Whither MCI
What is the proper reaction of the federal government?


When allegations of wrongdoing by a business escalate by the week, the usual admonition to mere bystanders is “innocent until proven guilty.” But how should the federal government balance its many responsibilities in reacting to such allegations when its regulators were responsible for preventing much of the wrongdoing, when its prosecutors are responsible for prosecuting the alleged wrongdoing, and when the government itself is one of the largest customers of the alleged culprit?

The question is not merely hypothetical. MCI, the nation’s second-largest long-distance company, stands accused in recent weeks of new forms of business fraud. Several federal agencies as well as MCI itself have launched investigations of the many allegations of fraud. These investigations, however, will take months to conduct properly.

In the meantime, what is the proper reaction of the federal government to the claims of fraud by MCI? Wall Street has largely discounted the allegations. The Street seems to believe that MCI will weather the storm not because it is innocent but because it is too big and too important to the government to fail. The government, or so the Wall Street theory goes, will not let MCI go under because the telecommunications markets cannot afford to lose a major competitor and because too many politically well-connected investors have paid billions of dollars to bring MCI out of bankruptcy.

Yet the federal government cannot wave a wand and magically wish away the unusual, widespread, and specific allegations of fraud by MCI. The alleged wrongdoings cannot be blamed on a few isolated rogue employees. Although allegations of pervasive corporate fraud easily attract headlines, relatively few American corporations actually stand accused of it, and fewer still are put out of business as a result. For every Enron or Arthur Andersen, thousands of businesses manage to operate without the slightest hint of deception.

Just last year, MCI, then WorldCom, admitted to the largest financial fraud in U.S. history. Now the government is publicly musing whether $11 billion in accounting shenanigans was just the tip of the iceberg. Claims have been made that MCI, among other illegal activities, failed to pay substantial taxes, illegally stripped information about the origin of long-distance calls, failed to pay legitimate fees to other telephone companies for the use of their networks, overcharged the government for services, and unlawfully routed domestic calls through Canada. The FBI is seeking witnesses to wrongdoing.

MCI has yet to respond fully to the allegations, and perhaps it will be able to exonerate itself fully. Some pundits claim the new accusations are little more than temper tantrums by the commercial competitors of MCI as it emerges from bankruptcy. Yet if the accusations have no merit, why have so many government agencies taken them so seriously?

Michael Capellas, the current CEO of MCI, and his new management team have been on the job for less than a year. They must retain the trust of their employees, their investors, and their customers. They certainly did not authorize any of the alleged misdeeds inherited from the prior MCI management of Bernie Ebbers. Capellas, however, cannot merely blame his predecessor for his company’s woes. Some of the allegations pertain to MCI business practices today, not from years past. More troubling, outside parties, not MCI, are revealing the dubious business practices.

The federal government is in an awkward position. If its regulators had been doing their job vigilantly, the alleged wrongdoings would have been difficult to execute. If government’s auditors had been more vigilant, the alleged overcharges would not have been possible. Now, prosecutors may be asked to bring a case that Wall Street appears to believe the federal government would rather avoid.

MCI’s future may depend on special protection by the government. The irony is that MCI became a large company not through government protection but precisely because it was willing to challenge the government in court — and win. For much of the past generation, MCI symbolized competition in telecommunications. It led the charge against government-protected monopolies, and defeated the government and monopolist alike in court. But MCI won court victories and the hearts of millions of American consumers because it had the law, low prices, and honest business practices on its side. MCI must convince the American public that it still has nothing but that combination today.

The nimble competitor of yesteryear may have become the Humpty Dumpty of today. Both Wall Street and MCI would be deeply mistaken to believe it is too big to fail. If MCI is found to have engaged in fraud, all the powers of the government and Wall Street combined cannot put it together again. The government will have no choice but to bring MCI to justice, and the American public will have long since abandoned it.

— Harold Furchtgott-Roth is a former commissioner of the Federal Communications Commission. He is currently president of Furchtgott-Roth Economic Enterprises.