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PUC Slams Door on Carrier for Illegal Switching

September 07, 1996|MICHAEL G. WAGNER | TIMES STAFF WRITER

SAN FRANCISCO — An Illinois telephone company accused of illegally switching the long-distance service of more than 7,000 Californians, including hundreds of Vietnamese and Latino customers in Orange County, has been ordered to stop doing business in the state for two years.

The harsh penalty, believed to be the first of its kind in the United States, will cost Cherry Communications Inc., millions of dollars in lost revenue during its two-year suspension, regulators said Friday. The company must also send a $20 refund to every customer it switched. "The commission wanted to send a loud message that slamming is illegal in California," said Larry McNeely, chief investigator for the state Public Utilities Commission.

"Slamming" is the practice of switching telephone customers from one long-distance company to another without their authorization, and often without their knowledge. State and federal regulators estimate more than 1 million American telephone users have been slammed in the past two years, including several hundred thousand in California.

More than 400,000 California phone customers are projected to become victims of the illegal practice this year.

Cherry Communications, a company with 500,000 customers in 36 states, built its business through high-pressure telemarketing and aggressive door-to-door sales techniques. Regulators say Cherry's agents frequently misrepresented themselves as employees of other phone carriers such as Pacific Bell, forged customer signatures on forms authorizing the changes, and made thousands of improper switches.

State regulators estimate that 700 to 800 customers were slammed by Cherry Communications in Orange County.

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Cherry was started in 1991 by James R. Elliott, 43, a former real estate whiz whose Westchester, Ill., company had been in the business of leasing bank card processing equipment before it ventured into pay phones and, finally, providing residential long-distance service.

Elliott, who owns Cherry, was convicted of mail fraud in June 1984 for defrauding two federal loan programs of $135,000, sentenced to three months in jail and five years' probation, according to records. In February 1986, he pleaded guilty to single counts of mail and wire fraud in connection with loans made to him by an Illinois savings and loan at which he served as a director and was sentenced to six months in jail and 4 1/2 years' probation, records show.

Elliott would not comment. But company president David Giangreco freely acknowledged the company's marketing problems. He attributed them to growing pains.

"All the problems that we encountered are pretty much a microcosm of the failings of the industry," he said. "It came to our attention late last year that in the course of our sales activity a small percentage of field representatives have engaged in conduct improper in nature and the situation was [aggravated] by a lack of controls."

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Giangreco said the company has since reformed its practices and no longer uses commission sales agents, whom he blamed for the high volume of slamming complaints.

Cherry, after starting as "a company with no prior experience in the telecommunications business, is really kind of an exciting story," said Giangreco, estimating that the company has monthly revenues of $40 million to $45 million.

But customers who complained to state and federal regulators found their experience with Cherry anything but exciting. Unlike other companies with lengthy complaint records, Cherry didn't meekly accept the customer's word and vow to correct problems: It sued them in Chicago if they didn't pay their bills.

"Suing customers in another state was just an outrageous practice that was grossly unfair to California customers," said McNeely.

One of the phone customers Cherry sued was Wayne Wakefield, San Diego-based publisher of the Business Opportunities Journal. In July 1995, Wakefield had Cherry switch five of the 19 telephone lines used by his business to see if the company's rates on calls to Canada were as good as it claimed.

The first day of his test, instead of switching only five lines, Cherry switched all 19, including his computer modem and fax lines. Wakefield immediately canceled the order. Over the next seven weeks, Cherry slammed his phones six more times, severely disrupting business.

It also shut down service to his 800 number lines for two days, costing his business "thousands of dollars." Cherry "even had the audacity to bill us for $806.11 for the days they illegally slammed us," Wakefield complained to regulators.

When Wakefield refused to pay, the company sued. That infuriated Wakefield, who complained to state and federal regulators, and even to President Clinton.

"Wayne Wakefield became the customer from hell," said McNeely. Eventually, the company and Wakefield settled their differences under terms that prevent him from commenting. But he took the highly unusual step of hiring a lawyer to launch a formal proceeding before the PUC.

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