Posted on 07/26/2003 6:18:40 PM PDT by Timesink
ASHINGTON, July 26 — Federal prosecutors have opened an investigation in the United States and Canada into accusations that MCI, the nation's second-largest long-distance carrier, defrauded other telephone companies of at least hundreds of millions of dollars over nearly a decade, people involved in the inquiry said.
The central element of MCI's scheme, people involved in the inquiry said, consisted of disguising long-distance calls as local calls to avoid paying special access tariffs to local carriers across the country. Those tariffs are the largest single source of MCI's costs for carrying calls and data transmissions.
The investigation is based on internal documents and information from former MCI executives and three other telephone companies: AT&T, SBC Communications and Verizon. They have provided significant technical evidence that shows, they say, that MCI is continuing to avoid paying access charges through the scheme, according to people involved in the inquiry.
Telecommunications experts said that in the 1990's, it became common for long-distance providers to seek legal ways to shift telephone traffic to reduce access tariffs. But there have also been criminal prosecutions of companies that improperly avoided the tariffs.
The three other telephone companies have long been bitter rivals of MCI (formerly WorldCom) and have competitive motives to try to derail the company's plan to reorganize and emerge from the bankruptcy proceedings it entered last year after the admission that it had committed the largest accounting fraud in history. But the Justice Department is taking seriously the evidence that they and the former executives have presented, people close to the inquiry said.
MCI received a subpoena late this past week ordering it to turn over documents and other material. MCI executives said they believed that the allegations were unfounded and that the investigation was the latest effort by rivals to introduce new problems in its bankruptcy proceedings. The executives said they suspected that their competitors prompted the inquiry to raise questions among officials who are considering whether to continue to allow the company to do business for the federal government, which is MCI's largest client.
Nonetheless, the executives said they were conducting their own internal review to determine whether the company had redirected telephone traffic in improper ways.
"Access charges between local and long-distance carriers have existed for decades and are routine in the industry," said a statement issued by the company this morning. "As always, we take all inquiries by the U.S. Attorney's Office very seriously and will cooperate fully with any investigation."
The main scheme of avoiding access charges was referred to in company documents variously as "Project Invader" and "Project Scorpion," according to former technicians at the company. In statements provided to investigators, they described the enormous pressure they faced to reduce access fees.
Long-distance telephone companies are required to pay "origination" and "termination" fees to local telephone companies at each end of a call. The origination fees vary and the termination fees are typically 2 to 3 cents per minute for calls between states.
Justice Department officials have evidence that MCI may, in effect, have "laundered" calls through small telephone companies, and even redirected domestic calls through Canada, to avoid paying access fees or shift them to rival long-distance carriers, according to people involved in the investigation.
Lawyers from AT&T, SBC Communications and Verizon (formed through a merger of Bell Atlantic and GTE in 2000) have told prosecutors that extensive tests by the companies show that MCI continues to redirect telephone traffic. The lawyers told the investigators that the tests also showed that the billing codes that are transmitted with telephone calls in data packets had been doctored.
Prosecutors have also received detailed statements from former company employees who have described the details of a program, which operated out of the company's carrier management group.
"Everyone understood that we were stiffing Bell Atlantic, but I did not consider whether it was illegal," one design engineer who formerly worked at MCI said in a sworn statement provided to investigators. "We were told that Project Invader was an exploitation of a tariff loophole, a trick. We kept the project a secret. The traffic was ramped up slowly to avoid detection."
The engineer said that he was "sure that the originating point codes were changed because that was critical to the deception."
Former MCI executives, their lawyers, telecommunications experts and others involved in the inquiry said that the company saved at least hundreds of millions of dollars in access fees owed to other companies by systematically rerouting telephone traffic, although exact figures are not known.
Industry lawyers, extrapolating from thousands of recent test calls made by AT&T, SBC and Verizon using MCI lines, said the results showed that 40 to 50 percent of MCI's telephone traffic may have been diverted in some markets, and that MCI may ultimately have avoided more than $1 billion in access tariffs since 1994. In recent years, the industry has made a total of about $3 billion in access payments annually.
