Telecommunications: Telephone Slamming and Its Harmful Effects (Letter
Report, 04/21/98, GAO/OSI-98-10).

Pursuant to a congressional request, GAO provided information on: (1)
which entities or companies engage in telephone slamming violations; (2)
the process by which the providers defraud consumers; and (3) what the
Federal Communications Commission (FCC), state regulatory entities, and
the telecommunications industry has done to curtail slamming.

GAO noted that: (1) all three types of long-distance
providers--facility-based carriers, which have extensive physical
equipment, switching resellers, which have one or more switching
stations, and switchless resellers, having the least to lose and the
most to gain, most frequently engage in intentional slamming, according
to the FCC, state regulatory agencies, and the telecommunications
industry; (2) intentional slamming is accomplished by deceptive
practices; (3) these include falsifying documents that authorize a
switch and misleading customers into signing such a document; (4) the
FCC, state regulatory agencies, and the telecommunications industry rely
on the others to be the main forces against intentional slamming; (5)
however, with regard to the FCC, its antislamming measures effectively
do little to protect consumers from slamming; (6) although
representatives of state regulatory agencies and the industry view a
provider's FCC tariff--a schedule of services, rates, and charges--as a
key credential, the FCC places no significance on the tariffs that
long-distance providers are required to file with it before providing
service; (7) although the FCC in 1996 attempted to regulate tariffs out
of existence, a circuit court stayed that FCC regulation in 1997 as a
result of a lawsuit; (8) the FCC now accepts tariffs; however, it does
not review the tariff information; (9) thus, having a tariff on file
with the FCC is no guarantee of a long-distance provider's integrity or
of FCC's ability to penalize a provider that slams consumers; (10) as
part of GAO's investigation and using fictitious information, GAO easily
filed a tariff with the FCC and could now, as a switchless reseller,
slam consumers with little chance of being caught; (11) state regulatory
measures that could preclude slamming range from none in a few states to
extensive in others; (12) industry's antislamming measures appear to be
more market-driven; and (13) however, a Primary Interexchange Carriers
freeze--an action that consumers can take by contacting their local
exchange carrier and freezing their choice of Primary Interexchange
Carriers, or long distance providers--effectively reduces the chance of
intentional slamming.

--------------------------- Indexing Terms -----------------------------

 REPORTNUM:  OSI-98-10
     TITLE:  Telecommunications: Telephone Slamming and Its Harmful 
             Effects
      DATE:  04/21/98
   SUBJECT:  Telecommunication industry
             Consumer protection
             Regulatory agencies
             Fraud
             Telephone
             Sanctions
             Fines (penalties)

             
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Cover
================================================================ COVER


Report to the Chairman, Permanent Subcommittee on Investigations,
Committee on Governmental Affairs, U.S.  Senate

April 1998

TELECOMMUNICATIONS - TELEPHONE
SLAMMING AND ITS HARMFUL EFFECTS

GAO/OSI-98-10

Telephone Slamming and Its Harmful Effects

(600456)


Abbreviations
=============================================================== ABBREV

  AT&T - American Telephone and Telegraph
  FCC - Federal Communications Commission
  LOA - letter of agency
  PCI - Phone Calls, Inc. 
  PIC - Primary Interexchange Carrier

Letter
=============================================================== LETTER


B-279628

April 21, 1998

The Honorable Susan M.  Collins
Chairman, Permanent Subcommittee
  on Investigations
Committee on Governmental Affairs
United States Senate

Dear Madam Chairman: 

This letter responds to your request of January 6, 1998, and in
subsequent discussions, that we assist the Subcommittee by (1)
determining which entities or companies engage in telephone slamming
violations--the unauthorized switching of a customer from one
long-distance provider to another; (2) determining the process by
which the providers defraud consumers; and (3) reviewing what the
Federal Communications Commission (FCC), state regulatory entities,
and the telecommunications industry have done to curtail slamming. 
In addition, you asked that we present a case study of a
long-distance company that repeatedly slammed consumers as a standard
business practice. 

Telephone customers who are victims of intentional slamming\1 can be
harmed in a number of ways ranging from having to pay higher,
sometimes exorbitant, long-distance rates to being unable to use the
calling cards of their provider of choice.  Determining the
prevalence of telephone slamming is very difficult because no central
repository for slamming complaints exists.  But according to the FCC,
slamming is a growing problem:  The complaints received by the FCC
have grown from under 2,000 in 1993 to over 20,000 in 1997.  Further,
one local telephone exchange company (another general recipient of
slamming complaints) reported receiving over 80,000 complaints in the
first 9 months of 1997 alone.  Indeed, Daniel H.  Fletcher, the
owner/operator of the companies discussed in our case study (see app. 
I), apparently slammed over 500,000 consumers, through his companies,
in one effort. 


--------------------
\1 Sometimes, legitimate mistakes are made in transcribing data that
result in slamming, but these mistakes are not paramount to the
slamming issue and can be easily rectified. 


   RESULTS IN BRIEF
------------------------------------------------------------ Letter :1

All three types of long-distance providers--facility-based carriers,
which have extensive physical equipment; switching resellers, which
have one or more switching stations; and switchless resellers, which
have no equipment\2 --have incentives to engage in slamming. 
However, switchless resellers--having the least to lose and the most
to gain--most frequently engage in intentional slamming, according to
the FCC, state regulatory agencies, and the telecommunications
industry.  Intentional slamming is accomplished by deceptive
practices.  These include falsifying documents that authorize a
switch and misleading customers into signing such a document. 

