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Launching a program to lure new, fly-by-night customers with instant cash few in the face of MCI’s Zero Tolerance policy. But Rapid Advance was no more loopy than the other schemes management had been cooking up by 1996 to maintain MCI’s growth-stock mystique. They included paying $682 million for a satellite TV license in January, the $2 billion Internet 2000 initiative unveiled in March, and a multimedia joint venture with News Corp., dubbed SkyMCI, announced in April.11
With Marketing and Sales on board, Pavlo headed off to Accounting to get the computer “reason codes” Carrier Finance would need to accept money from Manatee. Accounting approved them without batting an eye.
Pavlo also sent Legal a list of the computer codes Accounting had assigned for Manatee and a stack of Marketing’s paraphernalia. He figured the more paperwork, the more legitimate the program would look and the less attention anyone would pay to the details. Legal never responded, so Pavlo forwarded a copy to Benveniste with what appeared to be a handwritten notation from an MCI attorney—but which Pavlo had scrawled himself—dubbing the contract “Approved as written.”
Marketing and Sales were so bowled over by Pavlo’s brilliance that they invited him to present Rapid Advance to a group of MCI customers and reps at the Palm Springs Marriott during the Telecommunications Resellers Association conference in early May, 1996.
The ballroom of the Palm Springs Marriott was packed with about 200 MCI vice presidents, directors, sales reps and carrier customers, plus Manatee’s Mark Benveniste. When Pavlo took the podium, he put up a viewgraph illustrating how money would flow under Rapid Advance.
Two days later, on May 9, Hilby formally signed his deal with Orion Management.16 But before he started making payments, Hilby wanted a letter from MCI confirming that Orion had taken care of the $2 million owed MCI.17 Recalling something he’d read in John Grisham’s novel The Firm, Pavlo avoided making blatantly fraudulent declarations about money being “credited” to TNI’s account, or its debt having been “paid off.” Instead, he sent Hilby a letter stating MCI appreciated his diligence in reducing TNI’s debt to “zero dollars.”
So he would not have to share the fruits of their labors with Uncle Sam, Mann arranged for an IRS tax dodge by having TNI’s payments received by an entity called ACC Telemedia, in the Cayman Islands. Orion started operations with a $300,000 upfront payment from Hilby to ACC’s Cayman account, and then Hilby began sending in his $140,000 a month.
A British Overseas Territory ranked in the top ten for GDP per capita in the world, Cayman was a tax haven and had a reputation for money-laundering. The secretive money flows and favorable tax treatment had attracted thousands of companies to incorporate there, along with hundreds of banking, trust, and insurance firms.
That had left Pavlo at the mercy of senior Finance managers who had pledged undying loyalty to The Plan, as MCI’s strategy for posting impressive numbers was known. That, in turn, had put him in a no-win position. By not allowing his department to fess up to the $120 million or $200 million or however much its bad debt had spiraled to, and without actually saying as much, Pavlo’s bosses had left him with the distinct impression he had no choice but to cook the books.
Pavlo wrote his name and Social Security number on Howard’s notepad and gave him his driver’s license to copy. He became beneficial owner of Parnell Investments, a limited liability corporation based in George Town, Grand Cayman. He was now officially an international money launderer.
Mann’s game was to transfer cash out of the Cayman companies as quickly as possible after it arrived from the States. That would make it harder to track the transactions in case anyone took an interest.
The $22,000 in cash they’d just received had come from yet another Cayman account. Nothing, Mann knew from experience, inspired business partners like big stacks of bills. As they drove back to the Coral Stone Club in their Jeep, Pavlo pulled out his $11,000 and riffed the paper.
The slick treatment at IMS, the wad of cash in his pocket, and the abandon with which Mann encouraged him to spend it had the desired effect of crowding out Pavlo’s qualms during the rest of the weekend.
He effectively ran Carrier Finance, had finessed the Manatee deal, sold Rapid Advance to Marketing and Sales, and had just received $91,000 of MCI’s money that it hadn’t a chance in hell of discovering.
PAVLO’S CAYMAN respite was a bright spot in a darkening landscape. The pressure of running Carrier Finance and traveling almost constantly to chase down MCI’s worst customers was taking a toll on his emotions and his health. Adding to the anxiety was the fear that his Orion activities could somehow come undone. He decided that if it did, he would do well to have some ammunition of his own. He began systematically squirreling away at home evidence of MCI’s accounting transgressions.
By his reckoning, he had personally helped MCI hide one hundred million or so in bad debt from regulators, accountants, and investors.
