IV. Description of Coral's Activities

A. Coral's Business Practices

Coral is a Florida corporation, and its last-known headquarters was in Boca Raton, Florida. Coral claims to have obtained authorization to charge customers for telephone calling cards through sweepstakes entry forms. These cards enabled customers to charge calls from other places to their local telephone number. For these calling cards, Coral placed ai initial set up fee of $2.99 and a monthly charge of $6.99 on customers' local telephone bills. Coral began billing California customers in May 1997.

CSD offered a series of declarations showing that Coral had billed 258,000 California customers for a Coral calling card, and that 97% of those customers did not use the card. Coral billed almost $6 million to Californians.

The declarations showed examples of the sweepttakes marketing approach that Coral used to obtain customer "authorization" to place charges on local telephone bills. The sweepstakes forms were primarily dedicated to promoting the prize, and only in the fine, seven point, print did the form reveal that the signature authorized Coral to charge the entrant for a telephone calling card. Consumer witnesses testified that they assumed the form was a raffle ticket for a drawing, not a contract authorizing charges to their local telephone number.

CSD investigators retrieved three Coral sweepstakes boxes from three different retail locations in Newark, California. Each of the boxes is about seven inches on a side with an angled top. Photocopies of each side of the boxes are included in the record. The tops have a tablet of forms and an attached pen. A slot on the top of each box is for placement of the completed forms. The forms on all three boxes mention Coral, and the outside of two of the three boxes mentions Coral.

Each of the boxes is different in appearance and has different "official rules" printed on it. Two of the boxes offer a $25,000 prize and one offers $50,000. One box has a picture of an automobile, which is unexplained.

The box that contains the most detailed explanation of Coral's role devotes a small portion--7% of the printed surface area--to the following statement: "Coral Personal Communicator card! Save up to 65% on your long distance calls while you're away from home or the office. Nationwide toll-free personal voice mail service." This is the entire statement on the box relating to Coral.

Each box has a tablet of forms that measure 5.5" wide by 4.25" tall.⁵ Copies of the forms are contained in the record. The forms on two of the boxes state in large letters "ENTER TO WIN $25,000" followed by a paragraph of Rules. The Rules paragraph is printed in eight point type, with lines spaced unusually close together. The Rules paragraph begins with the statement in all capitals "NO PURCHASE NECESSARY" and then goes on to state that Coral will issue a "Coral Communications Calling Card under the terms set forth on the form."

Following the Rules paragraph, the form is perforated.

After the perforation, the form reads: "OFFICIAL L.O.A. FORM" with large spaces below for signature, name, full address, age, "spouse's" age, date, and home phone. Below the spaces appears the following: "THIS IS A DISCOUNT TRAVEL CARD ONLY," followed in capitalized italics by "YOUR TELEPHONE SERVICE WILL NOT CHANGE." Then there appears the following statement printed in dense, seven point type: "I would like a Coral Communications Discount Travel Card sent to me at the address provided above. I authorize Coral Communications, Inc., to bill all calling card usage at 25 cents/minute plus my service fee of up to 25 cents/day and a one time fee of $2.99 to my home number listed above." The form contains no restrictions on who can sign it.

Coral based its claim of authorization to place charges on customers' local telephone bills solely on these forms.

Coral's claim to have obtained even this level of "authorization" for all the telephone numbers it billed is not supported by the record. For example, the purchasing manager for Kings County, California, stated that Coral had charged four county telephone lines. These lines included the line that a Kings County computer uses to call persons ordered to wear electronic monitoring devices. Not surprisingly, Coral was unable to supply any forms that purported to authorize these billings.

Coral memoranda showed that actual use of the calling card was minimal, with only about 3% of the cards ever being used at all. In fact, the actual usage rate was so low that Coral's vice president, William Gallo, admitted to CSD's investigator that Coral simply absorbed the actual costs of providing the calls rather than obtain a CPCN to provide telephone service.⁶ Coral erroneously believed that if it did not charge for the actual calls, it was not required to obtain a CPCN.

CSD also offered a videotape of the Coral sweepstakes promotion at a mall in Tracy, California. The portion of the tape viewed during the hearing⁷ shows that the Coral sweepstakes marketing display contained a boat and a large banner inviting the public to enter to win the boat or a cash prize. No visible signs informed potential entrants that the sweepstakes was associated with any telephone company or telephone service.

Coral's sweepstakes marketing method permitted persons other than the subscriber of record to "authorize" charges on the subscriber's telephone bill. For example, Coral's method allowed children to place charges on their parents' bill. CSD presented witnesses, including middle-school-aged children, who stated that a sweepstakes form was particularly attractive to that age group because the children believe that they will win a prize. One parent reported that when she called Coral to complain about the unauthorized charges, the service representative immediately attributed the charges to the customer's children, even before determining whether the customer had children. From this, we infer that using "authorizations" from children was a common occurrence with Coral.

