See:
http://www.privacy.nb.ca/cryptography/archives/coderpunks/new/1999-01/0140.h...
I remember hearing "I can get you MCI OC3's *real* cheap..." out of Hughes,
Hilby, and Co. at Simple Access, back in the day.
Now I know why.
Cheers,
RAH
http://www.forbes.com/forbes/2002/0610/064_print.html
Ring of Thieves
Neil Weinberg, 06.10.02
MCI introduced Walter Pavlo to a world of armed thugs, duffel bags stuffed
with cash and phony accounting. Now, sitting in a South Carolina prison, he
points a finger back at his former employer.
Walter Pavlo has plenty of time these days to walk the track inside South
Carolina's secluded Edgefield prison. He takes a daily stroll with Mark
Whitacre, the Archer Daniels Midland whistle-blower who is serving a
ten-and-a-half-year sentence for fraud. Surrounded by drug convicts, camp
fences and rolling woodlands, they chat about their pasts and draw
parallels to the scandals swirling around big corporations now--at Enron,
at Arthur Andersen, in telecom.
Pavlo, blond and still boyish at 39, committed his crimes at MCI as the
telecom business roared in the mid-1990s. He is in the 15th month of a
41-month sentence for obstruction of justice, money laundering and mail
fraud. An unremarkable rank-and-filer in a 25-person billing department, he
says he cooked the books, under pressure from higher-ups, to help bolster
MCI's growth. Pavlo employed an array of tricks--taught to him, he says, at
MCI--to hide hundreds of millions of dollars in aging bad debts and clearly
uncollectable receivables owed by a raft of upstart telecom resellers. In
the process, he used the same sleight of hand to skim $6 million on the sly
for himself and a couple of partners; for that he is doing soft time.
The resellers stoked growth at a time when MCI, lit up by the halo of the
Internet frenzy, was prettying itself up for a sale to someone bolder. The
company, with Walter Pavlo's copious assistance, granted easy credit to
dozens of fly-by-nights looking to lease its lines and resell service to
businesses and consumers. It blithely let just about anyone, from raw
rookies to pornographers and astrological touts, run up tens of millions of
dollars in bills. Then, Pavlo says, MCI kept the receivables on its books
long after any real hope of collecting had vanished--with the resellers
themselves, in some cases. Banks, eager for high interest and fees,
financed it all.
It was his job, he says, to hold these losses to a minimum, even if doing
so required deceptive means. His actions benefited MCI. The company filed a
proxy with the Securities & Exchange Commission recommending a $20 billion
buyout by British Telecom in 1997, just days after management knew it had
fraud on its hands, according to a brief filed by a group of banks that
sued MCI in 1997. That deal collapsed, and MCI then accepted a $41 billion
offer from WorldCom months later.
MCI denied the banks' allegations and has claimed it was duped by its own
employees. At MCI only Pavlo and James B. Wilkie, a senior manager, have
been punished (along with a third partner, an outsider named Harold R. B.
Mann). For five years Pavlo has wondered when someone might take a hard
look at the four levels above him, from his boss up to the chief financial
officer--Douglas Maine, who later became chief financial officer at IBM and
now runs its online arm--and above him to MCI chief executive Bert C.
Roberts, who now is chairman of WorldCom.
And so when Pavlo learned one day in March, as he sat reading in the prison
library, that the SEC is investigating whether there were any accounting
misdeeds at WorldCom, he had one sentiment: "It's about time." He believes
the remnants of his stunts are buried in a $685 million pretax charge for
bad receivables that WorldCom took in October 2000. The company blamed the
big charge ($405 million after tax benefits) on a handful of customers'
going bankrupt in the previous quarter. Pavlo argues that the charge was,
rather, a way to use the industry downturn to mask the writeoff of
receivables that had been rotting for years on the books of MCI and
WorldCom, artificially boosting profits.