The Guard nearly booted Wilkie after he decided to get a first-hand look at a University of Georgia football game and buzzed the stadium so low, the story went, he had turned sideways to get through the goal posts. Seven years Pavlo’s senior, and having mellowed a bit, Wilkie seemed the perfect choice for chasing down deadbeats.
Even with a ballsy guy like Wilkie helping him, Pavlo had more problems than he could handle and no legitimate ways to fix them. MCI had bowed a bit to reality in April, 1996 by adding $48.6 million to its bad debt allowance.1 The move reduced the company’s reported earnings by an equal amount. But it was still a far cry from the $100 million or so Pavlo had figured was lurking on its books.
Pavlo guessed that Sales managers might have been trying to avoid demands that they give back some of their commissions, or getting fired for keeping Hi-Rim connected long enough to do that kind of damage. Or they might have been arguing that holding a promissory note would help MCI get something out of bankruptcy court.
But no matter how fast Finance bailed, the ship kept sinking. “We are looking at a complete write-off of over $8 million,”3 was how Pavlo described in an email to Wanserski and his boss, Jim Folk, the ugly situation that had bubbled up with a customer called ATI. The company was so obstreperous it had already refused Folk’s proposal to sign a $7.5 million promissory note.
Pavlo fumed all the way home. He was pissed at Folk. “Cut them off” was an easy order to give from the distant safety of an executive suite. It was quite another thing to suffer the discomfort and danger of doing it in person. It was something else to hate about MCI.
Pavlo would have felt even more frustrated had he known that while he was crawling the streets of a New York industrial ghetto getting screamed at, MCI’s CEO Bert Roberts was planning to unload the company.
For Pavlo, money was becoming the salve for all his perceived wounds. Shitloads of it. Hilby’s TNI was making its $140,000 monthly payments to Orion like clockwork. Ward and Dickson of TM Systems had paid their $175,000 commission to MTC II. As Manatee’s first Rapid Advance customer, they would soon hand over control of their company’s revenues to Benveniste’s firm. Manatee would make sure MCI got paid on time for current network usage, and that Orion got its $22,000 a month for making TM Systems’ past debt disappear.
With so much money coming in, Mann encouraged Pavlo to live it up. He ordered a Eurocard linked to Pavlo’s Parnell account and hauled him off to Bespoke Apparel in Atlanta, a men’s tailoring shop that catered to the rich and famous. Pavlo felt reckless picking out a $2,000 suit and a few pairs of pants. Mann scoffed. “C’mon, Wally. You can do better ’n that!” He began rifling through wool swatches, tossing aside candidates. By the time they walked out, the value of Pavlo’s wardrobe had increased by $15,000.
Each morning, he left the luxurious sanctuary of his room at the Westin St. Francis to spend a humiliating and souldraining day chasing down delinquent carriers on the convention floor. By the last night he was ready to let loose. He got plastered at the open bars hosted by the various convention sponsors. Then, in hallowed tradition, he headed off with a pack of MCI managers and other conventioneers to Mitchell Brothers O’Farrell Theatre, a legendary strip club.
Pavlo explained that marginal small carriers stiffing MCI were only part of the problem. Three of its biggest accounts, WorldCom, Cable & Wireless, and Frontier, were also financial black holes. Together, the three used more than $90 million a month in MCI long-distance, representing just over half of Carrier Finance’s revenues.13 One of the problems was that Business Development, MCI’s contract negotiators, had locked MCI into long-term deals with the three that turned out to be money losers. MCI Finance tried to wriggle out of them by unilaterally tacking on $16 million a month in
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The disputes pushed his total accounts 90 days or more past due to nearly $50 million, $24 million of it owed by the three big customers.16 Accounting knew about the surcharge ploy, but Pavlo was feeling increased pressure anyway.
MCI’s senior executives had retreated to Chateau Elan ostensibly to talk business but in actuality to plan which Olympic events and galas to attend while enjoying a round of golf and spoiling themselves with manicures and back waxes. Underlings like Pavlo were summoned to attend a handful of meetings that could have taken place in a Dunkin’ Donuts but added an air of legitimacy to the extravagant use of corporate assets.
He and Mann had been in business together for four months. They had banked $940,000 in their Cayman accounts and had another $162,000 a month in installment payments coming in. Hennessy had done his part, making $11.5 million dollars disappear from MCI’s bad debt total to hide the theft.