The investigation may pose major new legal and financial problems for MCI, according to lawyers involved in the company's bankruptcy case. Its rivals assert that the company should be liquidated, with major assets sold to other companies. Executives at MCI have said that the company should emerge from bankruptcy intact because it has fixed its accounting problems.
The new inquiry, which began in May, threatens to undermine that claim and could place significant new financial liabilities on the company. Industry executives said that other phone companies that were deprived of the access fees have been considering filing lawsuits to recover them.
The inquiry into the calls began as separate investigations in the United States Attorney's offices in Dallas, which was tipped off to problems by SBC Communications, and in New York, where federal prosecutors received information from a corporate whistle-blower who had first contacted Verizon last May.
In the case of SBC, Texas customers were complaining that the caller identification function on their telephones was not working because it showed a local call when, in fact, the call was long distance. Investigators said they believed that the phones were not malfunctioning, but that the caller identification reflected that the phone codes had been altered to disguise the origin of the call.
The inquiries have now merged into one investigation under the supervision of the United States Attorney's Office in Manhattan, which has been leading a separate investigation in the accounting fraud case.
The technicians told investigators that the schemes were planned by MCI in 1994, five years before its merger with WorldCom. The plan began after MCI engineers discovered that the regional Bell companies had unmetered lines coming from independent telephone carriers that carried only local traffic. Local telephone traffic, unlike long-distance traffic, is generally not subject to any access fees.
According to the technicians, MCI then sought to sign low, fixed-cost contracts with small telephone companies to redirect the long-distance traffic to make the calls appear to be local.
Describing confidential documents outlining the scheme in 1995, the former MCI design engineer said, "The Project Invader memo describing the project said MCI wanted the traffic to ramp up slowly enough that Bell Atlantic would not notice it. The arrangement was intended to go on indefinitely."
"Employees at MCI were strongly motivated to cut access costs," the engineer said.
A report issued last month by lawyers retained by MCI to investigate the accounting fraud described how MCI's senior executives had long been troubled by those expenses and put enormous pressure on managers to take steps to reduce them.
In a second scheme, known by technicians as the "Canadian gateway project," MCI was said to have routed domestic telephone traffic to Canada through a series of small companies with which MCI had contracts. The technicians said that the billing codes were altered and that the calls were transferred to AT&T lines into the United States so that AT&T would have to pay the tariffs.
Joseph S. Friedberg a criminal lawyer in Minneapolis, said that he represented a client, a former MCI executive whom he would not identify, who had recently gone to prosecutors to outline what he called "a pattern of defrauding other companies out of fees."
"The magnitude of it I cannot begin to describe," said Mr. Friedberg, who said his client had been interviewed recently by federal investigators after receiving a subpoena.
I hope MCI goes bankrupt all over again.
I switched to MCI after that.
Maybe the moderator didn't like my comment concerning the motives of folks who defend AT&T while attacking MCI. They have evil motives.
Every time I would call, they would say that I must have chosen MCI. I would say, "Play back for me the recording of my choosing MCI" and I will pay you. If not, I'm not paying one cent.
They always removed all the charges, but still, that's when I knew MCI was in trouble financially.
I posted it late on a Saturday night, and probably rolled off the Front Page News sidebar pretty fast as people filled it up with new articles from their Sunday papers. Most Freepers probably never saw the post.
This would be a good place to note that everyone should have a "PIC freeze" on all your phone lines. All you have to do is call your local phone company's business office and request it; it's free and only takes a few minutes. After that, no scumbag outfit like MCI can come along and slam you, because you have to give express permission for any attempt to change your long distance carrier.
It's the first thing I did with Verizon after dumping MCI, because I fully believe they will try to slam me back.
Courier: Worldcom is a criminal enterprise that should be shut down and the last office chair sold in liquidation.Can anyone answer why the Bush administration got away with awarding the Iraq cellphone contract, without bid process, to WorldCom without a squeak here on FR? Even though AT&T, Sprint and other companies had the same expertise?
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