"This story is bigger than Walt Pavlo heisting money from MCI and going to
jail," says Walt Pavlo. "This is about corruption of telecom, with lots of
games. I didn't come to MCI knowing how to hide accounts receivable."
Pavlo is a convicted felon and an accomplished liar. But his claims have
some supporters. A shareholder lawsuit, dismissed in April and now under
appeal, makes the same claim about the October 2000 writeoff. The SEC seems
to harbor similar suspicions, and in March it asked WorldCom to list the
carriers included in the big charge, how much each owed and how old their
debts were. WorldCom says the charge was proper but declines to comment
about the SEC's inquiry or events at MCI.
Pavlo seemed an unlikely candidate for scandal. He grew up mostly near
Sistersville, W. Va. and Savannah, Ga., with two younger brothers. His
father describes Walter Jr. as a hard worker who started at quarterback in
high school one season, more out of grit than athletic ability. Pavlo
earned an industrial engineering degree at West Virginia University and an
M.B.A. at Mercer in 1991. After working at Goodyear Aerospace, where he met
his wife, Rhoda, he joined MCI in 1992 at age 29.
He was assigned to head a four-person group in the sleepy carrier finance
department in Atlanta, which handled about $240 million a month in billings
in 1993. MCI and the entire telecom business were on the cusp of big
change. After rising more than thirtyfold in 20 years, MCI's stock lost
ground in 1994 and 1995. A year later deregulation promised to upend old
monopolies and raze barriers to new competition, and soon MCI was in play.
The smell of fast money was in the air.
A raft of new resellers began buying contracts to repackage MCI capacity as
cut-rate long-distance, prepaid phone cards and caller-paid 900 numbers.
For MCI and other big carriers it was a godsend. Consumer long distance was
getting cutthroat. Margins on big corporate accounts were thinning.
Resellers were another story. Most started small and paid rates with gross
margins of 50% or more. Some doubled or tripled billings in a month.
The torrid growth set off a tug-of-war inside MCI: The sales side pursued
resellers with alacrity, but the finance side worried about the resellers'
ability to pay their bills. "Everyone who dealt with MCI considered them
feudal and schizophrenic," says the chief of one prepaid-card service.
By 1995 Pavlo had risen to senior manager and the carrier finance unit had
grown to 120 employees. It was handling $650 million in collections a
month. About 10% of sales, but a far larger slice of profits, came from
resellers. At 32, Pavlo was the department's "target man," charged with
handling high-risk accounts, collecting receivables and coming up with
creative ways to dispose of them. It was a job Pavlo performed well, Ralph
McCumber, his boss until the spring of 1996, stated in a deposition taken
in the banks' 1997 lawsuit charging MCI with fraud.
But the job was taking a heavy toll on Pavlo. MCI signed up resellers by
the dozen and let bad billings mount. When Pavlo went out into the field to
dun the debtors, he found a wild and woolly world. One prepaid calling card
outfit, Caribbean Telephone & Telegraph in Bloomfield Hills, Mich., signed
on in early 1995. By midyear CT&T owed MCI $30 million, Pavlo says. The
small firm's debt swelled faster than MCI could even track it; MCI took 60
days to get a bill out and waited another 15 days before it came due. Pavlo
visited CT&T's office in lower Manhattan, seeking payment, but owner James
Franklin insisted he couldn't afford to pay. Really? Pavlo says he spotted
duffel bags of cash, armed guards and money-counting machines. Pavlo
returned to Atlanta empty-handed and convinced that CT&T's pleas of poverty
were a bit exaggerated. By February 1996 MCI had cut off service to CT&T,
which had filed for Chapter 11 bankruptcy protection. Franklin blamed
CT&T's problems on slow payments from its own customers.