The FCC, state regulatory agencies, and the telecommunications
industry each rely on the others to be the main forces against
intentional slamming.  However, with regard to the FCC, its
antislamming measures effectively do little to protect consumers from
slamming.  Although representatives of state regulatory agencies and
the industry view a provider's FCC tariff--a schedule of services,
rates, and charges--as a key credential, the FCC places no
significance on the tariffs that long-distance providers are required
to file with it before providing service.  Although the FCC in 1996
attempted to regulate tariffs out of existence,\3 the D.C.  Circuit
Court stayed that FCC regulation in 1997 as a result of a lawsuit.\4
The FCC now accepts tariffs; however, it does not review the tariff
information. 

Thus, having a tariff on file with the FCC is no guarantee of a
long-distance provider's integrity or of FCC's ability to penalize a
provider that slams consumers.  Indeed, as part of our investigation
and using fictitious information, we easily filed a tariff with the
FCC and could now, as a switchless reseller, slam consumers with
little chance of being caught. 

State regulatory measures that could preclude slamming range from
none in a few states to extensive in others.  Industry's antislamming
measures appear to be more market-driven.  However, a "PIC
freeze"--an action that consumers can take by contacting their local
exchange carrier and "freezing" their choice of Primary Interexchange
Carriers (PIC), or long-distance providers--effectively reduces the
chance of intentional slamming. 

Daniel H.  Fletcher, the company owner/operator discussed in our case
study, apparently entered the business of long-distance reselling in
1993.  Between then and 1996--by when most industry firms ended
dealings with his eight companies, his companies had slammed or
attempted to slam hundreds of thousands of consumers, some likely
more than once.  In that period, according to incomplete industry
records, Fletcher companies billed their customers at least $20
million in long-distance charges and left at least $3.8 million in
unpaid bills to industry firms, including long-distance networks,
with which they were doing business.  Another long-distance provider
obtained a $10-million judgment\5 against one Fletcher company. 


--------------------
\2 Facility-based carriers, e.g., AT&T (American Telephone and
Telegraph), MCI Telecommunications Corporation, and Sprint, have the
physical equipment including hard lines and switching stations
necessary to take in and forward calls.  Switching resellers lease
capacity on a facility-based carrier's long-distance lines, resell
long-distance services, and have one or more switching stations. 
Switchless resellers also lease capacity and resell long-distance
services but have no equipment and little or no substantive
investment in their companies. 

\3 47 C.F.R.  section 61.20. 

\4 MCI Telecommunications Corp.  v.  FCC, No.  96-1459. 

\5 Phone Calls, Inc.  v.  Atlas Communications, Ltd., No.  CIV.  A. 
96-5734, 1997 U.S.  Dist.  LEXIS 12321 (E.D.  Pa.  Aug.  8, 1997). 


   BACKGROUND OF THE SLAMMING
   PROBLEM
------------------------------------------------------------ Letter :2

In July 1997, the FCC estimated that U.S.  consumers could choose
from over 500 long-distance service providers.  Slamming subverts
that choice because it changes a consumer's long-distance provider
without the consumer's knowledge and consent.  It distorts
telecommunications markets by enabling companies engaged in
misleading practices to increase their customer bases, revenues, and
profitability through illegal means.  In addition, slammed consumers
are often overcharged, according to the FCC and the industry; are
unable to use their preferred long-distance service; cannot use
calling cards in emergencies or while traveling; and lose premiums
(e.g., frequent flyer miles or free minutes of long-distance calls)
provided by their properly authorized provider. 

Collectively, slamming increases the costs to long-distance providers
and other firms involved in this industry.  Their increased costs
occur when slamming victims refuse to pay the charges of unauthorized
service providers or when slammers themselves take the profits and
leave unpaid bills, sometimes amounting to millions of dollars. 

Determining the prevalence of slamming is extremely difficult. 
Although the FCC began receiving slamming complaints after the
divestiture of AT&T in 1985,\6

no central repository exists for slamming complaints; and no entity,
in our opinion, has made a significant effort to estimate the
prevalence of slamming.  Contributing to the uncertainty concerning
the prevalence of slamming, some consumers, who do not review their
monthly telephone bills closely, are unaware that they have been
slammed.  Others may be aware that they were slammed but take no
corrective action, such as filing a complaint. 

Customers can voluntarily change their long-distance company--or
Primary Interexchange Carrier (PIC)--by contacting, or submitting an
"order" to, the local exchange carrier.  Long-distance companies can
also legitimately process a PIC change to which the customer has
agreed through either a written or verbal authorization.\7


--------------------
\6 At that time, facility-based carriers began to compete for
presubscription agreements with potential customers as a result of
the equal access rules and the procedures imposed on the
long-distance telephone industry by the FCC and the courts. 

\7 Written authorization is obtained by using a letter of agency
(LOA), whose sole purpose is to authorize a local exchange carrier to
initiate a PIC change.  The LOA must be signed and dated by the
subscriber requesting the change.  (47 C.F.R.  section 64.1150(b))
Verbal authorizations are usually initiated by a telemarketer. 


   WHAT ENTITIES ENGAGE IN
   SLAMMING AND WHY DO THEY DO IT? 
------------------------------------------------------------ Letter :3

The three types of long-distance providers are facility-based
carriers such as AT&T, MCI, and Sprint; switching resellers; and
switchless resellers.  According to representatives of the FCC,
numerous state regulatory agencies, and the industry, those who most
frequently engage in intentional slamming are switchless resellers. 
They have the least to lose by using deceptive or fraudulent
practices because they have no substantive investment in the
industry.  Nevertheless, the economic incentives for slamming are
shared by all long-distance providers. 

