MCI said to be target of federal fraud probe


WASHINGTON - Federal prosecutors have opened an investigation in the United States and Canada into accusations that MCI, the nation's second-largest long-distance carrier, defrauded other telephone companies of at least hundreds of millions of dollars over nearly a decade, people involved in the inquiry said.

The central element of MCI's scheme, people involved in the inquiry said, consisted of disguising long-distance calls as local calls to avoid paying special access tariffs to local carriers across the country. Those tariffs are the largest single source of MCI's costs for carrying calls and data transmissions.

The investigation is based on internal documents and information from former MCI executives and three other telephone companies: AT&T;, SBC Communications and Verizon. They have provided significant technical evidence that they say shows MCI is continuing to avoid paying access charges through the scheme, according to people involved in the inquiry.

Telecommunications experts said that in the 1990s it became common for long-distance providers to seek legal ways to shift telephone traffic to reduce access tariffs. But there have also been criminal prosecutions of companies that improperly avoided the tariffs.

The three other telephone companies have long been bitter rivals of MCI (formerly WorldCom) and have competitive motives to try to derail the company's plan to reorganize and emerge from the bankruptcy proceedings it entered last year, after the admission that it had committed the largest accounting fraud in history. But the Justice Department is taking seriously the evidence that they and the former executives have presented, people close to the inquiry said.

MCI received a subpoena late last week ordering it to turn over documents and other materials. MCI executives said that they believed the allegations were unfounded and that the investigation was the latest effort by rivals to present new problems in its bankruptcy proceedings. The executives said they suspected that their competitors prompted the inquiry to raise questions among officials who are considering whether to continue to allow the company to do business with the federal government, which is MCI's largest client.

Nonetheless, the executives said, they were conducting an internal review to determine whether the company had redirected telephone traffic in improper ways.

"Access charges between local and long-distance carriers have existed for decades and are routine in the industry," said a statement issued by the company yesterday morning. "As always, we take all inquiries by the U.S. attorney's office very seriously and will cooperate fully with any investigation."

The main scheme of avoiding access charges was referred to in company documents variously as "Project Invader" and "Project Scorpion," according to former technicians at the company. In statements provided to investigators, they described the enormous pressure they faced to reduce access fees.

Long-distance telephone companies are required to pay "origination" and "termination" fees to local telephone companies at both ends of a call. The origination fees vary, and the termination fees are typically 2 to 3 cents per minute for calls between states.

Justice Department officials have evidence that MCI might, in effect, have "laundered" calls through small telephone companies, and even redirected domestic calls through Canada, to avoid paying access fees or shifting calls to rival long-distance carriers, according to people involved in the investigation.

Lawyers from AT&T;, SBC Communications and Verizon (which was formed in a merger of Bell Atlantic and GTE in 2000) have told prosecutors that extensive tests by the companies show that MCI continues to redirect telephone traffic. The lawyers told investigators that the tests also showed that the billing codes transmitted with telephone calls in data packets had been doctored.

Prosecutors have also received detailed statements from former company employees who have described the details of a program, which operated out of the company's carrier management group.

"Everyone understood that we were stiffing Bell Atlantic, but I did not consider whether it was illegal," one design engineer who formerly worked at MCI said in a sworn statement provided to investigators. "We were told that Project Invader was an exploitation of a tariff loophole, a trick. We kept the project a secret. The traffic was ramped up slowly to avoid detection."

Former MCI executives, their lawyers, telecommunications experts and others involved in the inquiry said the company saved at least hundreds of millions of dollars in access fees owed to other companies by systematically rerouting telephone traffic, but exact figures aren't known.

Industry lawyers, extrapolating from thousands of recent test calls made by AT&T;, SBC and Verizon using MCI lines, said the results showed that 40 percent to 50 percent of MCI's telephone traffic might have been diverted in some markets, and that MCI might have avoided more than $1 billion in access tariffs since 1994.

The probe might pose major legal and financial problems for MCI, say lawyers involved in the company's bankruptcy case. Its rivals say the company should be liquidated, with major assets sold to other companies. MCI executives say the company should emerge from bankruptcy intact because it has fixed its accounting problems.

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