GTE Illegally Provided Services to Win Hollywood’s Business

GTE Corp. gave millions of dollars worth of fiber-optic and other communications services to a host of Hollywood notables over several years in an illegal effort to win big contracts in the entertainment industry, according to interviews and documents obtained by The Times.

The Irving, Texas-based phone company is negotiating with the California Public Utilities Commission to settle the allegations, which stem from a PUC review and subsequent company audit that uncovered misconduct on more than 100 customer contracts from 1995 to mid-1998. GTE likely will be fined several million dollars.

Those showered with free or cut-rate services included director Steven Spielberg, his DreamWorks SKG studio, and leading Hollywood talent firm Creative Artists Agency, as well as several other companies with ties to the entertainment industry. Other large GTE customers, including UCLA, also received preferential treatment, according to sources familiar with the case.

Favoritism and freebies for key clients are common in many industries, but they are prohibited in the state’s regulated local phone market. Regulators want to ensure that dominant phone companies don’t abuse their position, and want to prevent captive residential and business customers from unwittingly subsidizing low rates for others.

The PUC, which regulates phone companies in California, routinely reviews major contracts signed by GTE and others to make sure they comply with state rules.

Jack Leutza, director of the PUC’s telecommunications division, confirmed that the agency has been investigating GTE’s conduct but declined to discuss specifics of the case.

“The scope is very broad. . . . There are a lot of contracts that have problems,” Leutza said.

A GTE spokesman acknowledged that the investigations found “lots of process breakdowns and . . . blatant breakdowns in judgment” at its Los Angeles-area offices. The case involves contracts covering a “tiny” percentage of GTE’s $3.5 billion in annual California revenue, spokesman Peter Thonis said. “We are prepared to accept public scrutiny on this matter . . . but we’re not going to talk about individual customers,” he said.

About half a dozen of GTE’s Southern California employees--including two branch managers--lost their jobs last year because of the contracting violations. Several dozen others were demoted or reprimanded, according to a GTE employee with knowledge of the controversy. Thonis said GTE took disciplinary action against some employees, but he would not elaborate.

The case threatens to disrupt GTE’s sales efforts at a time when the company faces unprecedented competition from rivals. GTE also is nearing completion of its merger with Bell Atlantic, after which the combined companies would change their names to Verizon Communications.

Details of GTE’s contracting misconduct are laid out in a report compiled by the consulting firm Arthur Andersen and submitted to the PUC in March 1999. GTE has thus far blocked its release to the public, claiming that the information is confidential and serves no public interest.

However, a 10-month Times investigation that included dozens of interviews with people involved in the inquiry or who have knowledge of the case said GTE’s contracting violations included bogus technical “trials,” billing manipulations and undisclosed side deals. All these arrangements allowed employees to illegally set up and maintain free or below-cost services for certain customers without drawing suspicion.

Sources familiar with the investigation said GTE employees:

* Provided free videoconferencing equipment and high-speed communications services for two years to the multimillion-dollar Playa Vista project and then-developer Maguire Thomas. GTE employees hoped the move would help the company win lucrative contracts with Playa Vista, a 1,087-acre project near Marina del Rey. The project hopes to combine 13,000 residences and more than 5 million square feet of business space into a community meant to be a blueprint for cities of the future. DreamWorks planned to build a new studio at Playa Vista but dropped out. GTE sales employees arranged to have the monthly bills for the Playa Vista services routed to a GTE office, where the charges were offset with “vouchers.”

* Set up a free high-speed connection--worth $480,000 over five years--between the Simon Wiesenthal Center and the Survivors of the Shoah Visual History Foundation, a Spielberg-backed organization that collects and archives testimony from Holocaust survivors. Under an agreement between the groups and GTE, the phone company billed the Shoah Foundation $120,000 a year, then donated the same amount to the foundation. GTE filed a contract with regulators that omitted any mention of the donation side-deal and the quid-pro-quo arrangement that resulted in free service.

* Arranged to provide DreamWorks with a high-capacity link among its various offices that was worth hundreds of thousands of dollars, then paid that amount to the studio in a “promotional consideration” fee, which allowed GTE to use a photo of the studio’s three partners in a testimonial.

Such special treatment was afforded mostly to influential entertainment companies but also to major customers such as city and state government entities and Blue Cross of California, Amgen Inc. and others, sources said.

GTE’s entertainment team was especially anxious to land prestigious clients because the phone company had invested heavily to build a high-speed, high-capacity video transmission network expressly to tap the booming entertainment business.

Hollywood studios and related companies have become a key target for phone companies because of their need for big-ticket services such as high-bandwidth connections capable of handling large amounts of video. When GTE invested in its new video system, the company believed the entertainment market for such services could total more than $1 billion a year, according to a person familiar with GTE’s plans.

“It’s very competitive, and the phone companies are all trying to one-up each other. . . . Everybody wants to have the big-name account,” said Tom Kotlarek, who is in charge of DreamWorks’ information technology and infrastructure.

