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MCI’s federal contracts questioned

As scandal-ridden MCI, formerly known as WorldCom, continues to win government telecom contracts, critics and Congress are asking why when companies like Enron and Arthur Andersen were quickly banned from ever again receiving federal contracts.
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Two recent high-profile government contracts awarded to MCI, the company formerly known as WorldCom, are raising questions about whether the federal government is artificially propping up the scandal-ridden telecom giant. Despite filing the largest bankruptcy in history on the heels of its publicly admitted $9 billion accounting fraud, MCI has continued to keep and win new federal contracts when companies committing lesser offenses have been barred from doing business with the government.

FROM INSIDE ITS bankruptcy cocoon, MCI has managed to dodge its corporate bad boy image and win five federal contracts since it filed for protection under Chapter 11 last summer, according to company press releases. A longtime favorite among federal agencies and the Pentagon, MCI isn’t shy about touting the fact that it provides service to 75 federal agencies.

That MCI continues to ride a wave of lucrative federal contracts isn’t surprising to some observers who say the company is so infused into the work-a-day world of Washington that uprooting the company from the government’s telecommunications infrastructure would have dire consequences. That point was carefully underscored by then-CEO John Sidgemore who, last year, in the white-hot spotlight of the company’s newly disclosed accounting fraud, appeared before Congress to plead his company’s case.

“WorldCom is a key component of our nation’s economy and communications infrastructure,” Sidgemore told a congressional panel last July. “Both commercial and national security interests rely upon WorldCom’s operations continuing without disruption.”

THE WRONG MESSAGE? But critics say that it’s an irresponsible waste of taxpayer money to artificially prop up a bankrupt and scandal-ridden company and that continuing to hand MCI contracts sends the wrong signal to future corporate crooks.

The most recent example of such hubris on the part of the government, MCI’s critics say, is the awarding of a $45 million contract to build a cellular phone service in Iraq as part of the U.S.-led reconstruction effort despite the fact that MCI isn’t known for its expertise in building wireless networks.

A few weeks before the cellular contract was awarded to MCI, the company won a $7 million seven-year contract to provide high-speed satellite data services for the government’s weather forecasting service.

On the day MCI announced it had won the weather forecasting contract, it also agreed to pay a $500 million fine to settle charges of accounting fraud stemming from a Securities and Exchange Commission investigation. The fine was the largest ever handed out by SEC, but the amount was widely regarded throughout the industry as a slap on the wrist given the nature of the company’s fraud and its historic bankruptcy filing.

The government’s weather service contract award to MCI is “an outrage” said Tom Schatz, president of Citizens Against Government Waste. “The stunningly ill-conceived and mistimed move to award MCI a major satellite contract” on the heels of having been made to pay “a record-breaking fraud settlement… deserves to go down in the record books for its breathtaking chutzpah,” Schatz said.

$800 MILLION A YEAR MCI’s government business is worth nearly $800 million annually. The company ranks eighth among all government contractors, according to figures tracked by the trade publication Washington Technology; it is the first time that MCI has ever cracked the Top 10 in the 10 years that the publication has been compiling the list.

Rivals and critics are dumbfounded that government agencies continue to award MCI contracts, especially when other scandal-tainted companies such as Enron and Arthur Andersen were summarily “debarred” or banned from doing any future government business by the General Services Administration.

“We’re floored at the seeming blind spot on the part of the government contracting agencies to the perpetration of the biggest corporate fraud in American history,” said Jim Cicconi, general counsel of MCI chief rival, AT&T.

The calls for MCI’s debarment and allegations that the government is artificially propping up the company have reached the ears Congress. Sen. Susan Collins, R-Maine, who chairs the Governmental Affairs Committee has opened an investigation into why the government hasn’t debarred WorldCom/MCI like it has other companies like Enron.

“If any federal contractor is found to have committed fraud or otherwise demonstrated a lack of integrity of their business ethics, the federal government bars the company from doing business with federal agencies,” Collins said. “So I’m raising questions about why WorldCom is continuing to do business with the federal government. There may be good reasons why but I want to know what they are.”


In suspending Enron and Arthur Andersen from government business, the GSA said the companies “had engaged in misconduct and committed internal control irregularities that seriously affect their suitability to receive government contracts.” The debarment wasn’t to “punish a contractor or individual,” the GSA said, “but to protect the government from contractors that do not have a satisfactory record of business ethics and integrity.”

Collins’ inquiry asking the GSA to explain why MCI continues to pull down government contracts is the start of “some recognition that these guys aren’t living up to the guidelines Congress set up for dealing with the government,” said John Franz, vice president and counselor to the general counsel for Verizon, also an MCI competitor.

“It has not been proven that MCI has cleaned up its act,” Franz said. “Nevertheless the government continues to give them new business. And if you look at the GSA’s history with Enron and Arthur Andersen, both companies were suspended on the basis of far less severe misconduct than that exposed at MCI.”

MCI brushes aside such criticism. “The bottom line is that these recent attacks are a massive, well-funded public relations campaign that’s been orchestrated by some of our biggest rivals,” said Peter Luke, an MCI spokesman. MCI’s rivals, Luke insists, aren’t concerned about how the government is treating taxpayer money, “their only focus is on killing competition and they are clearly willing to stoop to new lows to do it.”

Luke also notes that there’s no legal basis for barring MCI from government business because none of the corporate officials responsible for the accounting fraud had anything to do with running the government contracts. “We always have and continue to meet all the stringent legal and service requirements that are set forth in our government contracts,” Luke said.

But that’s not good enough for critics alleging that MCI is being kept afloat through the shear will of government contracts and they point to government documents to underscore their case.


For example, MCI’s critics note that the company won lucrative telecommunications contracts based in part on fraudulent or misleading financial information that portrayed the company as thriving during a time when many telecommunications companies were decimated financially. The Government Accounting Office even noted in one dispute over the Pentagon’s awarding of a $450 million contract to MCI (then called WorldCom) that the military contracting officer “relied on grossly inaccurate financial information in making a determination that WorldCom is a responsible contractor” but the GAO said it had no jurisdiction to intervene.

The awarding of the National Oceanic and Atmospheric Administration (NOAA) weather forecasting contract to MCI drew a formal protest from failed bidder Verestar. In a GAO protest dispute decision affirming the awarding of the contract to MCI, the GAO noted that the NOAA contracting officer acted properly when he “considered that other agencies such as the Federal Aviation Administration recently awarded WorldCom a new contract, and that WorldCom provides communications services to many sensitive Department of Defense (DOD) activities, as a result of which it was considered highly unlikely that DOD would allow the demise of WorldCom.”

WARNING BELLS Such acknowledgement by a government contracting officer that the Pentagon wouldn’t “allow” the demise of a private sector company set of warning bells for government watchdog Schatz. “This kind of thinking, this kind of reasoning and the continued flow of contracts gives the appearance of a hidden bailout of MCI by the federal government.”

The government’s unabashed support for MCI doesn’t surprise everyone. “The obvious consensus in the government is that the public interest is served by MCI continuing in business,” said Scott Cleland, president of the investor research firm the Precursor Group, particularly in light of the fact that the company carries half the world’s data traffic.

In considering debarment of MCI, the government would be “looking at saying, ‘Is the death penalty appropriate for somebody we need alive?’ I’ll be flabbergasted if the government tried to put MCI out of business,” said Cleland, a former State Department official for telecom trade. “It would be the classic case of cutting off your nose to spite your face.”