AT&T just might be the next poster child for ethics and compliance gone seriously wrong, if the allegations before it ultimately prove to be true.
The damning exposé against the telecommunications and media giant comes in the form of a 233-page amended securities class-action complaint, In Re AT&T/DirecTV Now Securities Litigation, filed jointly by law firms Labaton Sucharow and Pomerantz on Sept. 17 in the U.S. District Court for the Southern District of New York.
Although the lawsuit is on behalf of all investors who acquired AT&T common stock in connection with AT&T’s June 2018 acquisition of and merger with Time Warner, everything about the troubling allegations have a Wells Fargo-esque air to them: (1) employees opening potentially thousands of unauthorized accounts and enrolling customers into services without their knowledge or consent; (2) improperly enrolling customers in services they didn’t need through sales tactics known as “bundling” or “cramming”; and (3) fraudulently charging customers for services they never requested or used.
The allegations further describe the same toxic, systemic culture that plagued Wells Fargo, whereby employees were “coached” to use fraudulent sales tactics, and that top performers were lauded and rewarded. Even more potentially damning to the company is that the allegations have been corroborated by numerous AT&T employees from a wide range of positions—from the floor level to retail and area sales managers to executives and internal financial analysts. One employee went so far as to say that “AT&T makes Wells Fargo look like angels.”
Moreover, the allegations are not limited to a certain region in the country. “We have witnesses from the East Coast, the West Coast, Hawaii, and the Midwest,” says Christine Fox, a partner with Labaton Sucharow, who serves as co-counsel in the case. Even after filing the complaint, more AT&T employees have come forward validating the evidence that’s already been gathered, she says.
And to show just how engrained sales pressure was within the company, the complaint throughout names a who’s who of AT&T executives and managers, including CEO Randall Stephenson; CFO John Stephens; John Stankey, then-CEO of AT&T Entertainment Group; Brad Bentley, executive vice president, marketing; John Donovan, CEO of AT&T Communications; and Brian Shay, president of AT&T retail sales.
The securities litigation against AT&T, however, tells only half the story. A simple online search brings up several hundred more complaints made by AT&T employees and customers themselves adding more color to these allegations.
Years before this lawsuit was filed, customers have been lodging complaints on AT&T’s own Web-based forum about duplicate charges and fake extra accounts. Hundreds of similar complaints discussed among AT&T employees on social media sites (like this conversation here on Reddit) uncover yet more allegations.
And this wouldn’t be AT&T’s first run-in with the law, either. Five years ago this week, AT&T on Oct. 8, 2014, reached a $105 million settlement with the Federal Communications Commission and Federal Trade Commission to resolve cramming allegations for placing third-party charges on customers’ bills without their knowledge.
“AT&T makes Wells Fargo look like angels.”
Anonymous AT&T employee
Fraudulent tactics unveiled
The underlying bane of AT&T’s existence in the latest complaint: DirecTV Now.
According to the allegations, pressure from the highest echelons of the company really mounted in November 2016, when AT&T first unveiled its streaming TV service, DirecTV Now. According to the testimony of numerous employees, they were pressured to meet sales goals that they describe as “extreme,” “aggressive,” “not realistic,” and “not sustainable.”
One employee described how on several phone calls with Shay it was hammered home that every store was expected to double its subscription sales month to month. For example, some sales reps who were originally given eight to 10 new DirecTV Now accounts as a monthly sales target quickly saw their required goals increase to 20 to 30 new accounts per month.
The complaint further describes from the perspective of several employees how sales reps that hit their sales targets were praised as “top performers,” incentivized with commissions or bonuses, while those that did not were threatened or fired. One AT&T manager, for example, said he was responsible for putting any sales reps that did not hit their sales goals on a “performance improvement plan” to “scare” them.
This combination of unrelenting pressure to meet sales quotas and strong-arm tactics from AT&T’s senior management to increase sales ultimately forced regional sales teams to resort to fraudulent sales tactics. In confidential witness testimony, several employees described the various ways they were, as one employee put it, “taught to manipulate” DirecTV Now sales. “They were getting these instructions from area sales managers, district sales managers, regional sales managers, and even the director of sales,” Fox says.
‘FALSE AND MISLEADING’ CODE
Below are the specific parts of AT&T’s Code of Business Conduct that were described in the lawsuit as “materially false and misleading.”
On March 27, 2017, the official AT&T YouTube account posted a video featuring CEO Randall Stephenson, in which he described AT&T’s Code of Conduct:
We’re guided by a core set of values at AT&T. That’s who we are. These values guide our mission, which is what we’re all about. And our strategy is how we fulfill that mission. The Code of Business Conduct is the codification of our core values. It lays out the guidelines and expectations for how we do business, how we operate, and how we interact with customers, suppliers, owners, and each other. We hold ourselves to the highest standards. That means always doing the right thing. And it means operating with integrity, transparency, and honesty in everything we do. Our business has changed radically over the years. And it will continue to change as we become a global leader in telecom, media, and technology. But what will never change is our commitment to our core values and the Code of Business Conduct. Consistently following the Code and doing the right thing has never been more important. It’s the foundation of who we are.
