One Scandal That Won’t Die


Another day, another fraud — it must be business as usual at MCI, the bankrupt phone company formerly known as WorldCom. But for a company struggling to emerge from bankruptcy, this latest allegation — that MCI may have illegally sidestepped certain fees — could be the coup de grace.

MCI , which filed for Chapter 11 last year after investigators uncovered a $9 billion accounting fraud, is now being investigated by the U.S. Department of Justice for “laundering” calls. Three rivals — AT&T (T), Verizon (VZ), and SBC (SBC) — have charged that MCI has been rerouting calls in an effort to avoid paying hundreds of millions of dollars in local access charges. In some instances, MCI allegedly has off-loaded the calls onto the networks of the competitors so that they are stuck with paying the access fees.

First a lesson in laundering. Typically, a long-distance call placed from New York to San Francisco travels through at least three networks. It starts with Verizon, New York’s local carrier, then moves through AT&T or another long-distance provider, then ends up at SBC, the local phone company of San Francisco. AT&T pays SBC for access to its local phone network. These access charges can range from a penny to almost 15 cents a minute, especially in rural and remote locales. When companies are competing on price and charging 5 cents a minute for their long-distance calls, the access charges are the difference between profit and loss.

MCI is being accused of funneling its long-distance traffic through other networks, or laundering calls. The alleged scam can work in three ways: In one hypothetical scenario, MCI off-loads some of its long-distance voice calls onto the AT&T network. MCI still makes money on the call, while Ma Bell gets stuck paying the access charges. In the second scenario, MCI, which is also a local carrier (thanks to WorldCom and a handful of smaller companies it has acquired), diverts its long-distance traffic onto local carriers’ networks to make the calls appear to be local, and thus avoids access charges. The third version of the scam has MCI making deals with independent local phone companies and giving them, say, 10 percent of typical phone access charges. When you tally up billions of minutes of long-distance calls, it adds up to a nice chunk of change.

This scam is nasty, but nothing new. Danny Briere, CEO of consulting firm TeleChoice, says MCI isn’t alone in resorting to dirty tricks; carriers, he says, “will do anything to avoid paying local access charges.”

Until the latest round of accusations surfaced, most insiders thought MCI would be able to shake off its bankruptcy woes and get back on its feet. No longer. Network Conceptions principal Phil Jacobson offers an opinion heard widely this week: MCI has managed to beat back its competitors’ demands for liquidation because the fraud it committed was directed at investors, not other companies. But this set of charges is different; we’re talking about allegations of actual cash losses being registered by the likes of AT&T, the Baby Bells, and even rural phone companies. “MCI will not make it out of bankruptcy court,” Jacobson predicts. “It will be broken up and sold.”

As a wise man once said, when investors get the short end of the stick, there are a lot of headlines, but not much happens. But when you defraud companies of billions in cash over many years, there may not be headlines, but you are on the short end of the stick. MCI might be about to learn that lesson.

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