AT&T sues MCI, adding new charges to call-routing complaint

MCI’s legal woes worsened Tuesday, as long-distance rival AT&T sued it and a business partner for fraud and racketeering in a scheme that allegedly cost AT&T tens of millions of dollars.

AT&T’s lawsuit, filed in federal court, recounts previously disclosed allegations that MCI and Onvoy conspired to unlawfully route MCI phone calls via Canada to AT&T, which wound up paying MCI’s costly fees to connect calls.

But AT&T also makes new allegations, bringing more companies and MCI practices under scrutiny. It alleges that:

* MCI, formerly WorldCom, took calls that were destined for its own local phone network in Phoenix — meaning MCI could have connected them for free — and routed them through Canada to AT&T. AT&T says it unwittingly paid MCI to connect them. As such, that let MCI create revenue ”out of thin air,” AT&T says. ”We have been cheated into paying access charges directly to MCI,” AT&T General Counsel Jim Cicconi said.

* MCI disguised calls by routing them through tiny phone companies to AT&T, which says it was tricked into paying connection fees. One company, FBN America, in 1997 handed MCI calls to another company, Athena, which handed them to AT&T. AT&T says it was deceived into paying the delivery fees. FBN declined comment. Athena officials couldn’t be reached.

In 2001, AT&T says, a company called Hertz Technologies was involved in a similar scheme along with MCI and FBN. Hertz officials couldn’t be reached.

AT&T says it isn’t sure if call data, which identify a call’s origin, were stripped or altered, as is the case in the allegations by SBC and Verizon.

”The fraud is not dependent on changing of (call) codes,” Cicconi says. ”I think (MCI was) relying on hiding the traffic in with a much larger herd. It’s not hard to hide millions of minutes in with billions of minutes.”

The new names join a growing list of companies, such as Focal Communications and DataVon, to be drawn into allegations of improper routing by MCI. DataVon, now owned by Transcom Communications, says it did nothing wrong. Focal has been subpoenaed by prosecutors but doesn’t think it is a target of the probe.

MCI, which has denied wrongdoing, says AT&T is trying to ”make headlines from something that is at best a commercial dispute.” Onvoy says it expects AT&T’s allegations to ”fall by the wayside.” It, too, has denied wrongdoing.

Still, the lawsuit is the latest hardship that No. 2 long-distance carrier MCI faces as it tries to exit bankruptcy protection this fall and recover from its $11 billion accounting fraud. It comes as federal prosecutors probe claims by AT&T, Verizon and SBC, who say MCI improperly shifted or avoided fees that carriers pay each other to connect calls.

AT&T’s lawsuit also comes days after Oklahoma filed criminal fraud charges against MCI, former CEO Bernie Ebbers and others, and six days before hearings begin on MCI’s reorganization plan.

Legal experts say AT&T’s lawsuit is unlikely to delay MCI’s plan to exit Chapter 11 but could hurt MCI’s image with customers and yield costly penalties. Racketeering claims carry triple damages. Several of AT&T’s claims seek damages of not less than $10 million.

Racketeering ”carries . . . sinister connotations . . . that will . . . further tarnish MCI’s image and (could give rivals) a greater . . . advantage,” says Christopher Bebel, a former prosecutor now with Shepherd Smith & Bebel.

AT&T filed its lawsuit in federal court because the bankruptcy judge still hasn’t ruled on its request to be able to sue MCI for damages it suffered following MCI’s July 2002 Chapter 11 filing.