Facility-based carriers have an economic incentive to slam because
they have high fixed costs for network equipment and low costs for
providing service to additional consumers.  Thus, providing service
to additional consumers, even without authorization, adds to a
carrier's cash flow with little additional cost.  Conversely, those
same high fixed costs represent a strong commitment to the
long-distance industry and a need to maintain the trust, and
business, of their existing customers. 

Resellers--switching and switchless--also provide long-distance
service to their customers.  Switching resellers maintain and operate
switching equipment to connect their customers to the networks of
facility-based carriers.  Switchless resellers, however, have no
equipment and generally rely on facility-based carriers and other
resellers to service their customers.  Resellers make a profit by
selling long-distance services to their customers at rates that are
higher than the fees the resellers pay to facility-based carriers for
handling their customers' calls.  Both switching and switchless
resellers have an economic incentive to slam because additional
customers increase their profits. 

Further, unscrupulous telemarketers, that contract with a
long-distance provider, may slam consumers to increase their
commissions (e.g., a flat fee for every customer switched). 

However, entrepreneurial criminals engaged in slamming operations
prefer acting as switchless resellers to generate fast profits and to
make criminal prosecution more difficult.  They have few, if any,
overhead costs and need little, if any, financial investment in their
businesses.  In addition, the cost of filing the required tariff--or
schedule of services, rates, and charges--with the FCC to initiate a
business is inexpensive; and an unscrupulous individual can avoid
that cost altogether.  The unscrupulous reseller can then slam
customers, collect payments from them, and run--leaving unpaid bills
to the facility-based carrier and other entities, such as billing
companies, that assisted the reseller.  If the reseller did not
submit correct information to the FCC or state regulatory agencies,
the likelihood of getting caught and prosecuted is negligible. 

The owner/operator of our case-study companies used such tactics. 
(See app.  I.) His eight known switchless reselling companies
operated at various times between 1993 and 1996, charged their
customers at least $20 million, and have been fined hundreds of
thousands of dollars by state regulatory agencies and the FCC. 
However, neither the FCC nor we were able to locate him in 1997 or to
date in 1998 because he has concealed his whereabouts. 


   HOW IS SLAMMING ACCOMPLISHED? 
------------------------------------------------------------ Letter :4

Both business and individual consumers must select a PIC to provide
their long-distance service through their local exchange carrier. 
Intentional slamming is thus possible because the legitimate ways a
consumer's PIC are changed (see following section) can be manipulated
easily and in a fraudulent manner. 

Slamming can occur through deceptive marketing practices--whether by
facility-based carriers, resellers, or telemarketers acting on their
behalf--by which consumers are misled into signing an authorization
to switch their PIC.  Unscrupulous telemarketers or long-distance
providers may also falsify records to make it appear that the
consumer agreed verbally or in writing to the switch.  It is also
possible to slam consumers without ever contacting them, such as by
obtaining their telephone numbers from a telephone book and
submitting them to the local exchange carrier for changing.  As an
FCC Commissioner stated before a U.S.  Senate subcommittee, "slamming
scenarios involve [, among other methods,] deceptive sweepstakes,
misleading forms, forged signatures and telemarketers who do not
understand the word no."\8


--------------------
\8 Statement by Susan Ness, Commissioner of the FCC, before the U.S. 
Senate, Subcommittee on Communications, Committee on Commerce,
Science, and Transportation (Aug.  12, 1997). 


   WHAT HAVE THE FCC, STATE
   REGULATORS, AND THE INDUSTRY
   DONE TO CURTAIL SLAMMING? 
------------------------------------------------------------ Letter :5

Although the FCC, most states, and the telecommunications industry
have some antislamming rules and practices in place, each relies on
the others to be the main forces in the antislamming battle.  Of the
antislamming efforts, those by some states are the most extensive. 
However, we found no effective antislamming effort to keep
unscrupulous individuals from becoming a long-distance provider.  For
example, the FCC does not review information submitted to it in
tariff filings that may alert it to unethical applicants.  In
addition, the FCC lags far behind some individual state regulatory
agencies in the amount of fines imposed on companies for slamming. 


      ANTISLAMMING MEASURES
---------------------------------------------------------- Letter :5.1


         THE FCC
-------------------------------------------------------- Letter :5.1.1

The FCC first adopted antislamming measures in 1985\9 and has
subsequently promulgated regulations to improve its antislamming
efforts.  For example, in 1992 as a result of an increase in
telemarketing, the FCC required long-distance providers to obtain one
of four forms of verification concerning change-orders generated by
telemarketing.\10 Verification would occur upon

  -- the customer's written authorization;

  -- the customer's electronic authorization placed from the
     telephone number for which the PIC was to be changed;

  -- receipt of the customer's oral authorization by an independent
     third party, operating in a location physically separate from
     the telemarketing representative; or

  -- the long-distance provider's mailing of an information package
     to the customer within 3 business days of the customer's request
     for a PIC change. 

In 1995, as a result of receiving thousands of slamming complaints,
the FCC again revised its regulations.  The revision,\11 in part,
prohibited the potentially deceptive or confusing practice of
combining a letter of agency (LOA)\12 with promotional materials sent
to consumers. 

However, we found nothing in FCC practices that would effectively
curtail unscrupulous individuals from entering the telecommunications
industry.  And no FCC regulation discusses what preventive measures
the FCC should take to ensure that long-distance-provider applicants
have a satisfactory record of integrity and business ethics. 
Further, according to FCC's Deputy Director for Enforcement, Common
Carrier Bureau, Enforcement Division, the FCC relies largely on state
regulatory agencies and the industry's self-regulating measures for
antislamming efforts. 

