The Scum at the Top

Commentary on the Rats in Washington

Politicians' Telecoms Wronged Consumers

By Tim Huber, Rick Linsk and Hank Shaw
St. Paul Pioneer Press
page 1
© Sunday, July 13, 2003

Some of Minnesota's top Republicans, including Gov. Tim Pawlenty and Auditor Patricia Awada, have had business ties to a Minneapolis-based telephone company accused of cheating consumers in seven states, a Pioneer Press investigation has found.

Last year, New Access Communications paid $222,000 to settle charges it violated consumer protection laws in three of those states - Washington, Oregon and Indiana - by overcharging some customers and tricking others into changing their telephone services.

Each case involved complaints filed while Pawlenty was one of three directors and an investor in New Access' parent company, NewTel Holdings. Directors are legally responsible for overseeing the management of a company and its subsidiaries, experts say.

Awada owned Capitol Verification, a company that checked New Access orders to make sure consumers truly wanted to change their telephone service. But regulators found her firm sometimes failed in that role. Awada in January sold the company to one of the founders of New Access and was paid, in part, with stock in the parent company.

New Access is also the subject of an ongoing investigation by the Minnesota attorney general's office, according to company officials, who said it agreed last year to stop telemarketing here until the case is resolved. A spokeswoman for the agency said she could not discuss any investigations that may be under way.

Pawlenty said he had no responsibility for overseeing New Access while he was on the NewTel board and "to the best of my memory, we never discussed it." Awada said her company's lapses were not significant. "My job was to catch everything humanly possible, and it's a very hard job," she said.

Other prominent political figures with connections to New Access are:

Elam Baer, a Minneapolis attorney, chairman of the New Access board and chief executive of NewTel Holdings. A GOP strategist, Baer also was an unofficial adviser to Pawlenty's transition team. Earlier this year, he recommended the person Pawlenty chose to run the state Commerce Department, which regulates telecommunications, among other things.
Victoria Grunseth, veteran political fund-raiser, former wife of 1990 Republican gubernatorial nominee Jon Grunseth and New Access' chief information officer, a job she said had nothing to do with the company's sales practices. Pawlenty appointed her to head the Metropolitan Airports Commission.
Timothy Commers, who started a phone company with Baer that New Access acquired a year ago and was a NewTel investor until recently. Commers, who also worked at one of Baer's earlier phone companies, was Pawlenty's campaign manager last year. He is now a top-ranking official at the Commerce Department.
Former political fund-raiser Jim Holmquist, former state GOP chairman Leon Oistad and former state Commerce Commissioner Bert McKasy, all NewTel investors. Holmquist also sits on NewTel's board.

The Washington, Oregon and Indiana investigations concluded that New Access wronged more than 5,600 people in 2001, either through overcharges or "slamming" - a term for improperly switching customers from one telephone company to another.

Regulators in Iowa and Wisconsin also substantiated slamming-related complaints about the company. North Dakota received eight complaints and referred them to the Federal Communications Commission. Montana received complaints as well.

New Access officials say none of the cases is significant, given the nature of the telemarketing industry. They said most of the complaints came from consumers who misunderstood the terms of the agreements or later changed their minds. Competitors or overzealous regulatory agencies instigated other complaints, they said.

"There will always be complaints in the long-distance business," Baer said in an interview. "We do not think that they are in any way outside the norm of the industry."

He said the settlement amounts pale in comparison to other notable enforcement cases around the United States.

But regulators in Indiana and Washington told the Pioneer Press slamming-related fines paid by New Access were the largest ever ordered in those states.

Slamming has been a persistent problem since the deregulation of the telecommunications industry. The mid-1980s breakup of AT&T was intended to foster competition and bring lower costs to consumers, and it did. But phone companies, from giants like Qwest and MCI to small resellers like New Access, have been accused of bending the rules in their efforts to sign up new customers. Federal regulators said that last year alone they handled more than 118,000 slamming-related inquiries from across the country.

