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Justice Department Inquiry Puts MCI's Recovery in Jeopardy

Posted on: Monday, 28 July 2003, 06:00 CDT

Jul. 28--Just as MCI appeared to be ready for a comeback from bankruptcy, a Justice Department investigation into whether it illegally circumvented local carriers' fees has cast shadows on the company once known as WorldCom Inc.

MCI has pledged to cooperate with the inquiry, part of which sprung from SBC Communications Inc. complaints to the U.S. attorney's office in Dallas several months ago.

The investigation, which is now being conducted out of New York, is looking into whether MCI routed calls in a variety of complicated ways to avoid paying more than $1 billion in access fees to local carriers since 1994.

On Monday, AT&T Corp. will offer evidence that MCI routed State Department calls through Canada to avoid the tariffs, according to The New York Times, quoting an unnamed AT&T executive.

Such calls would not be protected from eavesdropping that could compromise national security, law enforcement or confidential commercial information, industry lawyers said.

MCI spokesman Brad Burns issued a statement Sunday night that questioned the accusations' timing, coming so close to the company's expected emergence from bankruptcy protection.

"We are only one month from our bankruptcy confirmation hearing and expect a final decision on our government contracts in the upcoming weeks," he said. The U.S. government is MCI's largest customer.

Mr. Burns added that MCI executives have not met with the U.S. attorney's office to discuss the allegations. "It would be impossible and inappropriate for us to respond to any specifics surrounding their inquiry," he said.

MCI's competitors -- SBC, AT&T and Verizon Communications Inc., which also is expected to present evidence against MCI -- would benefit if MCI were to be forced into liquidation.

As recently as last week, it appeared that MCI would emerge from its Chapter 11 proceedings intact, nearly debt-free and profitable.

News of the investigation could have implications for the Richardson Telecom Corridor, which has been hit by massive layoffs the last two years. MCI has played a critical role in Richardson's development into a telecommunications hub since the 1970s, and the company employs about 4,000 people in the Dallas area.

The allegations are raising questions on Capitol Hill about the fate of MCI's federal contracts.

The latest disclosure "may have an impact on MCI's suitability" as a federal contractor, "and to that extent, we will look at it," said Michael Bopp, the staff director of the Senate Governmental Affairs Committee.

The panel's chairwoman, Sen. Susan Collins, R-Maine, is investigating why MCI has continued to receive government contracts.

In mid-May, MCI received a government contract worth a reported $45 million to set up a mobile network in Iraq. MCI does more than $1 billion a year in business with the government.

David Drabkin, deputy associate administrator for acquisition policy at the General Services Administration, said "it's way too early to tell" whether the investigation "will have any impact" on MCI's government contracts.

The Federal Communications Commission, meanwhile, could delay granting MCI license transfers if it feels uncomfortable with the allegations.

MCI needs WorldCom's licenses to do business, and competitors could point to the Justice Department's investigation as an argument against granting the transfer, said Robert C. Atkinson, research director at Columbia University's Institute for Tele-Information.

"This is something that's going to give ammunition to WorldCom's opponents," Mr. Atkinson said. "The FCC's standard is the public interest, so the question ultimately is whether WorldCom is acting in a way that is in the public's interest."

Even if MCI never faces charges from the new investigation, the Virginia-based company would have trouble living down the double whammy of a federal probe and the massive accounting fraud that put it into bankruptcy last year, analysts said.

It will be particularly difficult to make people forget about allegations that MCI rerouted calls to avoid access tariffs, said Mark Cooper, research director at the Consumer Federation of America.

Federal authorities will have to "look deep into the soul of MCI," he said.

SBC told the U.S. attorney's office in Dallas several months ago that it suspected routing information was being doctored on calls. A second whistle-blower in New York made similar charges, and eventually the two investigations were combined.

-- The Associated Press contributed to this report.

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(c) 2003, The Dallas Morning News. Distributed by Knight Ridder/Tribune Business News.

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