Stolen Without A Gun

by Walter Pavlo Jr.

When they couldn't squeeze any cash out of delinquents, McCumber and Pavlo turned to MCI's Accounting department for guidance on how to handle their debts. Accounting was under the same pressure from the executive suite, which was under pressure from the board of directors and Wall Street, to report earnings each quarter that would support the company's lofty share price.

One method McCumber and Accounting agreed on was to get a handful of the delinquent customers to sign promissory notes—legally binding promises by clients to pay back their debts over time.

An added accounting benefit was that since the promissory notes represented customers' obligations to pay MCI, they were categorized as assets on the company's books. That meant the bad debt was shifted off Carrier Finance's reports, making it look like McCumber and Pavlo were cleaning up troublesome accounts. It didn't seem to matter that there was no precedent to predict whether or not these debts would actually be collected.

In cahoots with Accounting, Carrier Finance accepted a $3.5 million promissory note from a client named Voicecom. The customer managed to pay $100,000 a month for ten months before defaulting on the remaining $2.6 million.4

TelRoute's attorney, realizing its last-gasp restructuring bid had failed, announced that if MCI was pulling the plug, the company had no choice but to liquidate. The small group of creditors agreed to meet among themselves in a conference room. When Pavlo entered, one of them already had his briefcase propped on the wet bar and was filling it with bottles of liquor. Others were sticking crystal glasses and coasters in their suit pockets and rifling through the cabinets.

Pavlo discovered a productive ploy–showing up unannounced at industry trade shows where carriers assembled to hype themselves and lure independent sales agents. One of the most colorful characters at the shows was James R. Elliott, chairman of Westchester, Illinois-based Cherry Communications. His company's booth was staffed by bikiniclad Cherry Girls who handed out Cherry beach towels, flip-fops, golf balls and, most popular of all, Cherry panties.

Behind the scenes, things were not so cheery at Cherry. Elliott had previous convictions for mail and wire fraud, and making false statements.4 He had run afoul of the Federal Elections Commission in 1992, for using company resources to pressure employees to attend a Republican fund-raiser.

Cherry's license had been revoked in California for “slamming,”6 the practice of switching customers' long-distance providers without their permission.

After two days working the trade show floor, and endless cocktail parties, Pavlo proudly walked away with $2 million in checks.

It was like a terrorist watch list, fagging companies that had caused mass destruction to the income statements of one big network operator after another. The resellers' counter-move was to put their accounts in the names of wives, girlfriends and drinking buddies.

One of Pavlo's most bizarre “targets” was Caribbean Telephone & Telegraph, based in Detroit but with a big operation in New York City.

Caribbean Tel was a big buyer of international minutes. It resold them as pre-paid calling cards that entitled users to a set amount of long-distance or international talk time. The calling card business was booming and when it came to growth CT&T was a model customer. It had gone from a run rate on MCI's network of a few thousand dollars a month a couple years earlier to $10 million by mid-1995. It was high-profit business, about 50 percent—if MCI got paid.

The big carriers hoped that the pre-paid cards would cut into the billions of dollars a year they were losing to “call-sell” thieves—guys who stole access numbers from credit card callers and then rang up huge bills re-selling calls at pay phones.8

By the time Pavlo came around, CT&T's unpaid balance had jumped to $25 million, more than that of any other upstart reseller. The situation was dicey because CT&T used local distributors who were themselves millions of dollars in hock to CT&T. For all Pavlo knew the distributors might also be owed millions by the beer and cigarette deliverymen rumored to be reselling the cards to urban delis and bodegas.

McCumber had been lobbying to pull the plug and a few times thought MCI would begin blocking calls carrying Caribbean Tel's ANIs, or automatic number identifications. But then he would discover it was still on the network. Sales had its spies and invariably had used its clout to keep them operating.

She nodded toward a door, reached under her desk and a buzzer sounded. He let himself in to a small lobby where two swarthy, bulky men lounged on a ratty vinyl couch that had been repaired with duct tape. They looked up at him with barely a ficker of interest. Each wore a leather jacket and had a nine-millimeter Glock semi-automatic pistol parked in front of him on a battered table.

Franklin opened an unmarked door. Inside, a large table was covered by a mound of cash. A woman was separating and stacking the bills by denomination. Two other women carried the stacks to counting machines, which bundled them in wrappers marked $1,000 each. A kid with a broom stood nearby sweeping up the currency that fell to the floor.