According to representatives from state regulatory agencies,
facility-based carriers, resellers of long-distance services, and
others in the industry, they view an entity's possession of an FCC
tariff as a key credential for a long-distance provider.  Each
long-distance service provider is now required\13 to file a tariff
with the FCC, including information that should allow the FCC to
contact the provider about, among other matters, an inordinate number
of slamming complaints against it. 

However, according to knowledgeable FCC officials, the FCC merely
accepts a tariff filing and does not review a filed tariff's
information, including that regarding the applicant.  Thus, the
filing procedure is no deterrent to a determined slammer.  Neither
does the procedure support the validity that states and the industry
place on an entity that has filed an FCC tariff. 

For example, we easily filed a tariff with the FCC through deceptive
means during our investigation when testing FCC's oversight of the
tariff-filing procedure.  In short, although we submitted fictitious
information for the tariff and did not pay FCC's required $600
application fee, we received FCC's stamp of approval.  Thus, with a
tariff on file, our fictitious company--PSI Communications--is able
to do business and slam consumers as a switchless reseller with
little chance of adverse consequences. 

Another antislamming measure--the FCC's Common Carrier
Scorecard--publicizes the more flagrant slammers, but it is
inaccurate.  The FCC prepares the scorecard, which lists the
long-distance providers about which the FCC has received numerous
slamming complaints, for the telecommunications industry and the
public.  The scorecard also compares those providers by citing the
ratio of the number of complaints per million dollars of company
revenue.  However, it presents an inaccurate picture because it
severely understates the number of complaints per million dollars of
revenue for resellers.  This occurs because resellers are not
required to, and generally do not, report their revenue to the FCC
unless that revenue exceeds $109 million.  Therefore, in the absence
of actual data and for the sake of comparison, the FCC assumes that
those resellers had $109 million in revenue.  This assumption results
in unrealistically low complaint-to-revenue ratios for a large number
of resellers. 


--------------------
\9 In a 1985 policy statement (50 Fed.  Reg.  25,982 (June 24,
1985)), the FCC decided that allowing customers to select
long-distance carriers via ballot rather than automatically assigning
consumers, through default, to only one competitor would benefit the
public interest.  Providers would then have incentive to provide
consumers with helpful information and competitive services, which
the consumers could use to make informed choices. 

\10 47 C.F.R.  section 64.1100 (1992). 

\11 47 C.F.R.  section 64.1150. 

\12 In 1997, the FCC amended the LOA form and content provision, in
part, to add the requirement that every LOA must be translated into
the same language as any promotional materials, oral descriptions, or
instructions provided with the LOA.  (47 C.F.R.  section 64.1150 (g)
(1997))

\13 Under section 203 of The Telecommunications Act of 1934, each
common carrier must file a tariff with the Commission.  However,
under section 203 (b), the Commission has discretion to modify this
requirement.  In 1996, the FCC promulgated a regulation (47 C.F.R. 
section 61.20), under which nondominant long-distance providers
(e.g., providers without the power to control prices) were exempted
from the requirement to file tariffs.  However, the regulation was
stayed in 1997 as a result of MCI Telecommunications Corp.  v.  FCC,
No.  96-1459.  Therefore, all common carriers must file tariffs at
the Commission. 


         STATES AND INDUSTRY
-------------------------------------------------------- Letter :5.1.2

According to representatives of some state regulatory agencies,
states rely largely on the FCC and the industry's self-regulating
measures for antislamming efforts.  While most state regulatory
agencies have some licensing procedures and requirements for an
entity to become a long-distance service provider, those
procedures/requirements vary from negligible to restrictive.  For
example, Utah does not regulate long-distance service providers.  In
contrast, in Georgia, switchless resellers must first file an
application with the state public utility commission and provide a
copy to the governor's Office of Consumer Affairs.  The commission
then reviews the submission, determines whether to issue an interim
certificate, and rereviews the interim certificate after 12 months to
determine whether to issue a permanent certificate.  In addition,
switchless resellers must adhere to Georgia commission rules. 

The telecommunications industry also attempts to weed out companies
involved in slamming.  For example, various facility-based carriers
have different antislamming measures based on the companies'
marketing philosophies.  Such measures include MCI's emphasis on the
use of third party verifications and AT&T's\14 emphasis on use of
written authorizations, or LOAs.  In addition, a facility-based
carrier may question a reseller's submission of a large number of
telephone numbers at one time.  However, we found few activities that
resellers were undertaking to curtail slamming.  In addition, we
found no industry practices that would effectively keep unscrupulous
individuals from entering the telecommunications industry.  Moreover,
according to officials of a reselling company and a billing company,
the industry largely relies on the FCC and state regulatory agencies
for antislamming measures. 

Indeed, the most effective antislamming measure appears to be one
that consumers themselves can effect against all but the most
resourceful of slammers--a "PIC freeze." The individual customer can
contact the local exchange carrier and request a PIC freeze, in
essence freezing the customer's choice of long-distance providers
from change.  The customer may lift the freeze by recontacting the
local exchange carrier and answering certain identifying questions
about the customer's account. 


--------------------
\14 In March 1998, AT&T publicly announced new steps that it would be
taking to curb slamming.  Those steps included cessation of the use
of outside sales agents to sell AT&T long-distance service at
community events, such as fairs, and institution of a toll-free
hotline to resolve consumer complaints about slamming. 