Even as bad debt escalated, the department had posted writeoffs of just $10 million in 1995, or $2 million less than the year before.1 Now, eight months into 1996, Carrier Finance revenues were forecast to nearly double for the year to $2.1 billion.2 Under an honest accounting of the most recent figures, bad debt would jump fourteen-fold to $142 million, eight percent of total revenues, and a four-fold increase over the old benchmark. The total included $64 million in “actuals,” meaning debt already recognized as uncollectible; $51 million in “exposure,” representing zombie companies that were
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Also on the Chateau Elan agenda was the disputed surcharge issue with WorldCom, Cable & Wireless, and Frontier. That had added $20 million or so to Pavlo’s headache, not to mention countless hours he had to spend in meetings with company lawyers who were handling the legal end of the pissing matches.
Elsewhere in telecom, the story was similar. AT&T would end up taking a $200 million charge in 1996 for carrier accounts,6 attributing the problem to “increased bankruptcies, delinquencies and fraud.”7 WorldCom was on the way to getting burned for nearly a quarter-billion dollars by Cherry Communications,8 the guys with the free panties.
Slovinski ended up suing Elliott, winning $2 million in punitive damages for emotional distress.10 WorldCom would lose another $100 million on Communications Network Corporation, known as Conetco, which was also on its way to the corporate graveyard.
MCI senior management had been informed about Carrier Finance’s problems from the start. McCumber had been tight with CFO Doug Maine and spoke his mind. Pavlo had been sending monthly “High Risk” reports up the chain of command for months. With a sellout on their minds, his bosses had fiddled over a strategy to win the war, leaving Pavlo to do his best at financial triage.
Adopting tricks already in wide use at MCI, and coming up with flourishes of his own, Pavlo had written bogus promissory notes and gotten accounting codes approved to credit MCI for payments not yet received, re-dated invoices so ancient debts appeared new, posted credits from potential customers who hadn’t yet signed contracts, and delayed credits to customers who had.
Folk, Wanserski, Pavlo, and Wilkie had spent much of July trying to strike the right balance in their upcoming presentation between explaining the scope of the looming disaster and why it wasn’t their fault.
Among the leading lights were Folk; Jim Schneider, finance chief for Pavlo’s entire division (and future chief financial officer of Dell Computer); Business Development VP Suleiman Hessami; Business Markets VP John McGuire; and a dozen or so rank-and-file Finance execs.13 Wanserski, Wilkie and Pavlo were the only ones in suits.
In fact, given the large amounts of cash the calling card vendors can collect, many of them appear to have launched with the specific intention of ramping up and defaulting on their debts to us. “Since they weren’t planning to pay us anyway, many have discounted their retail rates well below their contracted cost. We found one carrier advertising 20 cents a minute to India for which it’s supposed to be paying us 80 cents.”
The meeting went on the same way for another half hour, moving from one client disaster to the next. The discussion of the disputed international surcharges was equally inconclusive and ended with the same exhortations: Keep up the pressure. Get the money. Cash is king.
Folk and Wanserski put their best spin on efforts to maximize collections. Their intentions were good but only a full-scale retreat from the wholesale market would staunch the flow of red ink.
Either way, he was stunned that none of MCI’s executives had been willing to take decisive action, or own any responsibility for the mess they had created. He had prepared for the meeting expecting direction and commands that would help him solve Carrier Finance’s spiraling problems.
Pavlo returned to the office to face yet another crisis. MetroLink Communications was a local and long-distance reseller headquartered in luxury offices fifty-five stories above Chicago’s West Madison Street. The company touted itself as “the only vendor able to provide customers with a full-service telecommunications package.”16 To Pavlo, it was just another client with a bad credit history and more braggadocio than brains.
If MetroLink really was the front-runner for Advantis, it would need bridge financing to pay its delinquent MCI bills. Paulsen was desperate. MCI had him by the balls. It sounded like a job for Harold Mann and Orion.
Paulsen not only took Mann’s bait but agreed to run his future invoices through the MCI-Manatee Rapid Advance program. It was all so easy.
In mid-August, Paulsen signed an agreement under which MetroLink agreed to pay $500,000 up front and $92,592 a month to Orion’s newest Cayman affiliate, Hightower Investments.17 Mann took its name from the street where his horse farm was located. In exchange for MetroLink’s payments, Orion took responsibility for its past-due $5 million MCI tab.18 That meant Hennessy would make MetroLink’s debt vanish from MCI’s books. Paulsen also signed an agreement for Manatee to control MetroLink’s revenue via Rapid Advance. Manatee then advanced MetroLink $754,573 to pay Orion, MCI, and its other bills.19
