A California federal judge dismissed a proposed settlement between AT&T Wireless Services Inc. and minority owners of AT&T cellular markets after the court discovered AT&T signed an employment agreement with attorneys that represented the minority owners.

If approved, the settlement would have closed the door on any complaints from minority owners about past business practices of McCaw Cellular Communications Inc. AT&T acquired McCaw’s cellular properties in 1994.

AT&T Wireless said it did nothing wrong.

“We were above board in this whole thing,” said AT&T Wireless spokesman Ken Woo. “We were just trying to get closure on this case because it was costing too much money.”

A hearing is scheduled for Feb. 12 to determine if another settlement will be attempted or if the case will go to trial.

Last August, a class action lawsuit was filed against AT&T Wireless in U.S. District Court for the Northern District of California. Class members are those who hold a minority interest in one of 31 AT&T cellular properties, at least 500 people.

The complaint states that for years, McCaw had been charging minority members management fees, switch-sharing fees, microwave rental costs and charges that were considered excessive, which “contains unreasonable amounts of overhead and profit for defendants, and is less favorable to the markets than could have been obtained from an independent manager,” the complaint states.

It is also alleged that from the mid 1980s, McCaw purchased equipment and materials for use in the business, then marked up the actual cost. The marked-up price was charged to the markets “solely to obtain a private and personal profit for defendants at the expense of the markets. Defendants’ mark-ups and illegal profits vary from 5 percent to 20 percent or more of the actual cost,” the complaint stated.

AT&T denies all the charges. “These accusations are straw men designed to make the plaintiffs rich,” said AT&T’s Woo. Nevertheless, AT&T changed the McCaw practices in 1995 “to be more in line with other operators.”

The 1995 changes didn’t, however, completely close the door on liability.

Attorney Joseph Carcione Jr. of Redwood City, Calif., had filed six other actions against AT&T Wireless before filing the class action lawsuit.

Three months after filing the class action, Carcione filed a proposed $48 million settlement in the class case, in which AT&T agreed to change its conduct from the date of settlement until the year 2002, according to court documents.

When the filings followed each other so closely, class member Lee McDonald became suspicious.

“Notices were sent out to class members by regular mail, saying we had 30 days to respond and that the settlement was worth $48.1 million,” McDonald said in a telephone interview from his Montana home. “This was a very creative way of closing the door, and how many class members were going to question it?” he said.

McDonald and another class member, Ronald Trinchitella, requested more time from the court to respond and they effectively held up the settlement. The men hired the Silicon Valley Law Group of San Jose, Calif., to look into the matter.

A second opinion was sought on the settlement valuation. Stanford University Professor Samuel Chiu studied the model for the proposed settlement and came up with a value of $5.2 million instead of $48.1 million.

“That troubled me because they represented it to be $48 million plus $10 million in legal fees, which AT&T agreed to pay,” McDonald said. “And it didn’t include the 1995 changes.”

Then objectors discovered an employment agreement between AT&T Wireless and class member attorneys Carcione and Tony Tanke of Belmont, Calif.

The employment agreement was dated Aug. 20-the day before the class action complaint was filed with the court. It stated that AT&T Wireless would hire Carcione and Tanke to monitor the settlement agreement for six years. The agreement was applicable only if the settlement was approved.

The employment deal with Carcione and Tanke wasn’t AT&T’s idea, said Woo. It had been worked out by the court-appointed settlement mediator, he said.

“The attorney wanted more than $10 million in fees. He wanted an agreement, so the mediator worked one out. We agreed to it just to settle, and we made full disclosure of it to the judge,” Woo said.

U.S. District Judge Lowell Jensen, in his Jan. 7 order denying the settlement, said,”Class counsel thus has an interest in this court approving the settlement, regardless of the benefits the settlement might bring the class.” Telephone calls to Carcione were not returned.

“Furthermore,” the judge said, “the willingness of the defendant to pay class counsel between $7.5 million and $10 million to settle a claim agreed by all parties to be worth less than $10 million, coupled with the employment agreement between counsel and the defendant, raises the specter of collusion.”

The judge also was concerned that Warren Linney, the class member who represented the 500 minority members, withdrew his support for the lawsuit due to the attorney conflict, concern that there was no way for an individual class member to opt out of the settlement and differences in valuation amounts.

AT&T Wireless said in court documents that it will make the proposed changes in business practices only if the settlement is approved. “If the settlement is not approved, not only will AT&T Wireless not implement the changes contemplated by the settlement, it will also be free to reverse or adjust some or all of the changes it previously made during its 1995 settlement efforts.”

The judge also stated in his order that the class would have difficulty proving at trial that the behavior of AT&T Wireless and McCaw was below the industry standard for a major interest holder, stating that markets managed by AT&T and McCaw “have performed extremely well.”

“The court’s impression of the terms of the proposed settlement is that they are reasonable,” the order states, adding that the changes by AT&T “will bring a benefit to the class.”


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