      PUNITIVE ACTIONS AGAINST
      SLAMMERS
---------------------------------------------------------- Letter :5.2

In comparison with some states' actions, the FCC has taken little
punitive action against slammers.  During 1997, the FCC obtained
consent decrees from nine companies nationwide that paid $1,245,000
in fines because of slamming.  However, in May 1997, the California
Public Utilities Commission suspended one firm for 3 years because of
slamming, fined it $2 million, and ordered it to refund another $2
million to its customers.  Further, within the same general time
period, other state regulatory commissions took more extensive
actions than did the FCC against the same companies.  For example,

  -- In December 1996, the California Public Utilities Commission
     reached a settlement with another company and its affiliate that
     were involved in slamming.  The settlement suspended the firms
     from offering long-distance service in California for 40 months
     and required the firms to offer $600,000 in refunds to 32,000
     customers that had complained about slamming.  In comparison,
     during 1997, the FCC issued a Notice of Apparent Liability to
     this company for $200,000 for apparent slamming violations. 

  -- In February 1998, the Florida Public Service Commission voted to
     require a third firm to show cause, in writing, why it should
     not be fined $500,000 for slamming violations.  (This firm is
     also the subject of numerous slamming complaints in New Jersey
     and Tennessee.) In comparison, during 1997 the FCC issued a
     Notice of Apparent Liability to this firm amounting to only
     $80,000 for apparent slamming violations. 

Further, the FCC takes an inordinate amount of time, as acknowledged
by FCC officials, to identify companies that slam consumers and to
issue orders for corrective actions (i.e., fines, suspensions) or to
bar them from doing business altogether.  For example, Mr.  Fletcher,
the owner/operator of the case-study companies, began his large-scale
slamming activities in 1995.  But it was not until June 1997 that the
FCC initiated enforcement action\15 against the eight known
Fletcher-controlled companies\16 with an Order to Show Cause and
Notice of Opportunity for Hearing.  In the order, the FCC indicated
that it had substantial evidence that the companies had ignored FCC's
PIC-change verification procedures and routinely submitted PIC-change
requests that were based on forged or falsified LOAs.  The FCC thus
directed Mr.  Fletcher and his companies to show cause in an
evidentiary hearing why the FCC should not require them to cease
providing long-distance services without prior FCC consent and why
the companies' operating authority should not be revoked.  Because
Mr.  Fletcher waived his right to a hearing when he did not file a
"written appearance," stating that he would appear for such a
hearing, the FCC could have entered an order detailing its final
enforcement action against the Fletcher companies and Mr.  Fletcher. 
However, as of March 1998, the FCC had taken no such action. 


--------------------
\15 In December 1996, the FCC initiated a Notice of Apparent
Liability for Forfeiture against one of Mr.  Fletcher's companies,
Long Distance Services, Inc.  An Order of Forfeiture was entered
against the company in May 1997. 

\16 The eight switchless resellers were CCN, Inc.; Church Discount
Group, Inc.; Discount Calling Card, Inc.; Donation Long Distance,
Inc.; Long Distance Services, Inc.; Monthly Discounts, Inc.; Monthly
Phone Services, Inc.; and Phone Calls, Inc.  (PCI).  Only two of
these, Discount Calling Card and PCI, had filed tariffs with the FCC,
according to FCC's June 1997 order. 


   CONCLUSIONS
------------------------------------------------------------ Letter :6

Neither the FCC, the states, nor the telecommunications industry have
been effective in protecting the consumer from telephone slamming. 
Because of the lack of FCC diligence, companies can become
long-distance service providers without providing accurate background
information.  Some states have taken significant action to protect
consumers from slamming, but others have taken little action or have
no antislamming regulations.  Further, the industry approach to
slamming appears to be largely market-driven rather than
consumer-oriented.  Given this environment, unscrupulous
long-distance providers slam consumers, often with virtual impunity. 
As a consequence, consumers and the industry itself are becoming
increasingly vulnerable as targets for large scale fraud.  The most
effective action that consumers can take to eliminate the chance of
intentional slamming is to have their local exchange carrier freeze
their choice of long-distance providers. 


   SCOPE AND METHODOLOGY
------------------------------------------------------------ Letter :7

Our investigation took place between January and March 1998.  We
interviewed representatives of the FCC and long-distance providers,
including facility-based carriers and resellers.  In addition, we
interviewed representatives of billing and data-processing firms
servicing long-distance providers.  We reviewed available public
records on slamming including prior congressional hearings and
documents belonging to long-distance providers.  These included AT&T
documents provided to us pursuant to a subpoena issued by the
Permanent Subcommittee on Investigations, Senate Committee on
Governmental Affairs.  Further, through the National Association of
State Regulatory Agencies, we obtained and reviewed information from
state entities that regulate long-distance service providers.  To
determine the extent of FCC's oversight of tariff filings, we filed
fictitious documentation with the FCC and did not pay the required
filing fee. 


---------------------------------------------------------- Letter :7.1

As arranged with your office, unless you announce its contents
earlier, we plan no further distribution of this report until 30 days
from the date of this letter.  At that time, we will send copies to
interested congressional committees and the Chairman of the Federal
Communications Commission.  Copies of this report will also be made
available to others upon request.  If you have any questions about
our investigation, please call me at (202) 512-7455 or Assistant
Director Ronald Malfi of my staff at (202) 512-7420. 

Sincerely yours,

Eljay B.  Bowron
Assistant Comptroller General
  for Special Investigations


CASE STUDY OF DANIEL H. 
FLETCHER'S BUSINESS VENTURES AS A
LONG-DISTANCE PROVIDER
=========================================================== Appendix I

This case study is based on our limited investigation of four of
Daniel H.  Fletcher's eight known business ventures\17 operating as
long-distance providers between 1993 and 1996.  Through each
business, it appears that Mr.  Fletcher slammed or attempted to slam
many thousands of consumers.  As a further indication of the extent
of his dealings, industry records, although incomplete, indicate that
between 1993 and 1996 two of Mr.  Fletcher's companies billed their
customers more than $20 million in long-distance charges. 