In Washington, Oregon and Indiana, investigators found that New Access telemarketers duped people into switching services by posing as their local phone company and promising rates that later turned out to be sharply higher; that verifiers sidestepped questions from skeptical consumers and gave out a customer-service number that was almost always busy; and that some consumers were billed for months even after complaining and trying to cancel their service.

Among those affected were elderly people, the mentally retarded and people with Alzheimer's disease, according to the government files. Some consumers said they had plainly stated they were not interested in changing phone services, yet were still slammed.

Being slammed was no mere inconvenience, angry consumers said. Dorothy Ennen, 86, of Bellingham, Wash., said she wrestled with New Access for four months to undo the slam. New Access even cut off her phone for a day, which is illegal in that state.

"It was just such a big mess. I was going back and forth just to get my phone back. It took forever," Ennen told the Pioneer Press. "You wonder how they can get away with this."

Ronald Keen, telecommunications director for Indiana's consumer affairs office, told his state's regulators in April 2002 there was "no evidence that New Access has taken any serious steps to remedy these problems."

"New Access seems to be good at slamming and seems to be good at doing it for a long time - and then moving on when the states catch up with them," said Carlene Hughes, investigator for the Washington Utilities and Transportation Commission, in an interview.

Industry experts agree that New Access is but one of many phone companies - large and small - that have been hit by slamming complaints. They also say it's entirely possible to avoid trouble.

Anthony S. Mendoza, who was deputy commissioner for telecommunications at the Minnesota Department of Commerce in the Ventura administration, said companies "have to be upfront with people" and make it clear they are switching phone providers.

"There are a lot of cases of slamming out there," Mendoza said. "But there are quite a few companies who have never had problems with regulators."

THE CALLS

The confluence of Republicans entering the telecommunications business did not happen by chance, but rather through the efforts of Baer. He had worked with them in 1990 on the ill-fated gubernatorial campaign of Jon Grunseth, who quit the race amid a sex scandal. Baer and Victoria Grunseth later entered the newly deregulated telephone industry, and as those ventures grew, some of their old friends joined them in the business.

Their current venture is NewTel Holdings and its U.S. subsidiary, New Access Communications, which are based in downtown Minneapolis.

With more than 200 employees - 60 at New Access and more than 140 in NewTel's operations worldwide - the enterprise has few of the trappings often associated with phone companies. It owns no skyscraper, no telephone poles, no repair trucks or switchboards.

New Access' business is leasing time, essentially line capacity, from the larger, more established firms such as Qwest or SBC Communications and selling it to consumers - in theory, more cheaply than the big outfits can.

Gregory Wilmes, Steven Clay and David Buss co-founded New Access, which was incorporated in May 2000. All had experience in the phone business. Wilmes and Clay were associates of Baer, who helped finance the venture through another of his companies.

The first slamming-related investigation against New Access began in Washington in January 2001.

That is the same month New Access was purchased by NewTel, making it one of NewTel's five divisions. Pawlenty was one of three members of the NewTel board who approved the acquisition.

Baer had launched NewTel to enter the telephone market in Europe. Earlier, he and Victoria Grunseth had founded QAI, a telephone company they sold in 1997 for $20 million. They each owned about 15 percent of the company.

The regulators investigating New Access were critical of the company's sales tactics, saying it:

Told consumers New Access had bought Qwest, as a Washington state man reported.
Said New Access "was handling (the) book work" of the local phone company, which would mean cheaper phone bills, as an Indiana man was told.
Changed consumers' local phone service when they had authorized only a long-distance switch. Mendota Heights retiree Elaine Fesler, for example, said she had to fight for six months to get her old service back.
Claimed local phone companies were adding new charges, making New Access appear a bargain by comparison.

Susan Hannigan of Cottage Grove says she was one of those enticed by the new-charges claim.

New Access called Hannigan, 47, in July 2001. The firm, she said, told her Qwest was starting a new $2.50-a-month charge and that New Access could save her 15 percent on her phone bills. Hannigan switched her service.

Hannigan became suspicious when she received her bill and there was no discount. She said she called Qwest, which told her there was no such new monthly charge.

Hannigan called New Access to cancel her service, but says she got a runaround. "When I called New Access, they said, 'Oh, you're reading your bill wrong,' " Hannigan told the Pioneer Press. She insisted that wasn't the case.