At the Las Vegas office of one prepaid-card shop, Hi-Rim, a colleague of
Pavlo's showed up to demand payment--and a Hi-Rim official threatened to go
get his gun, the colleague says. Another reseller, Tel-Central, had a bit
of star power: It was run by Dennis D. McLain, a 30-game winner as a
Detroit Tigers pitcher who later was convicted of money laundering, theft
and mail fraud. By early 1996 Tel-Central owed MCI up to $30 million and
had been cut off. McLain was indicted in 1998 along with John A. (Junior)
Gotti in a phone-card scam, but the charges were dropped in 1999. McLain is
now doing time for stealing $3 million from Peet Packing's pension fund.
Big carriers added to the problems by locking resellers into "ramp-up"
contracts that charged them set prices for an increasing number of minutes.
Many soon found rivals retailing service at prices below what they had paid
wholesale. For resellers, the choice was simple: Either keep collecting
from their customers, stop paying MCI and pocket wads of cash--or pay MCI
and go bankrupt. The uncollected bills got so bad that managers at MCI,
WorldCom, Sprint and elsewhere discussed setting up a database to track
offenders.
Pavlo was feeling the strain of it all. He was coming to work at 5 a.m. and
staying late. He traveled constantly. Yet the more he worked, the worse the
finances got. Until 1995 his group's bad debt had run $10 million or so a
year, well within range of the unit's 2% ceiling. Accounts more than 90
days past due remained in the 5% to 7% target range. But 1995 bad debt came
in at $90 million, and 90-days-late accounts had ballooned.
Pavlo sent his superiors a memo on Jan. 4, 1996, warning of $88 million,
and possibly more, in reseller receivables that MCI was unlikely to
collect, the plaintiff banks allege. Accounting rules urge firms to write
down such assets as soon as they realize they will not collect. But that
means adding to bad debt reserves or posting a special loss, hurting
earnings.
The banks alleged that James Folk, vice president in charge of revenue
operations, revealed the threat to Don Lynch, a senior vice president
reporting to Chief Financial Officer Douglas Maine. Pavlo says he got word
back via Steven Rubio, an accounting senior manager: Whatever the numbers
said, the 1995 carrier bad debt charge would be $15 million. "We can't let
this revenue get away. It's not in the plan," Pavlo says he was told. Folk,
who has since left MCI, now lives in Olney, Md., Lynch is a telecom
consultant in Fairfax, Va., Maine runs IBM.com and Rubio now is WorldCom's
assistant controller. All four declined to comment.
Pavlo says he, Rubio and other MCI financial planners started meeting
monthly to discuss the extent of the problem and how to make it go away. By
early 1996 they had found an ingenious way to keep a creaky unpaid bill off
the past-due ledger: Turn it into a promissory note. MCI's carrier finance
group did this on a large scale for the first time in early 1996, decreeing
that CT&T owed $100 million on a promissory note. Recognizing that Hi-Rim
was also going to welch, MCI disconnected it in March of 1996, wrote up a
promissory note for at least $35 million and carried the balance into 1997,
according to the deposition testimony in the banks' lawsuit, taken from
James Wanserski, director of finance for credit and collections and Pavlo's
boss from March 1996 onward. Wanserski, who now works for Arthur Andersen
in Atlanta, declined comment.
Pavlo says MCI had to have known the promissory notes were next to
worthless but nonetheless told auditors it expected to collect 75% of face
value.
Even the promissory gimmick, however, couldn't keep pace with MCI's rising
balance of bills 90 days late. So Pavlo and colleagues resorted to another
trick: misapplying so-called "unapplied cash," money customers sent in
without specifying the bill it was intended for. At the end of each month a
member of the carrier division went around asking, "Who needs money?"
Typically, $1 million to $2 million was doled out to cover older accounts,
according to Pavlo and two other former members of the department. Another
tactic: postdating invoices.
"Accounting was real loose," says a former financial analyst in the
department. "We'd move money around to keep over-90s down and managers off
our backs."
"Placeholder credits" were another tool. The carrier finance department
used them to credit a customer for up to several million dollars in
payments as if the money had already been received, when it hadn't yet
arrived at MCI. Sometimes the money behind a placeholder never showed up.