Mr.  Fletcher apparently began reselling long-distance services in
1993.  By mid-1996, the industry firms dealing with Mr.  Fletcher's
companies began to end those dealings because of his customers'
slamming complaints and/or his nonpayment for long-distance network
usage by his customers.  Collectively, these firms claim that Mr. 
Fletcher's companies owe them $3.8 million.  Another firm has
obtained a $10-million judgment against one Fletcher company.\18

Mr.  Fletcher's companies have also come under regulatory scrutiny by
several states and the FCC.  For example, in 1997 the Florida Public
Service Commission cancelled the right of one Fletcher-controlled
company--Phone Calls, Inc.  (PCI)--to do business in the state and
fined it $860,000 for slamming.  New York also took action against
PCI in 1997.  In May 1997, the FCC ordered another Fletcher
company--Long Distance Services, Inc.--to forfeit $80,000 to the
United States "for violating the Commission's rules and orders" when
it changed (or caused the change of) the long-distance providers of
two customers without authorization and through the use of apparently
forged LOAs.  The FCC did not refer the $80,000 forfeiture to the U. 
S.  Department of Justice for collection, according to an FCC
official, because the Justice Department had previously failed to
take action with similar cases.  In addition, in June 1997, the FCC,
citing numerous complaints and evidence of forged or falsified LOAs,
issued an Order to Show Cause and Notice of Opportunity for Hearing
regarding Mr.  Fletcher and his eight companies.  In that order, the
FCC, in effect, directed Mr.  Fletcher and his companies to show
cause why the FCC should not require them to stop providing
long-distance services without prior FCC consent and why the
companies' operating authority should not be revoked.  However, since
Mr.  Fletcher did not provide the FCC a written appearance, or
explanation, the FCC could have entered the order, citing FCC's final
enforcement action.  However, as of March 1998, the FCC had not done
so. 

It appears that all eight known Fletcher-controlled companies were
out of business by the end of 1996.  However, our investigation
identified several instances of Mr.  Fletcher's continued involvement
since then in the telecommunications industry.  We have been unable
to locate Mr.  Fletcher for his response to the allegations because
he knowingly used false information to conceal his identity and the
location of his companies and residence(s). 


--------------------
\17 The eight switchless resellers were CCN, Inc.; Christian Church
Network, Inc., doing business as Church Discount Group, Inc.;
Discount Calling Card, Inc.; Donation Long Distance, Inc.; Long
Distance Services, Inc.; Monthly Discounts, Inc.; Monthly Phone
Services, Inc.; and Phone Calls, Inc. 

\18 Phone Calls, Inc.  v.  Atlas Communications, Ltd., No.  CIV.  A. 
96-5734, 1997 U.S.  Dist.  LEXIS 12321 (E.D.  Pa.  Aug.  8, 1997). 


   FLETCHER'S CHRISTIAN CHURCH
   NETWORK, INC.  AND LONG
   DISTANCE SERVICES, INC. 
   RELATIONSHIPS WITH BILLING
   CONCEPTS AND SPRINT (1993-1996)
--------------------------------------------------------- Appendix I:1


      BUSINESS RELATIONSHIPS
------------------------------------------------------- Appendix I:1.1

Based on an introduction by a Sprint representative, Mr.  Fletcher's
long-distance reselling business Christian Church Network, Inc. 
(doing business as Church Discount Group, Inc.) entered into a
contract on August 18, 1993, with Billing Concepts\19 and Sprint.\20

Under the terms of the contract, Christian Church Network submitted
electronic records to Billing Concepts, representing its customers'
long-distance calls made over Sprint's network.  Billing Concepts (1)
advanced 70 percent of the calls' cost (as charged by the Fletcher
company) to Sprint\21 and (2) retained 30 percent in reserve for its
administrative costs and potential nonpayment by the Fletcher
company's customers.  Sprint deducted its network charges and sent
the remainder to Christian Church Network. 

Under this arrangement, Billing Concepts sent the electronic records
of the customers' long-distance calls to the appropriate local
exchange carriers for billing (at Christian Church Network's charged
rate) and collection.  Within 60 days, the local exchange carriers
sent approximately 95 percent of the billings' value to Billing
Concepts for the Fletcher company.  The local exchange carriers
withheld 5 percent for possible nonpayment by the Fletcher company's
customers. 

On July 22, 1994, Sprint, Billing Concepts, and Mr.  Fletcher's
Christian Church Network modified their agreement whereby Billing
Concepts would advance 70 percent\22 of the billings directly to the
Fletcher company rather than to Sprint.  The Fletcher company was to
pay Sprint for its network charges from the advances.  Then from
November 1994 to July 1995, the company did not receive advances\23
from Billing Concepts and instead paid Sprint from payments received
from the local exchange carriers.  However, starting in July 1995,
the Fletcher company requested and again received 70-percent advances
from Billing Concepts. 


--------------------
\19 Billing Concepts was doing business as USBI. 

\20 Sprint--then known as US Sprint--had a business arrangement with
Billing Concepts under which Sprint would introduce resellers to
Billing Concepts. 

\21 Billing Concepts charged the Fletcher company interest for the
money advanced to Sprint. 

\22 The Fletcher company still paid interest to Billing Concepts on
the advances. 

\23 The company did this apparently to avoid the interest charges. 


