Gov't Halts Contracts With MCI

The General Services Administration (search) suspended federal business with MCI on Thursday after an investigation concluded the bankrupt telecommunications giant lacks necessary internal controls and ethics.

MCI's government contracts are valued at more than $1 billion each year. The company said it would not challenge the GSA decision, which does not affect existing government contracts.

"We are in the process of rebuilding our ethics program and understand that there is still more work to do," MCI (search) Chairman Michael Capellas said. He said the company will work to regain approval for new government business by addressing the GSA's concerns.

The GSA's decision is the latest blow to the company formerly known as WorldCom. It was among the fastest-growing and most aggressive players in the telecom and Internet boom.

After WorldCom (search) was driven into bankruptcy by an $11 billion accounting scandal, it proposed adopting the name of its MCI long-distance division in a bid to clean up its image. A bankruptcy court is considering efforts by the company to emerge from Chapter 11 bankruptcy protection.

MCI is accused of falsifying balance sheets to hide expenses and inflate earnings. Its collapse and bankruptcy wiped out up to $200 billion in shareholder wealth.

The Justice Department also is investigating accusations by rival carriers and former MCI executives that the company defrauded other telephone companies of hundreds of millions of dollars.

The investigation centers on whether MCI masked long-distance calls as local calls and diverted others to Canada to avoid paying special-access fees to local carriers across the country.

MCI has said its competitors are trying to throw up roadblocks to its emergence from bankruptcy.

Critics and competitors have said the government has been too lenient with the company by continuing to award it work, including hiring MCI to build a wireless phone network in Iraq.

"It is important that all companies and individuals doing business with the federal government be ethical and responsible," GSA Administrator Stephen Perry said. He said the agency acted to "protect the interests of the government and taxpayers."

A GSA official began considering last month whether the company met the standards required of all government contractors.

"This official determined that MCI WorldCom lacks the necessary internal controls and business ethics," the GSA said.

A GSA suspension preventing new contracts usually lasts less than a year. During the suspension, the GSA will decide whether to impose a more serious penalty called debarment, which could exclude the company from government business for a period typically not longer than three years.

Capellas said government contracts account for a small percentage of the company's business and the suspension would not affect plans to emerge from bankruptcy.

Later Thursday, a court delayed by two weeks, until Sept. 8, the start of hearings to confirm the company's emergence from bankruptcy to ensure MCI creditors have enough information on the case.

Meantime, MCI is facing mounting pressure in Congress. On Wednesday, Rep. Billy Tauzin, R-La., chairman of the House Energy and Commerce Committee, asked the Federal Communications Commission to explain how it is investigating MCI competitors' allegations. He wants the agency to turn over documents related to that probe within two weeks.

"A gross violation of regulations governing the origination and termination of long-distance calls undermines the basic telecommunications system of the United States," Tauzin wrote in a letter to FCC Chairman Michael Powell. "If true, these allegations represent an unprecedented violation of FCC rules."

Tauzin said he was particularly troubled by allegations that through a line-item fee MCI "may have been charging consumers fees for intrastate access charges that MCI was, in fact, circumventing."

FCC spokesman Richard Diamond said the agency will "cooperate fully with the committee and share the results of our own investigation."