In one case, Hi-Rim said it was sending a payment via FedEx. Pavlo's group
credited its account and tracked the payment's progress. When the envelope
was opened, says the former analyst, it was empty.
Placeholder credits apparently became common at MCI. "Competition among
business divisions" over which one had the "youngest" receivables "has
stimulated the posting of memo entries in advance of actuals," Folk, the
revenue operations chief, wrote in a 1997 e-mail quoted in a lawsuit later
filed by an MCI partner. "In time this practice became more the rule than
the exception." Folk admitted in a deposition that this had led to
"fudging" the age of receivables on MCI's books. What was in it for
employees? "They get to keep their jobs."
Pavlo was stuck: He knew customers were taking in piles of cash yet
refusing to pay their bills; he says his MCI bosses knew of the chicanery
but refused to write off the receivable. Increasingly, he feared for his
job and fretted about falling into legal jeopardy. He was drinking
heavily--and growing resentful. Even if MCI sold out at a premium, Pavlo
wasn't going to get rich like top managers. He earned $70,000 and had
vested options worth less than his salary.
"I'm getting instructions from other parts of MCI that aren't in writing,
like 'Make the bad debt $15 million,' but I'm the only one with my name all
over this stuff," he says. "I started to feel I was going to be made into a
scapegoat."
In early 1996 Pavlo complained to a pal and customer, Harold Mann of Iris
Enterprises, a caller-paid 900 service that handled phone sex, a lottery
for fishing licenses in North Dakota and fundraising for racist David Duke.
Mann soon became a central player (and codefendant) in MCI's reseller
scandal, along with James Wilkie, Pavlo's buddy and senior manager in MCI's
carrier finance unit. Mann introduced Pavlo to Mark Benveniste, president
of Manatee Capital, an Atlanta firm set up in 1994 to factor, or collect,
debts, for caller-paid phone services, including Mann's Denmark Dial. Why
not move up the food chain, acting, in effect, as a factor for MCI?
Benveniste proposed that Manatee could deliver MCI's receivables in days
instead of months by collecting from resellers' clients directly. The only
catch was that factoring reseller receivables was risky. Benveniste told
Pavlo the only way he could get bank financing was for MCI to cover any
collections shortfalls. Why not? Pavlo figured. MCI was out the money
anyway.
In March 1996 Pavlo met with Benveniste and several executives of National
Bank of Canada at the swank Georgia Club in Atlanta. He told the bankers
why MCI liked the factoring deal and said he was willing to sign a
guarantee. After the meeting a loan officer called MCI's switchboard to
make sure Pavlo worked there, according to court documents. That, it turned
out, was the sum of due diligence for what turned out to be $45 million in
revolving credit set up for Manatee by National Bank of Canada, NationsBank
(now part of Bank of America) and CIT Group--the banks that ended up suing
MCI in the fallout in 1997. Never mind that Pavlo had the power to
authorize credits of only $50,000 at most, and that his superiors were
unaware of the guarantee. "It's absurd, but that was the level of greed at
the table," Pavlo says.
Pavlo figured his superiors in finance would dislike the Manatee idea, so
he pitched it to Dan Dennis, head of the $7 billion (1996 revenue) carrier
division, who loved it, he says. "Walt, you've cornered the market. You
control the cash. This product is ingenious," is how Pavlo recalls Dennis
responding. At Dennis' urging, Pavlov says he gave the program a name:
Rapid Advance. Dennis, who has left MCI and now lives in Michigan, says he
doesn't recall discussing such a program with Pavlo.
But Rapid Advance soon became big stuff in Dennis' division. In April 1996
MCI began using Rapid Advance to collect from delinquent resellers and lure
new customers. It cranked out Rapid Advance banners, stopwatches and
CD-ROMs. The sales force had Pavlo pitching it at its meetings. He was a
star.
