Competitors Accuse MCI of Fraud and Racketeering, Cite National Security Risk

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"Project Invader" and "Project Scorpion" were two of the alleged names long-distance company MCI gave to schemes its competitors claim were designed to avoid paying hundreds of millions of dollars in tariff charges to local access carriers.

Former MCI technicians, who allegedly disclosed the scheme's inside code names, described to investigators an intense internal pressure to reduce access charges. The Justice Department is investigating the alleged schemes.
This latest fraud charge, levied by three of MCI's chief competitors—AT&T, SBC Communications and Verizon—could derail the company's efforts to resolve its Chapter 11 bankruptcy case with the federal government. MCI, formerly WorldCom, admitted earlier to the largest accounting fraud in history and is struggling to keep the federal government as its No. 1 customer.

With $700 million to $1 billion in annual sales to the government at stake, MCI's competitors are hardly unbiased. The competitors have also complained that MCI's recent settlement of SEC securities fraud charges was too lenient and they have called for the MCI's liquidation, rather than reorganization.

However, tests run by AT&T and reported by The New York Times, show that MCI's efforts to avoid local tariffs on long-distance calls could potentially be a national security issue.

An AT&T executive, who refused to be identified, told the Times that AT&T had found evidence of calls from federal agencies—including the U.S. Agency for International Development, the Federal Deposit Insurance Corporation, the National Transportation Safety Board, the Pension Benefit Guaranty Corporation, the United States Postal Service, the Library of Congress and other agencies, as well as at least one member of Congress— had been routed through Canada.

The way the alleged scheme works is that small local companies would be used to make the long-distance calls appear to be local, avoiding origination and termination fees, which range from 2 to 3 cents per minute for calls between states. By routing the calls through Canada, these fees can be avoided and the calls can be brought back into the U.S. using rival lines, forcing them to pick up the tariffs.

Brad Burns, a spokesman for MCI, issued a statement that made no mention of the charge of rerouting government calls, but called into question the motives and timing behind the charge, the Times reported.

“We have yet to meet with the U.S. attorney's office, so it would be impossible and inappropriate for us to respond to any specifics surrounding their inquiry,” Burns said. “That said, we are only one month from our bankruptcy confirmation hearing and expect a final decision on our government contracts in the upcoming weeks. You can't help but to question the timing and motives of our competitors who are trying to create a difficult environment for us right before our planned emergence from Chapter 11.”

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