Telecommunications company MCI has opened an internal investigation after being accused of rerouting customer phone calls to avoid paying access charges to competitors.
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But the company, still legally known as WorldCom, 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," claimed Claire Hassett, a spokeswoman for MCI. "They're routine in the industry."
There were mixed reactions to the news from telecoms industry analysts, with some saying these latest allegations against MCI could spell the end of the company, but others agreed that access-charge disputes are nothing new.
On Sunday, press reports claimed that federal prosecutors have begun investigating allegations by three MCI competitors that MCI 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.
Yesterday, further press reports indicated that AT&T has accused MCI of routing US government calls, including sensitive calls from the US State Department, through Canada to avoid the local-access charges.
Representatives of AT&T, Verizon Communications, and SBC Communications - 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 on Monday, saying that it was co-operating fully with the US attorney's office in New York.
"As I have said all along, we will do the right thing," said MCI chairman and chief executive Officer Michael Capellas. "We have a zero-tolerance policy and, if any wrongdoing is discovered, you can be certain that we will take appropriate action swiftly."
Hassett added, "Ultimately, we'll let the facts speak for themselves."
Giga Information Group fellow Lisa Pierce expected a long investigation from the US Department of Justice and lawsuits filed by MCI competitors, just as MCI is attempting, in the next few weeks, to come out of bankruptcy.
"It has a potential for an absolute mess," she said. "It could hardly happen at a worse time, these allegations."
Pierce predicted that companies doing business with MCI will 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, disagreed. "[The fraud] should have cleared the field of most of the apprehensive customers. Those who have stayed probably aren't any more troubled than they were about the bankruptcy or the multibillion-dollar fraud."
Malone admitted that the latest allegations could slow down MCI's bankruptcy proceeding. But before observers write off MCI, the allegations 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 is 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 is 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," he added. "But they'll watch, because no one wants to do business with an unethical company."
MCI's government contracts could be of greater concern, Kagan said. MCI has been waging a public relations campaign since early June, saying it is a responsible government contractor, amid calls from competitors and other groups for the US government to stop doing business with MCI.
If MCI loses its government contracts which are worth close to $1bn, it would be big blow to the company, said Frank Dzubeck, president of telecom analysis firm Communications Network Architects. "Forget about anything in the business world, $1bn from one customer, seems to be the top of the list."
MCI's competitors could also kill the company by suing it to death once it gets out of bankruptcy. 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 was not 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."
Grant Gross writes for IDG News Service