COOKING THE BOOK
In about one week, Kathy Smith will endure a bitter anniversary. Two years have passed since she was called before her bosses and fired from a lucrative job selling advertising for the Yellow Pages in Phoenix.
Smith and another salesperson named Kimberly Seagraves were fired at about the same time. Each was accused of fraud for supposedly manipulating their accounts to steal money. Each was sent from the U S West building in disgrace. Each denies any wrongdoing.
But the shame is now shifting to U S West Direct and the union that could have helped Smith and Seagraves fight for their jobs--Local 1269 of the International Brotherhood of Electrical Workers.
Smith and Seagraves believe that their union--far from looking out for their interests--participated in investigating them, trumping up false charges and then pressing for their firings.
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And they believe that union officials themselves were engaged in substantial fraud of their own--fraud that the company tolerated ("A Union Made in Hell," April 7, 1993).
Now a federal investigation into the two women's claims--one of the largest and most complicated probes ever conducted by the Phoenix office of the National Labor Relations Board--is turning up evidence that Smith and Seagraves may be right.
After more than a year of investigation, during which it has subpoenaed more than 20,000 company documents and interviewed scores of current and former U S West employees and customers, the government is now preparing to take the company and union to trial.
Court filings and evidence obtained by New Times under a freedom-of-information request show that NLRB attorneys believe local IBEW officers--most notably, ranking union leader Karen Ortega and steward Phil Wheeler--have engaged in a pattern of improperly manipulating their accounts.
The incentive, the documents assert, was simple greed. By doctoring paperwork and taking advantage of lapses in U S West's accounting systems, the union officers were able to inflate their commissions and bonuses, the documents claim.
The company, the documents allege, tolerated the abuses to ensure a docile union that it could dominate, and even allowed union officers to assist in firing people like Smith and Seagraves, who challenged the cozy arrangement.
The government's allegations indicate that U S West's stockholders, advertisers and customers may have been unwitting victims of the fraudulent behavior, possibly to the tune of millions of dollars.
If union officials were improperly pumping up their commissions and bonuses, the company and its stockholders were paying the bill.
As advertising records were being manipulated, the court documents indicate, some advertisers whose accounts were handled by union officials may have been allowed to jump ahead of their competitors in the Yellow Pages, giving the favored advertisers a potentially profitable competitive advantage. In the Yellow Pages, ads running at the front of a category tend to draw more phone calls than those that follow.
In other cases, advertisers who weren't paying their bills may have been allowed to take out new advertisements, anyway, ads that ran ahead of competitors who were paying their bills.
Finally, customers who rely on the Yellow Pages when looking for services or businesses may have been misled by some advertisements. In at least one instance, for example, a page of the book contains what appear to be two separate advertisements for different businesses, when, in fact, the two companies are one and the same.
"This case could affect every consumer in the state," says one observer familiar with the investigation. "Unequivocally, there's never been a case like this one before."
The NLRB's attorneys will not discuss the investigation. Nor will those representing the company and union. U S West Direct will not talk about the charges or allow any of the employees involved--including Ortega and Wheeler--to discuss them.
Both the company and the union, in their own court filings and letters, vigorously dispute the government's arguments. In briefs and hearings on the case, they have accused the NLRB of engaging in a mammoth fishing expedition, and argue that the labor lawyers are misconstruing company documents to build a fundamentally flawed argument.
Unless the two sides agree to settle the case, the whole matter is scheduled to go to trial before an administrative law judge early next year.
Should the government prove its case, the NLRB could move to have the IBEW thrown out as the union representing Yellow Pages salespeople. It could also force U S West Direct to hire Smith and Seagraves back--with back pay--and refer any of its findings to other federal agencies for possible criminal prosecution.
Only a small fraction of the NLRB's evidence is yet available as part of the public record.
But, clearly, what began as a quest for vindication by Smith and Seagraves has mushroomed into a massive federal swipe at a tangle of alleged union corruption, corporate mismanagement and financial and consumer fraud.
In February 1993, months after Kathy Smith and Kim Seagraves had been fired, another U S West salesperson was given a special assignment. Susan Chen, a top salesperson with a master's degree in business from Georgetown University, was asked to track several years worth of Yellow Pages advertising by insurance companies.
The idea, Chen says, was to be able to show insurance firms that not only should they place ads in the Yellow Pages, but the bigger the ad, the better.