The company representative "got really snotty with me and said she'd marked me as canceled and didn't want to talk about it," Hannigan said.

But she wasn't canceled. Hannigan continued to get bills, and she continued to wrangle with New Access. When she received her first notice from a collection agency, Hannigan complained to the Better Business Bureau, the FCC and the Minnesota Attorney General's Office.

New Access finally settled with Hannigan in March 2002 - eight months later.

Some people switched by the company were not capable of making such a decision themselves, according to documents filed in the state investigations.

Last year, a Wisconsin father complained that New Access slammed his son, whom he described as "borderline retarded."

In March 2001, New Access switched the service of Iowa nursing home resident Darlene Rubida. Her brother, Eugene Waddell, told state officials his sister, now deceased, could not have knowingly authorized the change.

"She was on a lot of medicine. She was confused like crazy. Anyone talking to her would've known," Waddell said in a phone interview.

'DECEPTIVE PRACTICES'

New Access had ready answers to regulators' inquiries. The company typically denied any wrongdoing. Most often it gave refunds or changed telephone rates. Sometimes, it admitted to a clerical error. In other instances, New Access blamed its telemarketing subcontractors and said an offending telemarketer had been fired.

The responses did not impress officials in Washington, Oregon and Indiana, which said New Access was responsible for the actions of its telemarketers and other subcontractors. If telemarketers broke the law, they said, it was up to New Access to fix the problem and make sure it did not happen again.

"New Access willfully ignored problems with its marketing agents," Keen, the Indiana official, told regulators. "New Access was fully aware of the deceptive practices of its marketing agents but failed to correct the problems. ... Some of the misleading statements (to) consumers - specifically the misleading statements regarding price - were built into New Access' sales script."

New Access settled the Indiana case in September for a $20,000 penalty and $87,000 in refunds, some of which the company said it had already made.

In Oregon, after a yearlong slamming investigation, New Access in April 2002 agreed to pay the state a $33,000 penalty plus provide $1,500 in customer refunds.

In October, New Access paid Washington $60,000 in penalties and $20,672 in refunds. Regulators found that in 2001 the company had wronged 4,742 customers - one-sixth of its national customer base at the time.

The company admitted no wrongdoing in any of the cases.

Other agencies have settled for little or no money in exchange for promises from New Access not to slam in the future.

Some consumers complained directly to the FCC. It found five cases in which New Access had slammed customers, most recently in May, and ordered the firm to refund consumers' money.

Iowa utilities regulators handled about 100 complaints involving the company in 2001, and one led to a $500 settlement with the state Department of Justice. Lawyers for that department also sent the company a stern letter about its business practices.

Wisconsin has received 11 complaints about New Access since 2001. Officials say the state acts as a liaison between the company and the consumer to try and resolve problems without an official investigation.

New Access' record has resulted in an "unsatisfactory" rating by the Better Business Bureau of Minnesota and North Dakota. The organization cited "a pattern of complaints" about misleading sales tactics and poor customer service. But the bureau also says the company resolved most of the customer complaints after being notified of them.

In an interview, New Access officials said they made mistakes because they grew too fast, not because they set out to abuse consumers.

"It's completely illogical and irrational to say New Access ever intentionally slammed or misled anyone to get them on our service," co-founder Wilmes said. "That kind of business approach is a loser for any company that wants to succeed in this business."

Added Baer: "I'm not saying there was never a customer who was wronged, but it's unprofitable and we do what we can to correct it."

PAWLENTY'S ROLE

With a number of high-profile scandals rocking the business world, questions about corporate governance are raised more quickly whenever a company runs into legal or regulatory trouble. Increasingly, directors are being asked to provide more oversight.

A director "is not in that position to be just a potted plant," said Dan Kleinberger, a professor at William Mitchell College of Law in St. Paul. "If you have reason to suspect that something is going wrong, then you are supposed to inquire. You are basically there to protect other people's money."

