MCI Faces New Fraud Allegations

Currently being investigated by federal prosecutors, the allegations surfaced over the weekend, starting with a report in The New York Times claiming that MCI, formerly WorldCom, has been rerouting traffic through Canada for as long as 10 years. As a result, other service providers such as AT&T and Verizon had to pick up the tab for the traffic as it re-entered the United States--charges that should have been paid by WorldCom, according to various published reports.

Verizon has been waging a battle against MCI to have the company liquidated instead of allowing it to emerge from bankruptcy with a significantly lighter debt load and what it considers to be minimal punishment for its past fraud actions. Several competitors have objected to MCI's reorganization plan--which would reduce MCI's debt to between $4.5 billion and $5 billion--and believe that the $750 million penalty fine MCI has been ordered to pay for its accounting scandal isn't enough. When MCI filed for bankruptcy, it had $36 billion in debt.

In May, Verizon sent a letter to the Securities and Exchange Commission seeking support in its bid to have MCI liquidated. William Barr, Verizon's general counsel, also has lobbied several states to file complaints.

More recently, Verizon has urged not only the SEC but also members of the Congress to take a closer look at the settlement MCI reached to pay millions in fines, compared with the billions the company fraudulently pumped into its balance sheet.

Some competitors said they'd also like lawmakers to ban MCI from doing business with the government. MCI has continued to win government contracts throughout its bankruptcy proceedings and counts the federal government as its largest customer.

"I find it odd that [MCI] has to only pay millions in fines for fraudulent acts that allowed $15 billion or so to flow into their company," a Verizon spokesman said. "Some of the contracts they have with the government exceed the fines they have to pay for the fraud charges."

The spokesman added that Verizon has been aware of MCI's alleged rerouting of calls via Canada for some time but had been trying to work out the situation with MCI. "Now it's an investigation, and we are fully cooperating with that investigation," he said.

An AT&T spokesman said the company doesn't comment on ongoing federal investigations but called the new allegations against MCI a "disturbing new development."

"We had all hoped that after having committed the largest corporate fraud in U.S. history, MCI/WorldCom would have reformed itself--as it has claimed to have done," the spokesman said. The new investigation raises questions about the "validity of MCI/WorldCom's assurances that it has cleaned up its act," he added.

MCI couldn't be reached for comment.