WorldCom’s Phony Business Practices

Why are deregulated — or inadequately regulated — markets far from ideal for consumers?

June 28, 2000

Why are deregulated — or inadequately regulated — markets far from ideal for consumers?

Blatant corporate misconduct can leave customers frustrated — and without an effective recourse. This is especially true of those industries where regulators are hard-pressed to keep abreast of ever-changing technologies and developments. A case in point is the recently-announced settlement of a puny $3.5 million agreed between WorldCom, the second-largest U.S. long distance company, with the Federal Communications Commission (FCC).

In 1999 alone, the FCC had received 2,900 complaints from customers who found that WorldCom had “slammed” them, or switched their phone service to a more expensive rate or different provider without their consent.

With all those complaints, WorldCom holds a shameful record among U.S. phone companies. “Shameful” is also the word that comes to mind to describe the $3.5 million “penalty” levied on WorldCom, which recorded $38 billion in revenues and $4.6 billion in profits over the past year. Does the FCC seriously expect such a paltry sum to be a deterrent against future misconduct?

American law includes the principle of “treble damages,” which has been used in the past to induce changes in the behavior of corporations which misbehave. Interestingly, at about the same time that the WorldCom “settlement” was announced, newspapers reported that the grocery chain Safeway settled a bias suit for $27,500.

That suit turned on the dismissal of an employee because she had made an unauthorized purchase of a “distressed” lemon for 25 cents. The penalty in the WorldCom case — where we’re talking about thousands of consumer complaints — appears laughable in comparison.

No wonder consumer protection in the United States is a shambles. When companies — at worst — can expect a slap on the wrist, what incentive is there for them to change?

To demonstrate how frustrating the current process can be, consider this case. Some years ago, a business-services company chose AT&T as its long-distance phone service provider because it seemed to offer the best service at a reasonable price. Then, last year, the CFO was alerted by his accounting staff that the current AT&T invoice was zero — even though the phone bill usually ran into thousands of dollars.

The rejoicing over this money-saving opportunity was rudely interrupted by the arrival of an invoice from MCI WorldCom, a rival long-distance provider. The CFO was amazed to get an invoice from a company with which, to his knowledge, his firm was not doing any business. He also saw to his astonishment that, for every phone call placed, MCI had charged three times more than what had been negotiated with AT&T.

After a painstaking investigation, this is what the bewildered CFO found out. About five weeks before the MCI invoice arrived, the company’s office manager had received a marketing call from an independent sub-contractor who was offering MCI WorldCom long-distance phone services. The subcontractor gets paid a commission for every customer that switches to MCI WorldCom.

As “proof” that the switch has indeed been approved by the customer, the subcontractor transfers the customer to a verification service, which then records the customer’s approval. So far, so good. But as the intrigued CFO found out in a conversation with an industry expert, things often do not work that way.

According to this expert, some of these subcontractors, who most likely are in cahoots with the verifier, will ask an innocent question — such as “Are you the office manager?” — in order to be able to record a “yes” answer from that person on tape.

Then, even if their offer of switching phone services is declined, as industry sources readily acknowledge, they can “edit” the recording to make it appear as if the customer actually agreed to switching his long-distance account. As the recent FCC case confirms, this practice is widespread, and the number of complaints has been growing fast.

By using a subcontractor, companies such as MCI WorldCom can effectively deny any illicit activity, allowing them to claim “plausible deniability” — or what is known in Washington’s political circles as the “Poindexter Defense” (after a former National Security Advisor who had a conveniently spotty memory during the Iran-Contra Affair).

For the CFO, the most frustrating aspect of the whole business was not that his firm was involuntarily switched — without notification, and without even requesting the CFO’s written confirmation. Much more irritating was the company’s inability to get a fair hearing for its grievance. The Federal Communications Commission simply does not have the administrative clout it needs to kill these practices.

The lobbying power of the major telecommunications firms is so great that — thanks to the bribery-style U.S. campaign finance system — the U.S. Congress prevents the regulator from gaining any real power.

And, of course, MCI WorldCom went about making threatening phone calls about the unpaid invoices. To get rid of the administrative nuisance, the slammed company offered to pay MCI for the phone services rendered. But it offered to do so only at the lower rate which it had previously agreed with AT&T.

While MCI’s representatives feigned being open to that suggestion, they then engaged in a cumbersome, and highly predictable, “evaluation process” only to discover that such a “re-rating” was not warranted.

Why, you might wonder, didn’t the company simply sue MCI? While the CFO was sure he could easily win the case on the facts, he also knew that his legal expenses would easily run higher than the extra phone charges. Such a situation would evidently have played out quite differently in Europe.

Aside from being able to rely on more powerful regulators, a European company would have been able to sue and — relying on the “loser pays” rule — would have been sure to gain reimbursement for his legal costs. Because of the way the U.S. system works, large businesses thus virtually have a free hunting license, knowing courts are too expensive for most people — and regulators too weak. The United States should take a page out of the Europeans’ book when it comes to consumer protection.