Franklin made a face. “Can't be that much. I only have invoices for about $10 million. You better check that.” “If we cut you off today, $25 million's how much you'd owe,” Pavlo said, using one of his standard implied threats.

The tsunami of cash business in the calling card game had sparked an all-out war between MCI and its rivals to sign up customers like CT&T. One outfit, Teleperranda, was wreaking further havoc by selling its phone cards at a fraction of their wholesale cost. MCI's rapacious sales reps, meanwhile, had locked CT&T into a ramp-up contract that assessed penalties if it didn't meet ever-rising volume quotas.

Communications was a subsidiary of a penny-stock company called Teletek that was based in Nevada and appeared to be running a high-octane version of a bust-out scam. Instead of retailing long-distance service through its calling cards, Hi-Rim turned out to be fronting for other prepaid card firms not even authorized to use MCI's network.

Vice President Wayne Godbout was a master of nerve. After repeated promises that a check was in the mail, one day he gave Pavlo a FedEx tracking number to prove that a check was actually in the mail. The package arrived at MCI's Concourse offices the next day, empty.

McCumber and Pavlo needed some other way to protect their employer's interests. Fortunately, Cam-Net was still a going business with shares that traded on the Toronto Stock Exchange. Wary of McCumber's heavy pressure to pay up and threats to disconnect his firm, Cam-Net's chairman, Daryl Buerge, proposed giving MCI $2 million worth of stock to collateralize its debts.

Jesus H. Christ

Pavlo didn't know precisely how Accounting was booking its past-due debts and the stock MCI held as collateral, but as long as nobody was on his case he was content to let things ride. His confidence got another boost when Cam-Net sent McCumber a certificate for the two million shares precisely as promised.

“Holy shit's more like it,” McCumber growled. “Cam-Net sand-bagged us. They're spinning the deal as a vote of confidence by MCI. That's the good news. The bad news is that MCI's already got a partner in Canada. Stentor. This makes it look like we're screwing its sister.”

As Pavlo had predicted, the stock did well over the next year and MCI got its $2 million back. Then, some of their colleagues had the gall to gripe that he and McCumber had left money on the table when the stock rose further.

MCI was lucky to get anything, as it turned out. In the fall of 1996, Cam-Net's Buerge was charged with conspiracy to commit securities fraud4 and ended up on the lam.5 The company later went bankrupt.

Franklin's Caribbean Tel was at risk of burning MCI for $50 million. Godbout's Hi-Rim looked likely to whack it for $20 million in usage, plus millions more in contract penalties. More than a dozen other carriers were also fat-lining for a total of $50 million. That meant they had certified dead money totaling $120 million.

For 1995, revenues were on target to come in at around $1.1 billion.8 Two percent of that would mean writing off no more than $23 million. Yet the guys running Business Services, the half of MCI under which Carrier Finance fell, had committed it months earlier to a bad debt budget of just $10 million. That was $2 million less than the previous year, although revenue was up 60 percent.9 In contrast, the $120 million or more in bad debt McCumber and Pavlo were sitting on represented over 10 percent of revenues.

McCumber wanted out. He had been laboring 60 to 80 hours a week for five years to prevent slime-ball carriers from fleecing MCI. By late 1995, Sales' quest for commissions, and senior management's for growth, were completely overwhelming his efforts.

On the drive back to his office Pavlo didn’t need a calculator to see what Benveniste and Mann were so hot about. If MCI factored $100 million in risky accounts, Manatee could gross close to $20 million a year in interest and fees, and probably net half that after its own financing and administrative costs.

While Pavlo pondered factoring as a way to save the day, MCI had its own ideas of how to handle the growing problem of bad debt–hide it. McCumber told Pavlo that the Finance chiefs had decided to shift the Caribbean balance to a promissory note. Pavlo was shocked. They’d never accepted a promissory note for more than a few million. CT&T owed $55 million.

The first business day of 1996, AT&T shocked Wall Street and the telecom industry by announcing it would cut 40,000 jobs, one of the largest corporate work-force reductions ever, and take a $6 billion charge against earnings.5 The problem was competition. Like the first blast of Arctic air in the winter, the news felt like a harbinger for an industry struggling to adapt to a harsh new environment.

He forecast that this figure had hit $88 million in 1995. That did not even include December usage figures, which were not yet available and likely would have added tens of millions of dollars more to the previous year’s figure. Pavlo emailed his estimate to Don Lynch, a senior vice president of Finance, to Jim Folk, the newly appointed VP of Revenue Operations, and to McCumber.7 The task was one of his last under McCumber, who moved on to his new position.

