Accusations threaten MCI plans

If critics are right, a new wave of allegations that it committed fraud could hamper MCI's plans to emerge from bankruptcy and hold its strong position as a federal telecom contractor.

Over the past few days, MCI rivals AT&T, Verizon and SBC Communications have increased efforts to convince regulators to bar MCI from government contracts. The firms say that the company formerly known as WorldCom has been deceptively routing calls for years. These calls include some that originate from federal agencies, and the goal was to make them appear to be local calls or hide WorldCom's connection to the call, which would lower the fees that WorldCom had to pay to other companies for use of their networks, according to widely published reports.

The Justice Department is investigating the claims. Public interest groups and associations, members of Congress and MCI competitors have pressed the General Services Administration to suspend the MCI from doing business with the federal government. GSA officials are still weighing the arguments, but MCI has remained publicly optimistic that its course will be smooth.

GSA general counsel Raymond McKenna earlier said that suspension and debarment is for companies that are not suitable for contracting currently, not as punishment for past crimes.

But rivals dispute MCI's assertion that its dishonest behavior ended with the 2002 revelation of $11 billion in accounting fraud and the subsequent replacement of its executives and board members. Verizon, for example, accuses of MCI of continuing to wrongly route calls. With MCI hoping to come out of Chapter 11 bankruptcy soon, the allegations are coming at a critical time, said Warren Suss, president of Suss Consulting in Jenkintown, Pa.

"Timing is extremely important in these issues where there is a lot of congressional involvement," Suss said. "The timing is extremely bad for MCI. It couldn't have come at a worse time. It had looked like they were going to be able to thread the needle, but this may tip them over the edge."

MCI has hired the Washington, D.C. law firm Gibson, Dunn & Crutcher LLP to investigate the claims, company officials said in a statement issued Tuesday. MCI pledged full cooperation with the review.

The accusations, if true, hurt MCI in at least two ways, Suss said.

"It undercuts the argument of a few bad apples, because the problem is ongoing," he said. "It's not a few people in accounting, it's down to the engineering and day-to-day operations of the company. If the allegations are validated, it ties it directly to federal agency contracts and federal spending. We've already seen some competitors make the argument that federal pricing was based on fraudulent activities. [Agencies] couldn't get the low prices that [they] did without defrauding somebody."

Some media reports have pegged MCI's federal business at $700 million to $1 billion a year. MCI was one of only two carriers, along with Sprint, to win a spot on the FTS2001 telecom contract that GSA awarded in the late 1990s. Other companies have since added services through a "crossover" provision built into the contract, which expires in 2006.

The telecommunications field has become ruthlessly competitive, so it's not surprising that MCI's competitors are fiercely trying to eliminate the company from the federal realm, industry analysts said. Competitors have also said that letting MCI emerge from bankruptcy almost debt-free after engaging in the largest accounting fraud in history would be unfair to the rest of the telecom industry.

Removing MCI would be "enormously disruptive" for agencies that depend on the carrier for services, Suss said. If it were to happen, though, "I think we'd see a lot of competitors moving in here."

No one specifically accuses MCI's federal division of engaging in bad behavior, but that may not matter, Suss said.

"My guess is that the federal division didn't even know about this, but I don't know if that gets them off the hook," he said.

Earlier this month, MCI and Verizon had settled a dispute over routing fees. Ultimately, MCI agreed to pay $60 million and Verizon agreed to stop opposing MCI's bankruptcy plan. MCI spokeswoman Claire Hassett said that dispute involved interconnections, billing and collections charges.

In general, telecommunications carriers are supposed to pay fees to other firms when a call that originates on one company's services goes to a phone connected to someone else's network. In practice, Suss said, it's not always simple to figure out who owes what to whom.

MCI officials this week did not address the accuracy of the billing allegations. Jerry Edgerton, the company's senior vice president of government markets, did seek to reassure agencies that their communications were never compromised.

"We are confident that all U.S. government secure calls on MCI networks have been handled properly," Edgerton said. "Contrary to some of our competitors' implications, secure government traffic travels over MCI's network with a dedicated connection and encryption, not through gateways."

Edgerton has maintained that the company's scandals stemmed from leadership under former chief executive officer Bernard Ebbers, and should not reflect on the government division. The company has delivered good service to agencies, GSA Administrator Stephen Perry said in a recent letter to Sen. Susan Collins, (R-Maine), one of the lawmakers calling for the company's suspension from federal contracts.

Thanks to a complicated tangle of regulations governing telecommunications fees, it may be difficult and time-consuming to determine just what MCI is guilty of, if anything, Suss said. "There still is some ambiguity about whether or not this is the type of blatant fraud that is being reported," he said.