MCI investigating access-line dispute

WASHINGTON – Telecommunications company MCI, accused of rerouting customer phone calls to avoid paying access charges to competitors, said it has opened an internal investigation and is cooperating fully with U.S. federal investigators.

But the company, still legally known by its pre-bankruptcy name of WorldCom Inc., also maintained that disputes over access-line charges are nothing new in the competitive telecommunications industry.

“Access-charge disputes between local and long-distance carriers have existed for decades,” said Claire Hassett, a spokeswoman for MCI. “They’re routine in the industry.”

Telecommunications industry analysts had a mixed reaction to the news, with some saying these newest allegations against MCI could spell the end of the company, but others stressing, like MCI, that access-charge disputes are nothing new.

On Sunday, the New York Times reported that federal prosecutors have begun investigating allegations by three MCI competitors that the company has rerouted phone calls for more than a decade as a way to avoid paying long-distance access fees to local phone service providers. MCI is accused of routing long-distance calls through small regional phone companies in an effort to make the calls look local, thus avoiding long-distance tariffs charged by local phone companies. On Tuesday, the Associated Press reported that AT&T Corp. has accused MCI of routing U.S. government calls, including sensitive calls from the State Department, through Canada to avoid the local-access charges.

Representatives of AT&T, Verizon Communications Inc., and SBC Communications Inc., the MCI competitors accusing the company, were not immediately available for comment.

MCI, which filed for bankruptcy in July 2002 after revelations of a multibillion-dollar accounting fraud scandal, issued a statement late Monday, saying it was cooperating fully with the U.S. attorney’s office in New York. “As I have said all along, we will do the right thing,” MCI Chairman and Chief Executive Officer Michael Capellas said in a statement. “We have a zero-tolerance policy and if any wrongdoing is discovered you can be certain that we will take appropriate action swiftly.”

Hassett said the company didn’t have much more to say at this point in the investigation. “Ultimately, we’ll let the facts speak for themselves,” she said.

In the meantime, look for a long investigation from the U.S. Department of Justice and lawsuits filed by MCI competitors, just as MCI is attempting, in the next few weeks, to come out of bankruptcy, said Lisa Pierce, a research fellow at Giga Information Group. “It has a potential for an absolute mess,” Pierce said of the allegations. “It could hardly happen at a worse time, these allegations.”

Pierce expects companies doing business with MCI to rethink their decision. “On the enterprise side, this effectively hits the brakes,” she said of MCI sales. “What I saw was a slow erosion, and this just stops it cold.”

But John Malone, chief executive officer and analyst with Eastern Management Group Inc., disagreed, saying it’s unlikely these new allegations would stop a current customer from doing business with MCI. “(The fraud) should have cleared the field of most of the apprehensive customers,” Malone said. “Those who have stayed probably aren’t any more troubled than they were about the bankruptcy or the multibillion-dollar fraud.”

The new allegations could hurt MCI by slowing down the bankruptcy proceeding, Malone said. But before observers write off MCI, the new allegations, coming from MCI competitors, need to be proven, he said. “Does this cause the company to go under?” he asked. “I don’t think so. The jury is still out.”

It’s too early to predict the end of MCI, said Jeff Kagan, an independent telcom analyst. An investigation will take months to sort out, and it’s too early to tell whether MCI’s actions fall within normal access-line disputes that happen frequently in the industry or whether the company stepped over the line. The “perception battle” between MCI and its competitors has gotten overblown with the latest allegations, Kagan said.

“I don’t know that their corporate customers are going to head for the gate,” Kagan said. “But they’ll watch, because no one wants to do business with an unethical company.”

Of greater concern to MCI could be its government contracts, Kagan said. MCI has been waging a public relations campaign since early June saying it’s a responsible government contractor, amid calls from competitors and other groups for the U.S. government to stop doing business with MCI. 

If MCI loses close to $1 billion in government contracts, it would be big blow to the company, added said Frank Dzubeck, president of Communications Network Architects Inc., a Washington, D.C., telecom analysis firm. “Forget about anything in the business world, $1 billion from one customer, seems to be the top of the list,” he said.

MCI’s competitors could also kill the company by suing it to death once it gets out of bankruptcy, Dzubeck said. “The issue is, ‘Let’s let them come out of bankruptcy and then let’s put them out of their misery,'” Dzubeck said of a possible strategy by MCI competitors. “This is very hard-ball … poker.”

With MCI slated to come out of bankruptcy within weeks, and some competitors charging that the revived company will be in better financial shape than some of its rivals, this allegation will give competing companies a way to fight back, Dzubeck said. Competitors will use the new allegation to try to show the bankruptcy judge that the accounting fraud wasn’t a isolated mistake created by a handful of executives, but that more people throughout the company participated in the efforts to reroute phone calls.

“Right now, it’s a PR campaign — very strong attacks, and the reason is MCI is coming out of bankruptcy,” Dzubeck added. “If they do come out of bankruptcy, then watch the flurry of activity.”