MCI on Hold

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More than a year after MCI investors learned that the company had bilked them of about $11 billion, the battered corporation’s relationship with the federal government—which yields about $1 billion in annual revenue—remained unchanged. The Bush administration is only now getting around to suspending the company from government contracts. In D.C., Republicans and Democrats alike have been puzzled. Why the delay?

One reason may be that some of the GOP’s savviest inside players angled hard to stave off the suspension. Conservatives like Grover Norquist, head of Americans for Tax Reform, sent out news releases stating that his group “Condemns the Attacks on MCI.” Norquist, the leader of a group of rightward thinking activists who meet regularly (sometimes with White House staffers), wrote to at least one senator who was bearing down on MCI and contacted the General Services Administration, the agency that administers federal phone contracts, to plug for the company. Norquist, who blames labor unions and other telecom industry competitors for ginning up the attacks on MCI, says he believes the company should continue to benefit from government contracts as long as its performance is up to speed.

Norquist had also been in touch with top GOP lobbyist Don Fierce about the issue. Fierce, who has long represented MCI and is an ally of White House political guru Karl Rove, spoke personally to the GSA about MCI’s status as a contractor, lobbied House members to head off a provision that would have short-circuited MCI's future contracts and talked about the matter to the White House—which also tried to influence lawmakers. In addition, an associate of former NYC Mayor Rudy Giuliani—who stands to make a reported $150 million if MCI's bankruptcy reorganization is approved—worked the Hill.

At GSA, general counsel Ray McKenna said he did not know if the White House had called anyone at the agency about the MCI (formerly known as WorldCom) matter. But agency officials only referred the matter to its division that handles suspension decisions in early June, after lawmakers, particularly Republican Sen. Susan Collins of Maine, stepped up pressure on GSA to do something. McKenna said employees in that division are walled off from outside pressure. The decision Thursday to suspend MCI relied on earlier reports from individuals hired by the company to do internal inquiries, as well as KPMG, MCI’s outside auditor. White House officials said they did not pressure GSA on the matter.

The competition hasn’t been idle either. Companies like Verizon, AT&T and SBC have banded together to mount an aggressive attack on MCI. They’ve been primarily concerned that MCI would emerge from bankruptcy with relatively light penalties and the lowest debt load in the business. (Last May, MCI reached a $750 million settlement with the Securities and Exchange Commission, the largest in the agency’s history but a fraction of the amount investors lost to fraud.) The competitors were recently helped by a whistleblower who went to Verizon and told executives there that MCI had been creatively rerouting calls to avoid paying high access fees to local carriers. In some cases, it meant the fees were dumped on other carriers, like AT&T, it was alleged. Verizon steered the whistleblower, along with additional evidence it had been able to gather, to the U.S. Attorney’s office in Manhattan. News of the investigation broke a week ago, and MCI hired a law firm to do yet another internal investigation.

For its part, MCI has been fighting back with a campaign that included running newspaper ads about its internal reforms—in papers sure to be read by decision makers. “MCI: We've Only Just Begun,” read the tagline. It must have been some kind of cosmic joke that one of the ads ran opposite a news story in the Washington Post about the fresh allegations that MCI illegally rerouted its calls. Other probes by congressional committees and the FCC are in the works. Meanwhile a hearing on the firm’s bankruptcy reorganization plan has been postponed until early September.

MCI chief executive James Capellas maintains that the company is committed to honesty and accountability, and it hasn't protested GSA's decision for now. But the agency could take months to decide whether to formally bar MCI from government contracts; meanwhile the company can bid but can't be awarded any government work. The loss of its largest customer could, in the end, be fatal to the telecom giant, industry analysts warn.