Higher Power

Posted: 04/2002

Higher Power
Baby Bells Intensify Probe of Inaccurate Reporting

By Josh Long

COMPETITORS NEED TO BE CAREFUL how they report the percentage of intrastate long-distance traffic terminating on the incumbent’s network. The Baby Bells may not be the only ones watching.

After a 14-month FBI-led investigation, Texas-based NTS Communications has agreed to pay Southwestern Bell Corp., $22 million for falsely reporting that 99 percent to 100 percent of its long-distance traffic was interstate, originating outside the state of Texas. The company agreed to plead guilty to five counts of mail fraud.

NTS president Barbara Andrews and COO Brad Worthington have agreed to plead guilty to misprison of a felony, “knowingly concealing and failing to report the scheme,” NTS disclosed March 1, in a prepared statement.

The U.S. Attorney’s Office for the Western District of Texas recommended Andrews and Worthington receive three years probation and no fine for the crime, which can carry a maximum sentence of three years in prison.

Telecom veterans say the Bells’ competitors have been tweaking numbers for years to circumvent lofty intrastate charges in states like Texas. (Between July 1, 1997, and June 1, 2001, interstate charges ranged from 0.004 cents a minute to 0.019 cents a minute while intrastate charges ranged from 0.034 cents a minute to 0.074 cents a minute.)

The Bells are aware of the activity. “Qwest has not initiated legal proceedings against any carrier we do business with for misreporting the number of interstate vs. intrastate calls,” says Qwest spokesman Bill Myers, adding that the company recognizes there can be circumstances in which carriers self report and the company regularly monitors the data, but Qwest has found “nothing irregular or problematic.”

However, BellSouth Corp. reported that last year it sent about 50 service providers bills for inaccurately reporting the percentage of intrastate traffic terminating over the incumbent’s network. BellSouth billed 12 to 15 carriers for inaccuracies dating all the way to 1994. “We suspected all along there was misreporting,” says BellSouth spokesman Bill McCloskey, estimating the tab could run into “tens of millions of dollars.” He also recognizes many of the offenders may be out of business. To date, BellSouth has filed no criminal charges or civil suits against any of the offenders.

Neither has Verizon Communications Inc., but the No. 1 local phone company is conducting its own probe. “We are looking into the accuracy of some of the self-reported data by some of the carriers,” company spokesman Bob Bishop said. “We rely on self reporting because much of the traffic is difficult to measure.”

That could change, though.

BellSouth has installed equipment that allows it to monitor where calls are terminating, and in some cases, bills a provider such as AT&T Corp. based on the information.

Explaining the grounds for the inaccuracies that federal authorities say cost Southwestern Bell $76 million, NTS spokesman Scott Cain says the company’s system was “flawed.” But he adds that inaccurate reporting “wasn’t anything malicious or any kind of scheme to defraud Southwestern Bell.” Even so, authorities stated in a criminal filing that NTS intentionally routed calls over an old telephone network “in order to prevent Southwestern Bell Telephone from being able to independently determine what portion of NTS’ traffic was interstate and what portion was intrastate.”

In late 2000, Southwestern Bell noticed that NTS was reporting practically all its traffic as originating outside Texas, says SBC spokesman Bill Noble. Yet authorities say NTS was billing its customers for intrastate calls. Southwestern Bell brought the matter to the attention of the Texas Public Utility Commission, requesting an independent audit of NTS’ books after the competitor refused to give the Bell access to the records. The PUC denied the audit.

Texas PUC spokesman Terry Hadley says Southwestern Bell never filed a formal complaint with the commission, which could have led to arbitration or other hearings. “It would be expected SWB would file a complaint but it never did.”

What happened next led to a 14-month FBI investigation. SBC contacted legal authorities.

Was SBC playing hard ball? “I certainly see the telecom wars have once again turned a bit ugly and CLECs are suing the Bells all over the place, and if I was working for a Bell company I would respond in kind,” said Robert Saunders, a senior analyst at The Eastern Management Group. “If this thing looks like it was illegal and SBC was being defrauded then they take it to a forum that can make a judgment and issue the right type of punishment that will discourage this type of behavior in the future.”

A long-time telecom consultant who used to be a reseller says he gets calls all the time from competitors trying to pull off one scheme or another. One tactic includes acquiring a Bell’s local lines under the pretense of using the infrastructure to make outgoing calls.

A case in point: Four Texans — Shane Gregg, Lacy Ward and Danny Hodges, of Kilgore, and Robert Seale, of Victoria — recently agreed to plead guilty to felony charges after they allegedly defrauded Ameritech and AT&T out of more than $5 million in local service fees for four years. Operating under company names such as Ward Products and National Marketing, the quartet ordered T1 lines telling Ameritech and AT&T that their telemarketing businesses needed to make outgoing calls, according to a 30-count indictment filed last July.

They bought the lines from Ameritech and AT&T at a flat rate rather than the higher per-minute termination rate. This pricing would be acceptable as long as the companies made only local outgoing calls, but they allegedly used the lines to allow long-distance carriers Thrifty Call and later Grande Communications Inc. to terminate traffic without having to pay the Bells’ local access fees, the indictment says.

Texas-based Grande Communications acquired Thrifty Call in 2000.

The defendants entered plea agreements March 8 in the U.S. District Court of the Southern District of Indiana. A hearing was scheduled March 22.

Prosecutors are recommending Gregg, Hodges and Ward receive 27 months to 33 months in prison and that Seale, who agreed to cooperate with authorities, receive a prison sentence of 10 months to 16 months. Authorities also are asking that the defendants pay $4.5 million in restitution.

Criminal charges have not been filed against Thrifty Call and Grande Communications, but could be in the future.

Thrifty Call also is a defendant in a civil case in the U.S. District Court of the Southern District of Indiana. Ameritech has reached a settlement for an undisclosed amount of money with Grande Communications, an SBC spokesman said. Grande declined comment.