Wanserski’s boss, Jim Folk, had taken to sending out inspirational emails quoting rosy forecasts issued by Jack Grubman, Salomon Brothers’ renowned telecom analyst.

Woooof

By January, 1996, long-distances prices had fallen by almost half since the break-up of AT&T a dozen years earlier.10 The giant regional Bells, which had been prevented from offering long distance services, were lobbying hard to get into that market. All signs pointed to more deregulation, more competition and ever lower long-distance prices.

Then Marketing’s Rick Knight detailed MCI’s latest “switchless” resale campaign. It was designed to drum up new business with resellers who hadn’t invested a dime in a phone switch or other physical equipment. All they needed was an MCI contract and some salesmen. McCumber had opposed switchless resale as a bad credit risk. Now that he was out of the picture, Marketing had succeeded in pushing it through.

Pavlo left the meeting with a clear mandate–delay issuing credit memos to good accounts (like the WorldCom $30 million discount) and write-offs to bad ones. He would brief Wanserski, but Pavlo had the distinct impression his incoming boss wanted to leave the mundane details to his staff.11 It would be up to Pavlo to figure out how to carry all the bad debt on their books. He’d have to get even more creative.

Pavlo was pumped. He’d had these bankers from Canada eating out of his hand for two hours. He was their man, their ticket to big new sources of revenue and profit. “We’re willing to stand behind them one hundred percent,” Pavlo said without a second thought. There, he’d done it. Why not a loan guarantee? His bosses wanted solutions. He was providing them.

PAVLO AND HIS STAFF faced the job of massaging the numbers once again in February to satisfy their bosses, as they had been doing every month now for some time. Pavlo achieved the desired result by ordering a stack of pizzas to keep his accounts receivable managers, mostly temporary help, fed while divvying up the month’s loot in such a way as to make the department look good.

Under pressure from above, Pavlo interpreted “as possible” as a license to engage in what is known as accounts receivable “lapping”– the posting of one customer’s payments to another’s account to hit certain targets.

In the case of MCI, the corporate headquarters set various financial “targets” without explicitly telling anyone to do anything unsavory to hit them. It was then left to functionaries like Pavlo to make their numbers by deciding, for example, how much deadbeat debt would be written off each month, and how much would stay on the books a little longer pretending to be collectible, or by recording some payments— temporarily, of course—where they would look the best instead of where they belonged.

One of the biggest fudges involved Ebbers’ WorldCom. The company’s monthly bill with MCI was running between $50 and $60 million a month. WorldCom was gaming MCI by mailing it a paper check on the last possible day.

The huge, last-minute payments wreaked such havoc with Carrier Finance’s over-90 day balance that Pavlo started flying a clerk to Jackson, Mississippi on the last day of the month to sit in WorldCom’s lobby and wait for the check to be handed to him. The clerk would then rush a fax of it to Carrier Finance, which would use the documentation to justify posting the sum to WorldCom’s account as if the cash were in the bank. Pavlo referred to the phantom money as “placeholder credits.”1 His workers called them The-Check’s-In-The-Mail deposits.

Pavlo knew that in a legit operation, this kind of prank would blow up when it hit the Accounting department. But at MCI, Accounting obliged Carrier Finance’s creativity. Pavlo persuaded the bookkeeping people to post the phantom pa...

This bizarre charade allowed Carrier Finance to hide in plain sight tens of millions of dollars from WorldCom’s over-90-day balance.

By early 1996, they were offering check’s-in-the-mail credits to any customer that produced a fax of a real, cashable check and a Federal Express tracking number to prove it was on its way.

The next unexploited opportunity was found in the millions of dollars in vagabond payments Carrier Finance received each month. Sometimes customers sent them in to profit off of MCI’s inefficient accounting system, and sometimes the system simply wasn’t up to figuring out where they should go.

MCI had millions in “unapplied cash” sloshing around, waiting until someone could figure out how to apply it to the right accounts. One manager reported with pride that he had used this accounting gap to “clean up” about $4 million in bad debt accounts.3 This ploy worked because the following month, when the loose cash got properly assigned to the account of the customer who paid it, the old bad...

Instead of gaming the system, MCI Finance had turned the system into a game, going so far as to send around a monthly internal report, grading departments on how well ...

Three and a half years before he’d been a new-hire manager. Now, at thirty-three years old, he was master of MCI’s carrier portfolio, overseeing more than $2 billion in annual revenues,5 and a hardened veteran in the art and science of squeezing money from the toughest clients.