer.

Hauser had been chief financial officer at Duke Energy, also based in Charlotte, N.C. He replaced Eugene Johnson, a co-founder of FairPoint and prime mover of the Verizon purchase, who retired. Hauser has a strong background in money management and customer service in a much-larger utility. But the noteholders say a struggling company shouldn't have hired one of its own directors, with no experience running a telecom business, to the top post.

Looking into these charges, Davies said, could help the judge fashion a plan that not only allows FairPoint to emerge with manageable debt, but also provides enough money to fix and upgrade the troubled operating system.

"Otherwise," he said, "you have a company with low debt, but a broken engine."