Verizon Lawsuit Charges Covad Falsified Thousands of Trouble Reports Costing

NEW YORK -Verizon has filed suit against Covad Communications, charging the Santa Clara-based company with an orchestrated and intentional campaign of lies and distortions designed to deceive the public and regulators and to shift its operating costs and blame for its own problems to Verizon.

In doing so, the suit says, Covad submitted more than 22,000 reports claiming falsely that Verizon failed to properly provide lines for high-speed data service known as DSL or digital subscriber line service. The lines were ordered to connect Covad DSL customers to the Verizon network.

The lawsuit is supported by more than a score of sworn statements by Covad employees.

"The picture we have is of Covad installers being thrown into the field under-trained and under-equipped, while the company was over-promising customers delivery on a schedule it had no hope of meeting," said Verizon Executive Vice President and General Counsel William Barr. "Then, when the inevitable happened and Covad couldn't deliver to customers, there was a policy in place to generate false complaints of Verizon service problems in order to cover up the Covad failures. This had the effect of shifting costs from Covad to Verizon."

In affidavits, former Covad workers said that the false reports were collected systematically, and they estimated that as many as 50 percent of the reported troubles were false.

Barr added that Covad even used this falsified data to persuade regulators to penalize Verizon. "The suit says that Covad directed employees to submit the false reports and, furthermore, designed work processes knowing that these processes would result in large numbers of false reports.

"Knowing that we are under an obligation to provide good service to all competitors, Covad used these false reports to induce Verizon to supply its flagging business with services, employee time and expertise, and facilities. Covad's systematic false reports cost us millions of dollars," said Barr.

The lawsuit was filed in federal court in U.S. District Court for Northern California in San Jose late yesterday and includes sworn statements of 26 former Covad employees. They state that they were "pressured" and "badgered" to make up false reports of Verizon service problems and that those who questioned the practice were reprimanded:

• One Covad employee recounted: "On more than one occasion I was told by Covad management to simply mark the loop [Verizon line] on the system as not delivered [even when they were].... I was troubled by this obvious dishonesty.... When I said so, however, I was reprimanded and told that I just needed to do my job." (Declaration 2, paragraph 7)

• Another Covad employee said: "On one occasion, I informed [a Covad manager] that there were no problems with the ILECs [including Verizon], to which he responded with words to the effect that there had to be problems, and that even if problems did not exist, we should say there were problems anyway." (Declaration 7, paragraph 5)

• Another Covad employee said Covad "managers and directors would often give me direct orders to open trouble tickets blaming the ILEC even when it was obvious the problem lay with Covad. ... At one point, I prepared a summary [of trouble tickets that showed] only approximately 2 of the 200 tickets involved genuine ILEC problems. ... I carried out the orders to issue false trouble tickets because I feared for my job and have a family to support." (Declaration 10, paragraphs 5-6)

• Another Covad employee said his supervisor "told the [Covad] installation techs to lie to the end users, and blame the problems on the ILEC ...." (Declaration 9, paragraph 9)

• Another Covad employee said, "Management pressured us and even badgered us into recording problems, saying that it was important to Covad's success to have lots of documented problems to report about the ILECs. I was very uncomfortable with this practice and believe that it distorted the true nature of the good relationship we enjoyed with ILEC employees." (Declaration 3, paragraph 13)

In addition to making outright demands for false reports, Covad management developed internal operating procedures that had the effect of producing false reports on a systematic basis:

• One Covad employee explained: "Prior to approximately November of 2000, when we encountered an installation problem, we would often go to the central office to determine if the line was good. We would do this before opening a trouble ticket because at the central office we could determine if it was an ILEC issue. In November 2000, our field operations manager ... told us not [to] go to the central office to figure out whether it was an ILEC issue, but instead to just open a trouble ticket" blaming the ILEC. (Declaration 6, paragraph 6)

Each of the more than 22,000 false trouble tickets triggered a response by Verizon technicians, who were often dispatched to correct the line problem and connect Covad's customers. "While we were chasing false alarms for Covad, we couldn't use our resources to provide service to other customers who actually needed our help," Barr said.

The suit also alleges that Covad used these false reports in making more than 200 lobbying visits to government officials and regulators in which Covad criticized Verizon service and sought further concessions to prop up Covad's ailing business.

One concession that Covad cashed in on was payments under Performance Assurance Plans. "Under the Performance Assurance Plans, we are held financially responsible for faulty loop provisioning. Covad abused these plans. Using their bogus trouble tickets, Covad received inflated payments and rebates," said Barr.

Covad's deception even went to the extent of keeping two sets of books, according to the suit. Covad management instructed employees to keep two sets of logs regarding problem orders: an "internal" log for Covad employees to record accurate information and an "external" log containing false information to disseminate to customers. Covad management instructed "that problems associated with Covad were to be kept in the internal notes only, and not to be included in the external notes. . . . Very often, [Covad] agents made misrepresentations in the external notes and wrongly blamed ILECs for problems." (Declaration 16, paragraph 13)

Verizon's suit asks for injunctive relief against Covad, as well as damages including lost profits and punitive damages. The full text of Verizon's complaint is available at http://newscenter2.verizon.com/kit/suit.

Verizon Communications

Verizon Communications (NYSE:VZ) is one of the world's leading providers of communications services. Verizon companies are the largest providers of wireline and wireless communications in the United States, with 112 million access line equivalents and 27 million wireless customers. Verizon is also the largest directory publisher in the world. A Fortune 10 company with approximately 260,000 employees and more than $65 billion in annual revenues, Verizon's global presence extends to 40 countries in the Americas, Europe, Asia and the Pacific. For more information on Verizon, visit www.verizon.com.