Connect?s Minutes Billed Raised Suspicions

Prior to June 2000, Connect Communications Corp. never billed Southwestern Bell Telephone Co. for more than 3.5 million minutes a month, Stephen G. Collins, executive director of financial operation in Industry Markets (a business unit of SBC Communications Inc.) said in his testimony filed with the Arkansas Public Service Commission on May 28.

But in June 2000, the bill was for 8 million minutes, Collins said. By August 2000, it was 32 million, and by January 2001, it was 103 million.

Between July 2000 and January 2001, Southwestern Bell paid Connect $5.6 million for more than 470 million minutes of interconnection use, Collins said.

In Connect’s annual report to the PSC, Connect said its revenue for 2001 was $8.65 million, enough to be ranked sixth among local exchange carriers in Arkansas. According to Connect owner Ted “Dub” Snider Jr., the company was relying on Southwestern Bell for more than 90 percent of its revenue.

SBC employees were suspicious of Connect’s business plan, and so were some Connect employees.

On June 30, 2000, John Salsbury of Little Rock called SBC. He identified himself as a former Connect employee and said Connect was fraudulently billing SBC thousands of dollars in reciprocal compensation, according to the FBI’s affidavit.

In an interview with the FBI almost a year later, Salsbury, who had worked for Connect as manager of information technologies between August 1999 and June 2000, said he believed Connect was “ripping off” SBC in several ways.

The main one was the Megaport business plan, Salsbury told the FBI.

“I think it’s an outrageous characterization,” Snider said of Salsbury’s comments.

But Salsbury wasn’t the only Connect employee who was uncomfortable with the business plan.

According to the FBI’s affidavit, Cynthia Lee, who was the manager of regulatory affairs, said she told Snider about her concerns about the Megaport service. Snider told Lee the Megaport service was legal, she said.

Still, Lee contacted Connect’s law firm, Swindler Berline Sheriff & Friedman in Washington, D.C., and asked about the legality of the service.

“The Swindler law firm told Lee that it was their opinion that the Megaport service was not legal and that Connect should back away from it,” the affidavit said.

“I can’t imagine why she would say that,” Snider said. Snider wouldn’t comment on any advice that attorneys have given him, but he said Lee might have made her statements because she was laid off along with other employees after Southwestern Bell stopped paying.

Lee relayed the attorney’s information to a Connect executive, but he told her not to seek any legal opinion about the Megaport service, the affidavit said.

At Southwestern Bell, Karen Carter, a regional sales manager, was the marketing contact for Connect and saw its orders for T-1 super trunk lines explode in the spring of 2000.

Initially, Southwestern Bell could handle Connect’s orders for the T-1s, Carter said in direct testimony filed May 28 with the PSC. But Southwestern Bell was concerned about being able to meet Connect’s forecasted need for an additional 100 T-1 super trunks per month for the next several months in 2000.

“This forecast was abnormal, re-questing many times over the number of T-1 super trunks Southwestern Bell usually sells in a one-year period,” Carter said.

Up until that point, Carter said, the typical customer ordering a super trunk was a large business, but Connect was ordering super trunks for residential or light business areas, including house trailers and nonprofit organizations that had few computers.

“Even assuming that some of these customers were using Megaport service to transport data, it is highly unlikely that they generated traffic volumes that required two T-1 super trunks,” she said.

And in none of the cases she reviewed did the customers need data transmission 24 hours a day, seven days a week.

In August 2000, Carter sent an e-mail to a Southwestern Bell executive that said she discovered what Connect was doing. She also said Southwestern Bell was going to gather information on Connect to file a complaint with the PSC.

“Shutting this company down means lost revenue for [Southwestern Bell’s] marketing [department],” she said in the message, apparently referring to the revenue that would be lost from T-1 fees. “Obviously, we will not make our [Internet service] objective with competitors giving it away. However, as a shareholder I was appalled.”

Snider said Carter’s e-mail is evidence that Southwestern Bell wanted to shut down his company.

Between October and December 2000, Southwestern Bell was paying Connect about $1 million a month, but it wasn’t enough. Connect said it was owed about $1.3 million a month. As a result, the company started laying off workers.

By the winter of 2000, orders for T-1 super trunks in Arkansas had slowed down, but Connect actively was marketing the service in Missouri and Oklahoma.

One of the final blows came on April 23, 2001, when Southwestern Bell informed Connect by letter that it would pay only $275,000 of Connect’s $1.87 million bill for February 2001. Southwestern Bell said most of the minutes “do not appear to be compensable voice or data communications” or “are not based upon the originated switch recordings required” under the agreement.

Snider said the calls for which Connect billed were legitimate.

Southwestern Bell has put just over $1 million in an interest-bearing account until the PSC rules on whether the calls generated under Connect’s plan are subject to payment.

But that offers little relief to Snider.

“We were really growing fast,” Snider said.

Eventually he was hoping to sever the Southwestern Bell lifeline and rely on Connect’s data services and long-distance programs for revenue.

“But we weren’t allowed to get to that point,” Snider said.