AT&T ACCUSES MCI/WORLDCOM OF ROUTING DoD CALLS THROUGH CANADA

Responding to AT&T’s accusations, MCI/WorldCom said it told the court in an earlier filing that it “fully expected our competitors to continue their efforts to obstruct our emergence from Chapter 11 and that appears to be exactly what they are doing.” It said that under its contract with DoD it was providing services that ran over the public network “and we are, and have been, carrying these calls appropriately.” MCI/WorldCom said “DoD makes the determination as to the security requirements for their traffic over our network.”

Also included in examples AT&T gave the court were in- state calls among Wis. district offices of U.S. Rep. Kind (D- Wis.). AT&T charged that the offices were presubscribed to MCI/WorldCom for long distance calling but calls between those district offices were routed over AT&T’s network after being “diverted to Canada.” AT&T said those examples had turned up since it filed its earlier objection because it had “continued to study information from its network relating to calls coming to AT&T from Canada that originated with [U.S. govt.] offices in the [U.S.]… Whether or not these Canadian-diverted U.S. government calls were encrypted so as to secure their content is beside the point. Encryption is by no means foolproof. Nor does the U.S. government encrypt all of its telephone traffic.”

AT&T said the statement MCI/WorldCom filed Mon. defending itself against AT&T’s charges “appears to admit the vast bulk of the allegations.” For example, AT&T said, MCI/WorldCom “admits to having entered into an agreement with Onvoy to reroute its traffic to reduce… access charges… Despite weakly claiming to have had no idea that Onvoy was sending its customer calls through Canada, [MCI/WorldCom] devotes the bulk of [its] brief to a defense of that tactic.” AT&T also disputed MCI/WorldCom’s claim that it was using legal “least cost routing” techniques: “While ‘least cost routing’ is indeed a legal and commonplace practice… [MCI/WorldCom’s] scheme does not bear any relation whatsoever to ‘least cost routing.'” AT&T disagreed with MCI/WorldCom’s “claim that fraud requires a showing that call detail had been removed and that the continued presence of call detail on the traffic emanating from Canada shields them from fraud.”

Meanwhile, the U.S. Bankruptcy Court Wed. approved MCI’s settlement with the SEC that called for a $2.25 billion civil penalty on the company to be satisfied by a $500 million cash payment and $250 million in common stock to shareholders and bondholders. The judge’s approval came after WorldCom/MCI filed a document outlining the effect of the GSA debarment action and DoJ fraud investigation on the plan of reorganization. In the amended disclosure statement filed Mon., MCI/WorldCom told U.S. Bankruptcy Judge Arthur Gonzalez, N.Y., that it didn’t think either event would “have an impact on the feasibility of the plan.” The disclosure statement helps creditors decide whether to vote for the reorganization plan.

The document does offer a more specific picture of the financial impact that could result from debarment: (1) If MCI/WorldCom was recertified as a govt. contractor by Nov. 1, it would see only a “de minimis” change to its business plan, a $45 million drop in 2004 and $30 million in 2005. (2) If the company didn’t win recertification until July 1, 2004, it would see a more substantial 1.7% reduction in revenue and 2.9% reduction in earnings before interest, taxes, depreciation and amortization, the result of a $427 million revenue hit in 2004 and $570 million in 2005. MCI/WorldCom told the court: “In order to determine the impact on the proposed debarment, management conducted a preliminary review of its existing federal and state contracts and identified contracts with renewals scheduled over the next 18 months. In addition, the [company] reviewed the assumptions for new federal and state contracts included in [its] business plan.” The analysis assumes state govts. will follow GSA’s lead and restrict new contracts, MCI/WorldCom said.

In a related action, Citizens for Tax Justice urged Congress to block alleged tax avoidance action by MCI/WorldCom. The group said it objected to the company’s use of a loophole to get around a requirement that companies whose debt is cancelled must pay tax on the forgiven debt: “The tax code allows companies coming out of bankruptcy to postpone the tax temporarily, but MCI claims that its tax [of] between $6.7 billion and $9.5 billion should be totally eliminated.” The group said federal law wasn’t “as clear as it could be” but legislation pending in the House and Senate would clarify it.