Little did MCI management know that Pavlo was working a side deal with
Mann. Not long after Rapid Advance was up and running, Pavlo was griping to
Mann over drinks at Taco Mac in Atlanta. He cited one reseller, Robert
Hilby of Telemedia Networks, who owed MCI $2 million and, Pavlo believed,
had no intention of paying. Pavlo said he would love to rip off Hilby right
back. Mann said he know how to make Hilby pay--and to pocket some cash in
the process, according to Pavlo and Mann.
Mann contacted Hilby and offered to have his own factoring firm, Orion
Management Services, pay off Telemedia's MCI debt in exchange for a
$200,000 upfront commission, 25% of Telemedia and a promise to pay back
Orion over five years. Hilby took the offer, Pavlo says. He got a call from
Hilby telling him of the Orion deal. Pavlo acted surprised and agreed. He
wrote to Hilby, congratulating him for paying up. Then Pavlo and Mann flew
first class to the Cayman Islands to party and deposit their $200,000.
Pavlo put his account in the name of Parnell Investments, after the street
he had once lived on in Savannah. They checked in to the Coral Stone Club
and celebrated with Cristal champagne and Cuban cigars. "I felt on top of
the world sitting in the middle of Seven Mile Beach," Pavlo says.
Orion never paid MCI. Instead, Pavlo used tricks he had learned on the job,
like diverting unapplied cash, to strike Telemedia's debt from MCI's books.
Hilby could not be reached for comment, but in a deposition in the banks'
suit against MCI, Hilby said he warned the carrier as early as October 1996
that he suspected a "conspiracy to defraud" MCI and its resellers.
All told, Pavlo, Mann, Wilkie and at least one other cohort signed on seven
resellers with Orion. That included Tel-Central, Denny McLain's old outfit.
They figured that by owning a piece of the resellers and forcing them into
Manatee-style factoring deals, they could keep some money flowing to MCI
and still skim off a nifty slice. Orion also skimmed money from four
Manatee customers by making bogus claims against them and diverting
payments as they came in, Pavlo says.
For a while, Pavlo says, he felt "bulletproof." Orion was bringing in tens
of thousands of dollars a week and paying his wife $100,000 a year (though
she held a full-time job elsewhere). Pavlo was wearing custom-tailored
suits, tooling around in limos and flying to the Caymans regularly. Orion
even bought the little West Virginia steel business where his father
worked. He knew his actions were wrong. "Was it legal? No. Was it
unethical? Absolutely," he says. "I know that now. But at the time you find
yourself in a situation like this and somehow justify it."
In August 1996 Pavlo visited Atlanta's exclusive Chateau Elan to brief
senior MCI execs in town for the Summer Olympics. Pavlo says he reported
that MCI held $170 million in doubtful reseller accounts. Wanserski, who
also attended the meeting, said in a deposition later that senior
management discussed the debts of CT&T and the likelihood that writeoffs
could soar.
"We just can't let this happen," Don Lynch, the senior vice president,
responded in a conference call to the Atlanta group, Pavlo says. Pavlo left
the meeting angry. The accounting games continued. Two months later, in
October 1996, Wanserski flew to Washington D.C. to brief Chief Financial
Officer Doug Maine on carrier bad debt. Maine declines to comment on the
result. The following month, British Telecom announced plans to buy MCI for
$20 billion in the largest cross-border deal ever. If it went through, many
senior MCI managers would reap overnight riches. It was then, Pavlo says,
that his boss, Wanserski, took him into his office and told him: "You have
to get us through this purchase."
But Pavlo was slipping. As the numbers mounted, it was becoming
increasingly tough to disguise Orion's theft on MCI's books. Pavlo was
gobbling Prozac and drinking a half-bottle of scotch a night. In January
1997 a carrier division analyst noticed that part of a $41.5 million
payment WorldCom had made for using MCI's network had been posted
elsewhere. At first the analyst thought it was just another "covering of
agings." But it was too big. Pavlo had shifted $5 million to Denny McLain's
Tel-Central in a desperate bid to cover his theft.
