New scandal only adds to MCI’s woes

MCI is entangled in yet another scandal that may seriously impact the carrier’s ability to win new business even after it emerges from bankruptcy.

MCI is entangled in yet another scandal that might seriously affect the carrier’s ability to win new business even after it emerges from bankruptcy.

The Department of Justice, FCC, House Energy and Commerce Committee, and a mass of lawyers are investigating claims that MCI intentionally and fraudulently rerouted voice calls through Canada to avoid paying sometimes-hefty access fees to other service providers.

AT&T, MCI’s prime rival, brought the allegations to light early last week when it filed its second objection to MCI’s plan of reorganization with the federal bankruptcy court.

AT&T’s motion details how MCI deliberately set up the Canadian Gateway Project to avoid paying millions of dollars in access fees and to unfairly win new business by offering lower service rates. AT&T is asking the bankruptcy judge to remove current restrictions that prevent it from pursuing a racketeering and fraud suit against MCI after it emerges from bankruptcy.

AT&T’s claim and possible lawsuit aren’t as threatening to MCI as the tangential ramifications that come with these assertions.

After nearly two months of pressure the General Services Administration last week suspended MCI from winning any new government contracts, saying it has been watching the company closely since it filed for bankruptcy last year and specifically reviewed charges of fraud against MCI.

The carrier says it has hired a team of lawyers to “vigorously” investigate the claims internally.

“We have a zero-tolerance policy, and if any wrongdoing is discovered, you can be certain that we will take appropriate action swiftly,” says MCI CEO Michael Capellas.

“One thing [MCI] can’t afford is the loss of confidence in the minds of corporate customers,” says Doug Jarrett, a partner at Washington, D.C., law firm Keller and Heckman, which specializes in regulatory and customer contract issues. “And this will impact [MCI’s] ability to sell in the corporate market.”

Whether AT&T’s claims are completely accurate, completely false or somewhere in between, MCI is involved in yet another scandal that can only hurt the carrier. AT&T might have had this in mind when it considered making its allegations public, some experts in the telecom field suggest.

“For AT&T there is a mix of motivations, some of which is genuine frustration that MCI hasn’t been punished enough,” says Johnna Till Johnson, president and chief research officer at independent technology research firm Nemertes Research and a Network World columnist.

As recently as two weeks ago, competitors including Verizon sat before government officials and stated MCI’s Securities and Exchange Commission (SEC) settlement was not enough punishment for the carrier’s wrongdoings. MCI is expected to pay $700 million to the SEC, the largest settlement in history, for its $11 billion in accounting fraud that was revealed last year.

MCI competitors might view the new fraud allegations and ensuing chaos as “de facto justice,” considering just two weeks ago it appeared that MCI would emerge from bankruptcy this fall as the company has predicted for months, Johnson says.

While some analysts still see that happening, there are questions as to how well MCI will weather this latest storm.

“If AT&T succeeds they are going to hit MCI where it really matters, in the pocketbook,” Johnson says. Experts estimate that AT&T might have lost anywhere from $10 million to $100 million in access fees as a result of MCI’s alleged scam. But MCI could lose much more. If MCI is denied government contracts, it could lose $5 million to $8 million per month, Jarrett says – not to mention the number of commercial customer contracts the carrier might not be able to win now that it’s in the midst of yet another scandal.

MCI’s revenue has been down in the past two monthly operating reports it is required to file with the bankruptcy court. The carrier is bringing in just more than $2 billion per month. MCI also amended its original reorganization plan last month, reducing its revenue projections over the next three years by $4.2 billion. MCI attributed the change to a difficult economic market. However, it’s tough to drum up new business when in the midst of a bankruptcy, because no one can predict when or even if the company will emerge.

At a minimum this scandal could prolong the perception that there is still too much uncertainty surrounding MCI to sign a new long-term deal with the carrier. And at worst, the regulators might find that MCI isn’t fit to carry telecom traffic, Jarrett says.

In addition to users questioning the long-term financial health of MCI, some might now feel less confident in MCI’s new management team because it’s possible it let fraudulent undertaking continue on its watch. AT&T says MCI started illegally routing calls through Canada two years ago and was doing so right up until the carrier filed its motion with the court on July 28.

“It’s believable that the scheme was set up prior to Capellas joining, and it was never discovered,” Johnson says. “The level of disorganization within [MCI] makes that a real possibility.”