Indeed, GTE lavished attention--and services--on Spielberg, one of Hollywood’s biggest names. A solid relationship with him, it was hoped, ultimately would lead to increased business with the many ventures tied to him. Those include the DreamWorks studio, of which he is an owner, the massive Playa Vista project that was to house a new DreamWorks headquarters, and the GameWorks chain of high-tech arcades owned by Spielberg, game maker Sega and Universal Studios.

Over the span of at least two years, GTE provided a variety of free services to Spielberg at his home in Pacific Palisades, including dedicated high-speed connections of undetermined value, according to sources. Spielberg spokesman Myron Levy said GTE provided “helpful technologies,” but added, “We would not have had any awareness as to whether there were any regulatory concerns.”

At DreamWorks, GTE provided a variety of high-speed connections among the studio’s offices, some of which were provided for free in exchange for promotional rights, the investigation found. Kotlarek said he believed the studio’s GTE contracts to be “on the up and up.”

Auditors also found that GTE provided various levels of free services to music studio Media Ventures, the now-defunct video network firm Jazz Media, Creative Artists Agency and a celebrity client of Creative Artists who was known to GTE only by the pseudonym “Dusty Douglas.”

Many of the companies were given high-speed communications lines under the pretense of conducting some form of technology test. Under certain circumstances, state regulators allow companies to conduct trials with nonpaying customers, but they typically are limited in scope and duration and must be approved by the PUC.

Creative Artists received free high-speed connections from GTE for nearly two years under the guise of a “technical trial” that was described to regulators as only lasting a few months.

Creative Artists spokeswoman Andrea Galvin said the company was unaware of any irregularities. “GTE indicated to us that all the correct approvals were obtained, and as soon as we learned about the problem, the service was terminated,” Galvin said.

The Creative Artists contract and other service agreements at issue are known as “individual case-basis” or “customer-specific” contracts, and must be approved by the PUC because they typically include nonstandard phone services or prices.

The cost for services included in those agreements must be within a range of prices set by the state to make sure the companies do not skew competition with below-market pricing.

“The price floors are protection against anti-competitive behavior. . . . You can’t give away service, because it’s unfair [to rivals] and it discriminates against other customers who didn’t get service for nothing,” the PUC’s Leutza said.

People familiar with the investigation believe the contracting violations stemmed from a combination of lax oversight and GTE employees who were poorly trained and unaware of the complex regulations that prohibit service giveaways and require prompt filing of service contracts.

That environment is fertile ground for problems because today’s telecommunications markets are only partially deregulated, leaving GTE to periodically compete for business against new telecommunications companies that operate under less-stringent regulation.

“The [GTE employees] didn’t do anything with malice or ill intent, they were just pushing the envelope on how things get done,” according to a GTE employee with knowledge of the controversy.

A year and a half ago, GTE paid nearly $1 million in fines and penalties to the PUC after the contract irregularities first came to light. The PUC levied that penalty after GTE admitted to providing some high-capacity network services to UCLA for free or below cost under service contracts that were never filed with the PUC.

After the UCLA problems were uncovered, GTE voluntarily embarked on a detailed review of all its individual-case-basis contracts and then informed the PUC when the internal probe turned up a pattern of violations, according to GTE spokesman Thonis.

“We’re not proud of what we found when we did the audit, but we’re very proud of what we did when we found it,” Thonis said. “We’ve taken significant and aggressive corrective steps internally to ensure compliance going forward.”

GTE said it has since stepped up employee training, revamped contracting procedures and taken unspecified disciplinary action against some employees.

The company expanded its in-depth contracts audit to the 27 other states where GTE provides local phone service, but found only minor problems for which it does not expect to be fined, Thonis said.

In late 1998, GTE paid $13 million to settle a case that included allegations that top company officials shredded documents and misled the PUC to conceal the extent and duration of sales marketing abuses at the company’s foreign-language assistance center in Santa Monica.

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GTE Woes

GTE Corp., which has 3.4 million customers in California, has been plagued by a series of missteps in recent years.

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March 1998: GTE mistakenly printed the names and unlisted addresses and phone numbers of up to 50,000 of its customers in street-address directories that are leased to telemarketers and mail solicitors. GTE waited weeks to inform California regulators, and notified the affected customers only after the Los Angeles Times revealed the gaffe.

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Late 1998: GTE paid $13 million to settle a case that included allegations that top company officials shredded documents and misled regulators to conceal the duration of sales abuses at the company’s foreign-language assistance center in Santa Monica, which had been charging customers for services they never ordered.

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February 1999: GTE admitted that an equipment error exposed the unlisted phone numbers of about 53,000 customers (plus an unknown number of cellular users) to caller ID machines for almost four years before it was discovered by a customer.

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July 2000: GTE negotiates to settle allegations that it illegally gave Hollywood customers and others free or below-cost services to boost prospects for future business.