      SHARP INCREASE IN CUSTOMER
      BASE AND SUBSEQUENT PROBLEMS
------------------------------------------------------- Appendix I:1.2

From November 1995 through April 1996, Christian Church Network
produced a tenfold increase in the billable customer base.  Between
January and April 1996, the company also apparently stopped paying
Sprint for its customers' network usage, keeping the full 70-percent
advance from Billing Concepts as its profit.  Further, in July 1996,
Mr.  Fletcher--representing another of his eight companies, Long
Distance Services, Inc.--signed a second contract with Billing
Concepts. 

Billing Concepts continued advances to Christian Church Network until
September 1996.  Then, after receiving a large number of slamming
complaints from Christian Church Network's customers following the
increase in the company's customer base, Billing Concepts terminated
all business with both Fletcher companies. 

From December 1993 through December 1996,\24 the two Fletcher
companies submitted over $12,432,000 in bills for long-distance usage
to be forwarded to their customers.  When Billing Concepts terminated
business with the two Fletcher companies in September 1996 because of
the alleged slamming, it had already advanced the companies more than
it would receive from the local exchange carriers.  (Those carriers
returned less than had been billed because some customers did not pay
after learning they had been slammed.) Billing Concepts claims that
the two Fletcher companies owe it approximately $586,000 that it was
unable to collect from the local exchange carriers. 

In addition, Sprint terminated its business relationship with
Christian Church Network and Long Distance Services in September 1996
for nonpayment of outstanding network charges.  Sprint claims that
the two companies still owe it about $547,000 for that nonpayment. 
(Sprint attempted to renegotiate its contract with Mr.  Fletcher's
Christian Church Network before the termination.  Our investigation
indicates that Mr.  Fletcher instead took his increased customer base
to Atlas Communications via another of his eight companies, Phone
Calls, Inc.  [PCI], and did not pay Sprint.  See later discussion
regarding PCI and Atlas.)


--------------------
\24 Under the contracts, Billing Concepts continued the billings for
the Fletcher companies' customers for 90 days beyond termination of
the contract. 


   FLETCHER'S LONG DISTANCE
   SERVICES, INC.  RELATIONSHIP
   WITH AT&T (1994-1997)
--------------------------------------------------------- Appendix I:2

On October 19, 1994, Mr.  Fletcher, doing business as Long Distance
Services, Inc., signed a contract with AT&T to place his customers on
its network.  The agreement called for Long Distance Services to
purchase a minimum of $300,000 of long-distance service annually. 

AT&T's incomplete records\25 indicated that starting in March 1996,
the Fletcher company began to dramatically increase the number of new
customers to be placed on AT&T's network.  During an April 8, 1996,
telephone call to AT&T and in an April 9, 1996, letter sent via
facsimile, Mr.  Fletcher requested that AT&T confirm that (1) AT&T
had accepted the new customers that his company had transmitted to
AT&T since March 1, 1996, and (2) AT&T had put them on line. 
According to Mr.  Fletcher's letter, his Long Distance Services had
requested that more than 540,000 new customers be switched to AT&T. 
The letter also noted that the company was sending an additional
95,000 customer telephone numbers that day. 

In an April 9, 1996, return letter\26 to Mr.  Fletcher, AT&T
questioned his customer base and his customers' letters of agency
(LOA) authorizing the change of long-distance companies.  AT&T
requested that Mr.  Fletcher forward a sampling of the LOAs, and Mr. 
Fletcher provided approximately 1,000. 

In another letter to Mr.  Fletcher, dated April 16, 1996, AT&T
provided reasons why it believed the LOAs were in violation of FCC
regulations (47 C.F.R.  section 64.1150):  (1) the LOAs had been
combined with a commercial inducement, (2) Mr.  Fletcher's LOA form
did not clearly indicate that the form was authorizing a change to
the customer's Primary Interexchange Carrier (PIC), and (3) it did
not identify the carrier to which the subscriber would be switched. 
On April 25, 1996, AT&T wrote Mr.  Fletcher informing him that it had
rejected all "orders" (new customers) sent by Long Distance Services,
Inc., presumably since March 1, 1996. 

Although AT&T recognized a problem with Mr.  Fletcher and his
business practices during April 1996, it continued service to Long
Distance Services, Inc.  until November 1, 1997, when it discontinued
service for nonpayment for network usage.  According to an AT&T
representative, Long Distance Services, Inc.  still owes AT&T over
$1,652,000. 


--------------------
\25 Although AT&T was subpoenaed to provide us all documentation
involving its business dealings with Long Distance Services, it
produced limited documentation that provided only sketchy information
concerning its approximately 3-year contractual agreement with the
Fletcher company.  AT&T officials told us that because of poor
recordkeeping, they were unable to produce the proper records. 

\26 In the letter, AT&T stated that Mr.  Fletcher had submitted about
35,000 new customers in March 1996, a significant contrast with the
over 540,000 claimed by Mr.  Fletcher in his April 9, 1996, letter. 


   FLETCHER'S DISCOUNT CALLING
   CARD, INC.  RELATIONSHIP WITH
   INTEGRETAL (1995-1996)
--------------------------------------------------------- Appendix I:3

On January 5, 1995, Mr.  Fletcher, doing business as Discount Calling
Card, Inc., signed a contract with Integretal, a billing company. 
Although Integretal officials provided us little information, stating
that the information was missing, we did determine the following. 

From May 5, 1995, through February 26, 1996, Integretal processed
approximately $8,220,000 in long-distance call billings for Discount
Calling Card customers.  Under the terms of its agreement, Integretal
advanced the Fletcher company 70 percent\27 of the billing value of
the electronic records of calls submitted by the company.  Integretal
was contractually entitled to retain 30 percent of the calls' value
for processing and potential nonpayment by Discount Calling Card's
customers. 