As she went through several years worth of phone books, Chen says, she began noticing some peculiar things.
One cardinal rule of Yellow Pages sales, according to company policy, involves the order in which advertisements appear in the book. That order is determined strictly by seniority.
The rules are designed so that, for example, a brand-new auto-repair shop cannot buy its way to the front of the listings, ahead of advertisers who have been in the book for years.
But Chen says it appeared to her that some advertisers in the insurance section were being allowed to jump ahead of people in front of them.
"I started to find ads that had jumped into positions they weren't entitled to," Chen says. "There seemed to be a pattern."
Then, Chen says, she started to notice oddities in the way phone numbers were showing up in the advertisements. Some of the phone numbers kept changing from year to year, while ad positions did not, she says.
Uncertain what she was seeing, Chen says, she started pulling up some of the ad accounts on the company's computer to see how they were being handled. (At that time, U S West ad salespeople were allowed regular access to company computers. Chen says she had been told by the company to research the advertising accounts. Since the federal investigation began, the company has placed limits on who is allowed to read the computer files.)
It was when she saw some of the computer records, Chen says, that she became deeply suspicious about what was going on.
Yellow Pages salespeople, company documents show, are paid vastly different commissions depending on whether an advertisement is brand-new or simply a renewal of the previous year's ad.
On simple renewals, the salesperson can be paid as little as a 30 percent commission, while on brand-new ads, the commissions can balloon up to about 70 percent.
Chen suspected that the salespeople handling the odd accounts were playing a shell game with phone numbers. Using that game, they appeared to be tricking the system by making old accounts look like "new money" and, therefore, inflating their commissions.
"I was saying, 'What is this? We're not allowed to do this stuff,'" Chen says. And there was another possible benefit to switching around phone numbers, the NLRB documents explain. Each salesperson's annual performance--and the possible bonus he or she might receive--is calculated based on how much more advertising he or she sells each year than the year before.
By juggling accounts from phone number to phone number, the NLRB documents contend, salespeople could artificially lower the number of dollars constituting their beginning-sales yardstick for the next year's book. That legerdemain would make it seem as if they had generated more "new money" in the new year than they actually had.
Because she wasn't sure if any chicanery was taking place, Chen says, she decided to turn her findings over to managers and let them determine if something was, indeed, amiss.
"I wanted to be the least confrontational as possible," she says. "In case I was wrong."
In addition to the insurance accounts, Chen says, she also stumbled upon other accounts that appeared questionable, including ads in sections of the book listing appliance repair, air-conditioning service, heating repairs and electrical repairs.
In some cases, Chen said, she found accounts in which the advertisers had not paid their bills and weren't supposed to be allowed back into the book, but they would show up again, anyway.
The accounts had one notable characteristic, Chen says. Virtually all of them were handled by IBEW officers, and most of them were handled by either Karen Ortega or Phil Wheeler.
For the next several months, Chen says, she engaged in a futile attempt to have someone--in the company or the union--check out her findings and determine if anything improper was going on.
With one exception, she says, she was met by a wall of resistance. Upper management did not want to listen to her, she says, and IBEW officials, up to and including the union's international president, made no apparent effort to check out what she was alleging.
Only the Phoenix office commissions manager, Laurie Garcia, took her findings seriously, Chen says.
In fact, in late February, Garcia wrote a memo to her supervisors in the Denver headquarters of U S West Direct warning that there seemed to be irregularities in at least two accounts handled by Ortega and Wheeler.
The memo, now part of the public record of the NLRB's case, shows that Garcia was concerned that a heating and air-conditioning account handled by Ortega had been recorded in a way that might have inflated the commission Ortega was paid.
Garcia noted that she was asking Ortega's assistant for an explanation. "If she does not have a real good reason why this happened, I think we should advise [upper management]," Garcia's memo says.
The memo also raises questions about an electrical-service account handled by Wheeler, noting that a batch of phone numbers Wheeler had sold advertising on had been disconnected, but that the same company had popped up again with a new phone number.
"I'm going to follow up periodically and see what he's up to," Garcia said in her memo.
Despite Garcia's interest, however, Chen says nothing was ever done to answer her questions.
So last fall, she took them to the National Labor Relations Board. Ever since, she says, she has been vilified by company management and union officials, at one point even being required to sit at the company's reception desk and answer the telephones.