From Dec. 16, 1999, until Dec. 31, 2001, Pawlenty was a member of a three-person board that ran NewTel, the parent company of New Access. At the time, he was also a state legislator from Eagan and majority leader of the Minnesota House of Representatives.

Pawlenty said NewTel's board approved buying New Access in January 2001 and then paid little attentionto it, except for occasionally reviewing its finances. New Access had its own executives and directors, and the NewTel board did not take an active role; instead, NewTel's directors focused "90 percent" of their attention on Europe, the governor said.

Pawlenty said NewTel trusted the New Access board to focus on the company.

The only common member of both boards is Baer. He is NewTel's chairman, chief executive and indirectly holds a major stake in the company.

"We simply held an interest in New Access, whereas the European companies, we were trying to run them," Pawlenty said. "We stayed at kind of the macro financial level."

However, records indicate that NewTel was deeply involved in the business of New Access during Pawlenty's tenure on the board. Through almost all of 2001, it owned between 60 percent and 100 percent of New Access; it made a significant financing decision on New Access' behalf; and New Access accounted for more than one-third of NewTel's $29 million in revenue that year.

Ties between Baer and Pawlenty date to the mid-1980s. They worked to help elect former U.S. Sen. David Durenberger and later teamed up to recruit Jon Grunseth as a candidate for governor.

Pawlenty said he didn't know about the New Access investigations until Baer told him recently.

Baer also said Pawlenty and the other NewTel board member never received information about state slamming investigations. Baer declined thePioneer Press' request to view the minutes of the company board meetings.

"To the best of my memory, we never discussed it. If it was referenced, it certainly wasn't referenced as an action item or anything," Pawlenty said. "You want to say, 'Pawlenty's on the board of NewTel, ergo he's responsible, or to blame, for these operational issues,' but I think that's a leap."

Corporate governance experts interviewed by the newspaper disagree. A director has a duty to know what is going on at a subsidiary, regardless of whether it is partly or wholly owned or has its own management and board, they said.

That duty extends to demanding that management makes sure a subsidiary operates legally, said Charles M. Elson, director of the John L. Weinberg Center for Corporate Governance at the University of Delaware.

"Part of managing the parent is overseeing the actions of the subsidiary," Elson said. "If the company's constantly in the soup on slamming, then obviously the question is, how effective is the management? ... Is the director demanding appropriate conduct out of the management?"

Ignorance is no excuse, although directors often use it as one, said Karen Schnatterly, an assistant professor at the University of Minnesota's Carlson School of Management.

"They don't necessarily want to know what's going on in the child company, although they are still legally required to do so," Schnatterly said. "Part of the responsibility of a board member, theoretically, is to ask questions to make sure they understand the business, to make sure they understand what's going on."

After leaving the NewTel board, Pawlenty stayed on as a shareholder for nearly a year.

As a director, he received 1,000 shares of NewTel stock and 3,000 options. He returned that stake to NewTel for $10,000 late last year. Baer says NewTel deliberately paid less than market value because Pawlenty was about to become governor. Baer described himself as "hypersensitive" about how it would look if the governor-elect were to receive a large payout from NewTel just before taking office.

As chief information officer at New Access, Grunseth said she, too, had nothing to do with the marketing side of the company. Documents describe her as a key management employee at New Access and a director and officer at TelEurope, an Australian firm that owns one-fourth of NewTel.

THE WATCHDOGS

Companies such as Capitol Verification, which Patricia Awada owned until January, were intended to be an answer to the abuses that plagued the telecommunications industry.

But in the New Access cases in Washington and Oregon, investigators said Awada's employees too often failed to perform their watchdog role.

Under FCC rules enacted in 1996, phone companies employ "an independent third party" - in this case Awada's firm - that either calls a customer back after they've talked with a telemarketer or is connected to the customer by the telemarketer.

Verifiers are supposed to ask neutral, scripted questions that make sure consumers understand the terms of the agreement and approve any changes to their phone service. They are not supposed to try to persuade consumers to switch.

When this process works well, all sides are happy: The customer's wishes are carried out, the phone company gets a new customer, and the verifier gets a check. Capitol Verification was paid for every phone call a salesperson sent to the firm, whether or not the sale was approved.