During April 2017, AT&T published an updated code of conduct. This code included a cover letter addressed to AT&T employees, stating:
We follow ethical sales practices. Our customers should always know we value them. We fairly represent our products and services to them. We listen to our customers, and challenge ourselves to find new ways to offer the best solutions available to help them communicate efficiently, sustainably, and safely. We earn and preserve their trust by treating them with honesty and integrity and in a professional, courteous manner. We deliver what we promise. We do not provide goods or services that customers did not authorize.
Under one scheme, wireless customers who came into the store looking to upgrade their phones were told they had to pay a $35 activation fee for the upgrade and that as a perk they’d get up to three months of DirecTV Now for free. When DirecTV Now ran a promotion, sales reps were instructed to create up to three DirecTV Now accounts with that $35 activation fee by creating fake e-mail addresses and running the same credit card for each account. Once the DirecTV Now “trial period” had passed, sales reps were instructed to manually cancel those subscriptions, all unbeknownst to the customer.
In another scheme, customers were being charged for replacement SIM cards that should have been free, so that AT&T employees could apply it as a DirecTV Now charge, according to the allegations. To ensure customers were not alerted to a service they never signed up for, AT&T disabled its e-mail verification process, and AT&T employees created fake email addresses and passwords so they could cancel subscriptions when needed or when directed.
In a third scheme, other AT&T employees describe how they were instructed to misleadingly drive sales of DirecTV Now through sales tactics called “bundling” or “cramming,” whereby customers would agree on a particular “bundle” of services for a certain price, and employees would then add DirecTV Now to that bundle of services. “You could have saved them fifty bucks, but instead you slide it in as DirecTV Now,” one employee stated in witness testimony.
Internal investigation ensues
According to several employees’ testimony, AT&T launched an internal investigation into the sales tactics of DirecTV Now subscriptions at some point in 2017. According to one employee, the investigation was conducted by employee relations managers and human resources business partners—which, if true, indicates AT&T viewed this as an HR headache and not a serious and systemic legal and compliance problem. This same employee said that, following conclusion of the internal investigation in late winter/early spring 2018, he was provided a list of over 100 employees who were fired “nationwide.”
And this is from the perspective of just one employee. Other examples are discussed on social media. “In March , reps who were slated to go on a trip to Florida for having stellar numbers the year before were terminated,” one former AT&T employee wrote in a Reddit article last year.
By responding in this way, AT&T made the same critical ethics and compliance mistake as Wells Fargo: using “rogue” employees as scapegoats, while ignoring the broader, systemic cultural problem at hand. Within AT&T, the discounts and fee waivers that were being offered weren’t something that store-level employees could have done on their own. “They could only have been done with the approval of management or higher-level employees,” Fox says.
Even if these employees violated the company’s Code of Business Conduct, a truly effective ethics and compliance program can’t be sustained by a paper policy. In fact, according to the complaint, AT&T’s code of conduct was “materially false and misleading,” because, among other things, AT&T does not engage in ethical sales practices, fairly represent products, or act with honesty and integrity, as its code stated.
Securities lawsuit ensues
In public statements, AT&T executives—including the CEO and CFO— touted DirecTV NOW as having “caught fire” and being in high demand, with growth that was described as “dramatic.” In truth, according to the complaint, these claims were a “mirage.” DirecTV Now subscriptions were tanking. Once a promotion period ended, many customers dropped their subscriptions—at least, among those who knew they had an account.
While DirecTV Now subscriptions were “purportedly skyrocketing and so great,” Fox says, AT&T “had metrics that showed that nobody was really using the product.” That should have been a red flag: If it was so successful, why were there metrics showing that nobody was tuning into Direct TV Now? “It was because many people didn’t even know they had the service, didn’t even know they were paying for the service,” she says.
When it was eventually revealed in financial results that DirecTV Now net subscriber additions plummeted more than 85 percent, a law firm investigation ensued. “We wanted to find out the reason for that drop, what had happened within the company,” says Emma Gilmore of Pomerantz, co-counsel in the lawsuit.
“We conducted a very thorough and widespread investigation. When we started to hear about these improper sales tactics, we just kept digging into them,” Fox says. “We found out it was not an isolated incident,” she says, but rather “an engrained, indoctrinated practice.”
When reached out for comment, AT&T had only this to say: “We plan to fight these baseless claims in court,” an AT&T spokesperson said.
As more employees come forward and the evidence continues to build, however, it seems difficult to believe the allegations—as widespread and systemic as they appear to be—truly are baseless. At this time, AT&T would neither confirm nor deny whether any investigation was in the works or whether it has received any inquiries, to date, from the Securities and Exchange Commission or any other agency that may be investigating the alleged fraudulent sales practices.
Moreover, when asked what internal controls the company has in place to ensure such fraudulent sales tactics are not systemic throughout the company and how it mitigates and audits against such a risk, that question, too, was met with the sound of crickets.
Even as recently as a couple of months ago, hundreds of AT&T retail sales associates who have left reviews on sites like Indeed and Glassdoor still lament about an unethical sales culture that cares only about driving DirecTV Now sales at any cost.
How many thousands of customers have been affected, how many employees have been fired, and how many stores are still allegedly engaging in these practices will eventually come to light, as systemic ethics and compliance failures always do. Says Fox, “I think we’ve only uncovered the tip of the iceberg.”