Wanserski sent an e-mail to Pavlo, who was at the Four Seasons at Rancho
Mirage, Calif., and demanded a call at 4:30 local time the following
morning, Pavlo says. He stayed up all night drinking and popping
antidepressants. Wanserski wanted him back in the office immediately. Pavlo
said there was nothing to talk about. Pavlo never returned to the MCI
office. An investigation soon uncovered his role. According to a brief
filed by the banks, by March 3, 1997 Wanserski and Folk knew MCI had fraud
on its hands. Saying nothing, MCI filed a proxy four days later,
recommending the BT merger.
Shortly afterwards James Folk, the boss of Pavlo's superior as vice
president of revenue operations, discussed the events leading up to the
fraud in an internal e-mail. "The second half of 1995 saw big growth in the
carrier segment, which brought in unethical and shady companies," Folk
wrote, according to a deposition he gave the following year in a
breach-of-contract lawsuit that Manatee filed against MCI.
The banks, still counting on Pavlo's MCI guarantee, kept pushing Manatee to
lend more. Unaware that Pavlo had been fired, they hiked Manatee's credit
limit to $30 million in March and to $45 million two months later. The
legal wrangling began in the fall of 1997 when, seven months after it
uncovered Pavlo's scam, MCI reported it to the banks. Out at least $28
million, they sued MCI for racketeering, fraud and breach of contract.
The suit, in the U.S. District Court in Atlanta, charged MCI with using
Rapid Advance to keep overstated assets on its books, avoid writeoffs and
"conceal misconduct, including the alteration and falsification of MCI's
financial books and records." Manatee owner Jack T. Hammer sued MCI for
breach of contract. MCI countersued the banks and Manatee for negligent
misrepresentation, fraud and civil conspiracy. MCI claimed that Pavlo,
Mann, Wilkie and Benveniste used Orion to divert funds from its resellers
to accounts they controlled in the Caymans and then doctored MCI's accounts
to hide the theft. Shortly thereafter, a grand jury began looking into the
fraud charges against Pavlo and his co-conspirators. Wilkie turned himself
in to federal prosecutors in 1998 and received jail time.
The maze of suits and countersuits was so complicated it took another two
years to get to court. By then WorldCom owned MCI. It agreed in April 2000,
on the second day of trial in the banks' case, to pay them $8 million.
Manatee owner Jack Hammer received $1 million, though former president
Benveniste is still fighting fraud charges in court and has pleaded not
guilty.
After Pavlo was found out in early 1997, he was constantly looking over his
shoulder, fearing he was being followed by the feds. Finally, in the summer
of 2000, he walked into the FBI office in Atlanta to cut a deal. He entered
a guilty plea in October 2000--the same month WorldCom announced the $685
million write-off now under SEC scrutiny. Pavlo entered prison in March of
last year to serve 41 months but hopes to reduce it by 10 months by
completing an alcohol treatment program. Harold Mann will begin a 54-month
sentence this summer.
James Wanserski, Pavlo's ex-boss, stepped down when the scandal broke in
October 1997. He was paid his $138,752 salary, plus a $50,000 incentive for
cooperating in MCI's defense and for not disparaging the firm. The day
after the agreement expired in 1998, he joined WorldCom's auditor,
Andersen, in Atlanta.
The drama continues. Pavlo and Mann insist they have disgorged their entire
ill-gotten gain--there's no stash on some island. The shareholder suit
filed against WorldCom last year was dismissed by a judge in March but is
on appeal. Along with the SEC investigation, it may or may not prove Pavlo
to be a legitimate, whistle-blowing crook--just like Mark Whitacre of ADM.
"I started out a company man but abandoned that to act selfishly, as I
believed others were doing. I was wrong," Pavlo says. "But so were they."
--
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R. A. Hettinga