Because of billing complaints made by Discount Calling Card's
customers,\28 Integretal claims that it lost about $1,144,000 that it
was unable to recover from the company.  Integretal stopped doing
business with Discount Calling Card in November 1996 because of
numerous customer complaints. 


--------------------
\27 Integretal charged the Fletcher company interest on the advances. 

\28 Because of incomplete Integretal records, company officials were
unable to determine if these were slamming complaints. 


   FLETCHER'S PHONE CALLS, INC. 
   RELATIONSHIPS WITH ATLAS
   COMMUNICATIONS, INC.  AND
   SPRINT (1996)
--------------------------------------------------------- Appendix I:4


      BUSINESS RELATIONSHIPS
------------------------------------------------------- Appendix I:4.1

On June 18, 1996, the Fletcher-controlled Phone Calls, Inc.  (PCI)
and Atlas Communications, Inc.  signed a business contract for PCI's
customers to be placed on Atlas' network (Sprint).  In early July
1996, PCI provided its customer base of 544,000 telephone numbers to
Atlas.  (Information developed by our investigation suggests that
Fletcher companies slammed these customers largely from the customer
base they had given to Billing Concepts.) Subsequently, Atlas
provided the PCI customer telephone numbers to Sprint for placement
on Sprint's network. 

However, within the next several weeks, Atlas was able to place only
about 200,000 telephone numbers from PCI's customer base on Sprint's
network.  This occurred, according to Atlas representatives, because
(1) the individual consumers had placed a PIC freeze with their local
exchange carriers, preventing the change or (2) the telephone numbers
were inoperative.  Because of this low placement rate, Atlas became
concerned that PCI was slamming customers and elected not to honor
its contract.  Subsequently, on August 19, 1996, PCI filed a lawsuit
against Atlas in Pennsylvania,\29 attempting to obtain (as per the
original contract) the raw record material representing the details
of its customers' telephone usage, which would allow PCI to bill its
customers.  Sprint had supplied this raw record material to Atlas. 


--------------------
\29 Phone Calls, Inc.  v.  Atlas Communications, Ltd., No.  CIV.  A. 
96-5734, 1997 U.S.  Dist.  LEXIS 12321 (E.D.  Pa.  Aug.  8, 1997). 


      LEGAL SCRUTINY
------------------------------------------------------- Appendix I:4.2

In August 1996, Atlas submitted evidence, in the breach-of-contract
suit brought by PCI, indicating that many slamming complaints had
been made against PCI.  For example, after the first bills,
representing PCI customers' calls for July and August 1996, had been
sent out, an unusually high percentage (approximately 30 percent) of
PCI customers lodged complaints with regulators and government law
enforcement agencies--including the FCC, various public utility
commissions, and various state attorneys general; Sprint; and
numerous local exchange carriers.  According to an Atlas
representative, Atlas attempted to answer these complaints and
reviewed the customers' LOAs authorizing the change of long-distance
companies.  After the review, Atlas believed that a number of the
LOAs were forgeries. 

According to the vice president of Atlas Communications, the judge
issued a temporary restraining order, preventing PCI from obtaining
the raw record material.  The judge also agreed to allow Atlas to
charge PCI's customers at the existing standard AT&T long-distance
rates (as the most prevalent U.S.  service) rather than PCI's
excessively high rates.  Subsequently, Atlas entered into a contract
with US Billing to perform billing-clearinghouse services for Atlas
regarding PCI's customers.  In this instance, Atlas' prompt action
prevented PCI from receiving any payments for its customers'
long-distance calls. 

By February 1998, Atlas was serving less than 20 percent of the
original 200,000 PCI customers that had been successfully placed on
Sprint's network.  This sharp drop in the customer base occurred,
according to an Atlas representative, largely because PCI had
initially slammed the customers.  On the basis of the 1996 suit in
Pennsylvania, Atlas obtained a $10-million judgment against the
Fletcher-controlled PCI because, according to the court, PCI

  -- fraudulently obtained customers to switch their long-distance
     telephone service to Atlas' network;

  -- identified customers to Atlas, for Atlas' placement on its
     network, in states within which PCI was not certificated as a
     long-distance service provider;

  -- failed to supply customer service to those customers it had
     caused Atlas to place on its network; and

  -- failed to supply customers, Atlas, or regulatory agencies with
     those customers' LOAs upon request. 

Further, in August 1997, the Florida Public Service Commission fined
the Fletcher-controlled PCI $860,000 for slamming, failing to respond
to commission inquiries, and misusing its certificate to provide
telecommunications service in Florida.  This fine was in addition to
the commission's March 1997 cancellation of PCI's certificate. 
According to a statement by the chairman of the commission, PCI
accounted for over 400 of the nearly 2,400 slamming complaints
received by the commission in 1996.  This was the largest number of
complaints logged by the commission against any company in a similar
period.  New York regulators also revoked PCI's license in mid-1997. 


MAJOR CONTRIBUTORS TO THE REPORT
========================================================== Appendix II


   OFFICE OF SPECIAL
   INVESTIGATIONS, WASHINGTON,
   D.C. 
-------------------------------------------------------- Appendix II:1

Ronald Malfi, Assistant Director
John Ryan, Senior Special Agent in Charge
Fred Chasnov, Senior Evaluator
M.  Jane Hunt, Senior Communications Analyst


   OFFICE OF THE GENERAL COUNSEL,
   WASHINGTON, D.C. 
-------------------------------------------------------- Appendix II:2

Barbara Coles, Senior Attorney


*** End of document. ***