Awada herself wrote in a 1998 newspaper column, "It is our task to assure that customers actually wish to make a change."

Yet last year in Washington, investigators concluded Capitol Verification had engaged in "continued marketing of the New Access product," rather than simply verifying the wishes of consumers.

Oregon said Capitol Verification's own recordings proved some consumers did not understand what they were agreeing to when New Access switched them in 2001. Verifiers record their conversations with consumers to have proof of the transaction, should anyone challenge it later.

In Indiana, "It was pretty clear that (consumers) didn't know what they were talking about when they agreed to do it," Mary Beth Fisher, a spokeswoman for the Indiana Utility Regulatory Commission, told the Pioneer Press.

Though Capitol Verification was criticized by the states, it was not fined or penalized. Under federal and state slamming laws, only telephone companies, not verifiers, can be fined.

Awada says she had no conflict verifying the sales of companies owned by her friends. FCC rules say verifiers cannot have business ties to the companies that hire them, but the regulations do not address more casual connections.

Awada said if anything, her company would have been motivated to protect her friends from slamming in their companies.

"They hire me to stop bad sales," she said. "They don't want bad sales."

Awada is another of the many veterans of the 1990 Jon Grunseth campaign. She purchased the verification business used by Baer's former phone company in 1996, and the company - now owned by a New Access co-founder - also has verified sales for New Access since that company started.

The new owner, David Buss, says he does not treat his old firm any differently from any of Capitol Verification's other clients. He said he's determined to run the company in a way that will help prevent consumers from being slammed.

"As long as we're following all the FCC and state requirements, and we have no incentive to verify bad sales, we're straight up," said Buss, adding that he no longer owns stock in NewTel or New Access.

As part of that sale, Awada acquired stock in NewTel when the transaction was completed shortly after she took office as state auditor. Awada said she decided to sell the verification business last year even before running for auditor.

Awada, who would say only that she made a six-figure profit on the sale, said she never really liked dealing with telemarketers.

"Telemarketing in general is very sleazy, and so it's the same issue that's gotten everyone in trouble, from the Qwests to the Sprints," she said. "I don't mean to minimize this, but every telecommunications company is written up for something. It's a function of pure volume. The public hates it, and they're going to complain."

THE AFTERMATH

Some states say complaints about New Access have slowed of late. "We don't have nearly the volume of customer complaints about them that we did in 2001," said Chuck Seel, customer service manager for the Iowa Utilities Board.

Still, the FCC has certified three slamming complaints against New Access this year, and the Iowa board fielded several gripes this spring about the company.

One of those came from Dawn McCombs of Des Moines, who told Iowa officials someone claiming to be with Qwest called in March and warned that her bill was going up $19. The caller informed her of cheaper alternatives, including New Access, she said. Minutes later, a New Access telemarketer called touting its service.

New Access officials told Iowa investigators a "rogue" telemarketer was to blame for the calls and had been fired, and they apologized to McCombs. Company officials also told the Pioneer Press they they stopped using the marketing firm altogether, but refused to identify the firm.

But that didn't stop the complaints.

Edna Clinton of Ames, Iowa, told regulators she got a misleading call from New Access in April, just minutes after watching a television news report detailing McCombs' complaint about the company.

"Something is not right," Clinton said in an interview, "when company officials say they've terminated someone and within the same day I'm getting a call."

ABOUT THIS REPORT

These stories are based on dozens of interviews and thousands of pages of documents, including government files, court records, campaign finance records and company financial documents.

Tim Huber is a reporter on the business team. He can be reached at 651-228-5580, or at thuber@pioneerpress.com.

Rick Linsk is a reporter on the Pioneer Press investigations team. He can be reached at 651-228-5371, or rlinsk@pioneerpress.com.

Hank Shaw is a reporter covering elections and money in politics. He can be reached at 651-228-5257, or at hshaw@pioneerpress.com.

Computer-Assisted Reporting Coordinator Janet Roberts and Pioneer Press researchers Erin Pfeiffer, Paulette Myers-Rich and Pat Thraen contributed to this report.

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