"They treat me as if I've done something wrong," Chen says. "If they had listened and been responsive, none of this would have ever happened. They were told there were millions and millions of dollars being removed from their pockets by union officials using illicit methods, but they didn't want to do anything about it."
What the company did not want to hear, the NLRB lawyers and investigators surely did. By then, both Smith and Seagraves had filed complaints against both the company and the union charging that they had been unfairly fired. The NLRB was preparing to argue that Smith and Seagraves had done nothing wrong and should be given their jobs back.
It would greatly strengthen the NLRB's case if attorneys could show that Smith and Seagraves were fired for alleged fraud they did not commit while the union officials who helped get them canned were engaged in widespread fraud of their own.
Willie Sutton said he robbed banks because that's where the money was. The Yellow Pages is an inviting place to commit fraud because that's where a lot of money is.
After the breakup of the national Bell-system telephone monopoly, U S West was left to service 14 states, and U S West Direct became the subsidiary that sold Yellow Pages advertising in that territory.
The advertising salespeople in those states, as well as some others who work for Pacific Bell in California, are represented by Local 1269 of the IBEW. Karen Ortega sits on the local's executive board, making her the highest-ranking union officer in Phoenix.
The Phoenix Yellow Pages, according to an internal company document obtained by New Times, is the crown jewel of the 14-state region. The Phoenix metropolitan-area book makes more money--and charges higher advertising rates--than any other book in the U S West Direct system.
As of March 1994, U S West Direct was selling over a billion dollars per year of advertising in its various Yellow Pages directories. The Phoenix books that landed on doorsteps and business desks in March of this year led the pack in generating revenue for the company.
The Phoenix book--two books, actually--came up lucky sevens, with total published revenue of $77,777,000, the document shows.
But if the NLRB lawyers are right, some percentage of that estimated revenue was mythical, because IBEW officers allowed delinquent businesses to continue advertising in the Yellow Pages.
One clear example of the machinations taking place at the Yellow Pages is the advertising of an appliance-repair company formerly run out of Scottsdale by a man named Gerald Zukerman. For the past few years, the account was handled by Yellow Pages salesperson Karen Ortega.
Zukerman, according to current and former company employees, was one of the largest advertisers that the Phoenix Yellow Pages office dealt with. He ran companies in many states, providing repair services for air-conditioners, heaters, dishwashers and almost any other appliance you can name.
Whichever Yellow Pages salesperson had Zukerman's account was assured of tens of thousands of dollars in commissions each year, because he placed ads in so many of the company's books. Zukerman's sales representative drew commissions on ads he placed in Phoenix, Seattle, Omaha and all the other places he did business.
In the late 1980s, Zukerman says and current and former U S West salespeople confirm, his advertising orders became so big--involving so many different cities and directories--that he moved his account to the national Yellow Pages sales office.
The national office, based in Maryland, handles huge accounts--like truck-rental firms or moving companies--that advertise in many books across the country and want to coordinate their advertising, instead of dealing with dozens of salespeople in myriad markets.
In 1991, Zukerman says, he was pulling back, selling his various businesses off as franchises. That meant his advertising would return to the Phoenix office of U S West Direct.
When the Zukerman account was rumored to be returning to Phoenix from the national office, current and former salespeople say, the salespeople in Phoenix began salivating. Zukerman meant a lot of money in commissions for somebody.
But Zukerman, according to documents in the NLRB case, also had a bit of a problem paying his bills. In fact, he had fallen behind far enough that the U S West Direct credit department had decreed Zukerman had to pay 12 months worth of bills in advance to place advertisements in any of its directories.
When the Zukerman account arrived back at U S West Direct, court documents indicate and salespeople who watched the situation say, there seemed little question that company policy dictated the lucrative account be assigned to Roxie Winters. She had handled the Zukerman account before it moved from Phoenix to the national sales office.
But Winters never received the golden goose. Instead, the account was assigned to Karen Ortega. Winters filed a grievance with the union, which was not heard for more than a year. Ortega, ranking officer of the union local hearing the grievance, was ultimately affirmed as the proper salesperson for the account.
In the files of the NLRB, the Zukerman account now stands as perhaps the strongest evidence of how Ortega and other union officials manipulated records to enhance their own salaries and performance, and possibly harmed other advertisers who had no idea that corruption in the company was costing them business.
Turn to page 109 of the 1994/95 Yellow Pages that are now probably sitting under your telephone. You will see what appears to be a page with two advertisements on it--one for a company named Phoenix Service Center and the other for a company named Same Day Appliance.
Each company offers to fix whatever is broken in your dishwasher, refrigerator, washer, dryer or stove.
Look very closely, and you will see--in very small print--that the two companies are "affiliated" with each other. Between them, the two ads feature five phone numbers that someone in need of stove repairs might conclude are different businesses. A customer might call several of the numbers seeking different bids on the cost of a repair.
But all of the numbers connect you to phones that ring at the same place.
That place is the appliance-repair business once owned by Gerald Zukerman, which he says he has since sold.
The practice is not illegal, and does not violate the Yellow Pages company rules. There is no reason to believe the companies cannot repair your appliances or that they will in any way cheat you on a deal.
But the advertisements, according to documents now public at the NLRB, demonstrate how officers of the IBEW used their positions to place misleading advertising in the Yellow Pages.
Various U S West documents now contained in the public record indicate that Zukerman--when he owned the two businesses--was frequently behind in paying his bills, and probably should not even have been allowed to place advertisements in the book.
But he was allowed to, and his ads ran in front of other repair companies that were paying their bills.
Further, the government is arguing based on company documents, Ortega used the Zukerman account to skim extra commissions and bonuses from the company.
Zukerman admits that he frequently disconnected and reconnected various phone numbers as part of his business. He would, for instance, turn off the phone numbers he used in ads for heating repairs during the summer, and turn them back on again in the winter.
When he turned phone numbers off, Zukerman says, U S West would stop billing him for the advertisement. In effect, he would pay for his advertisements for only the few months of the year when they did him any good.
Because Zukerman was frequently disconnecting phone numbers, the government documents assert, Ortega was able to manipulate his account records to make more money.
The documents indicate that Ortega would move advertising records from one phone number to another, allowing her to make existing ads look like "new money," for which she was paid high commissions. These moves also lowered her total sales at the beginning of a book cycle so she could enhance her apparent performance, the documents allege.
One of U S West's attorneys in the case, in fact, all but admitted the manipulations in a memo that the company accidentally gave to the NLRB along with other subpoenaed documents.
As part of her preparation to defend U S West, attorney Janice Procter-Murphy last year drafted an "Account Summary" of the Zukerman account.
The NLRB records show that someone accidentally included the summary in a batch of records that was turned over to the government. Procter-Murphy and U S West asked the judge in the case to force the NLRB to give the document back, but the judge ruled against them.
Procter-Murphy's summary indicates that Ortega was overpaid on the Zukerman accounts and that, in at least one case, Zukerman was never even billed for some of his advertising.
The Zukerman account, the government alleges, is just one of many that were manipulated by Ortega, Wheeler or other union officials. In all, the NLRB is investigating more than 20 advertising accounts placed under various Yellow Pages headings, including attorneys, electrical-repair services and insurance companies.
To an outsider, the whole affair may seem like little more than an airing of one company's dirty laundry. But to the NLRB, the account manipulations are the underpinnings of a more sinister problem.
Labor unions, of course, are supposed to represent their members, protecting their rights, bargaining with management and making sure whatever contracts are signed are implemented fairly for all members.
When someone--either union or company--runs afoul of the rules, those who believe they have been mistreated can go to the National Labor Relations Board for help.
Nationwide, the NLRB handles tens of thousands of complaints each year. Only a minute fraction of those reach the point where the U S West case is today.
In this case, the NLRB is arguing that IBEW Local 1269 has effectively sold out its membership. Under what is technically called an 8(a)2 complaint--an allegation seldom pressed by the NLRB, because it is so hard to prove--the government is arguing that the IBEW local and U S West management have formed an unholy alliance.
By allowing union officials to manipulate their accounts to make more money, the government argues, the company has penalized the 50 or so other salespeople in the Phoenix office who are forced to play by the rules.
A by-product of that, the government argues, is that the customers of union officials receive preferential treatment in their advertising programs that other Yellow Pages advertisers do not enjoy.
The alliance, the government argues, leads to labor-law violations like the firings of Smith and Seagraves.
And union members say it also raises troubling questions about how well their union is representing them in bargaining talks. Many workers were unhappy with the contract negotiated on their behalf in 1992.
The local's contract is up again for negotiations next year, and there are already rumblings about the possibility of a strike. That's assuming, of course, that the IBEW survives at U S West Direct.
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