B. Coral's Billing Agents and Factors

1. ITA

From May 1997 to June 1998, Coral submitted its billings to California and other LECs through ITA. The record contains details of Coral's weekly transactions with ITA for the first half of 1998. The summary of these transactions reveals the amounts that ITA, Coral, and the LECs retained:

Total Nationwide Coral Sales Billed by LECs $8.2 million

LEC Reserves for customer refunds - $1.2 million

Billing and Validation Fees⁸ - $1.0 million

ITA Reserve for refunds - $3.0 million

ITA Factoring Fee and Adjustment - $ .5 million

Amount Advanced to Coral $2.5 million

On March 4, 1998, Pacific Bell notified CSD that it had discontinued billing for Coral Communications through ITA because Coral could not provide proof that it had a CPCN.

In D.99-08-017, the Commission added ITA as a party to this proceeding. ITA, however, has not appeared. At the hearing provided for in D.99-08-017, CSD counsel stated her understanding that ITA had sought bankruptcy court protection. The Commission subsequently issued D.99-10-048, which directed California LECs to cease billing for ITA.

2. Accutel and OAN

Coral used Accutel as its first-level billing agent.⁹ Accutel combined Coral's billings with its own, and presented the combined billings to the second-level billing agent (and factor), OAN.

From May 28, 1998, to July 3, 1998, Accutel provided billing services directly to Coral. These billings, however, were placed on customers' bills using Accutel's name. Accutel billed $1,618,808.40 to California customers in this manner. Of this amount, $540,738.84 has been refunded to customers. Prior to entering into its agreement with Coral, Accutel's officers reviewed "boxes of Letters of Authorization" at Coral's headquarters. Based on their review of these forms, Accutel agreed to perform the billing services for Coral under Accutel's name.¹⁰

Accutel presented the combined billings to OAN. Accutel states that OAN was its "LEC outclearing company" from which we conclude that OAN then transferred the billings to the LECs. Thus, OAN acted as the second-level billing agent for Coral. OAN also provided factoring services indirectly to Coral, according to Accutel's accounting filed with the Commission. In that accounting, Accutel states that OAN factored Coral's accounts and that the fees retained by OAN were $621,515.50.

Accutel stated that it participated in the OAN billing and factoring program as a "subCIC"¹¹ to the Agreement between OAN and Nortel¹² dated January 1, 1997.¹³ OAN stated that it purchased accounts from Nortel pursuant to an Account Purchase Agreement, also dated January 1, 1997, as part of its factoring services. From OAN's description, we infer that OAN purchased the seller's (Accutel) accounts receivable. Consequently, OAN became the assignee of Accutel's accounts receivable. Accutel stated that it did not have a written contract with Coral, hence it is unclear whether Accutel actually obtained title to the accounts receivable or was acting as Coral's agent in transferring the accounts receivable to OAN.

In its supplemental accounting, dated April 17, 2000, OAN disputes many of Accutel's assertions. First, OAN reiterates that neither Coral nor Easy Access was ever a client of OAN; OAN states that it provided billing services on behalf of Accutel. Some of the services billed by OAN for Accutel were, at Accutel's request, designated "Coral Com SSM" for accounting purposes. OAN states that with considerable effort, it was able to provide accounting information on the Coral designated billings.

OAN's supplemental accounting also states that it had provided no factoring services to Coral or Easy Access. OAN states that it provided factoring to Accutel for all of its billings, including the billings designated Coral. OAN calculated that for the California accounts labeled "Coral," it had provided Accutel a total of $271,014 in advance payments. As set out in Attachment 1, OAN collected and retained from California customers a total of $288,690.¹⁴ OAN also stated that it refunded $91,359.77 to California customers.

Subtracting the amount Accutel says it refunded ($540,738.84) plus OAN's refunds ($91,359.77), from the amount Accutel billed to California customers on behalf of Coral ($1,618,808.40), leaves $986,709.80. Accutel states that it paid Coral $308,950.19,¹⁵ and that it retained $147,603.95 in fees, for a total of $456,554.14. Thus, out of the $986,709.80, the disposition of $530,155.66 is not shown on Accutel's accounting. In its supplemental accounting, Accutel attributes this latter amount to OAN's fees.

OAN's accounting is not consistent with Accutel's assertion. According to OAN's accounting, its fee for the nationwide total of Coral-designated Accutel billings was $139,855. OAN states that its total nationwide Coral-designated Accutel billings were $655,657, not $1,618,808.40 as Accutel states.

Clearly, Accutel and OAN are not reporting consistent accounting information. The OAN accountings report on a total of only $655,657, a fraction of the Coral billings Accutel reports, $1,618,808.40. Neither party offered any explanation or attempted to reconcile the data. It appears that the Coral-designated Accutel billings by OAN are a subset of the total Accutel billings. Accutel, however, did not report that it used the services of another billing agent to bill the unaccounted-for amounts. Accutel also did not state that all its billings that went through OAN were labeled "Coral," hence calling into question whether OAN's data would be complete. Consequently, on the record before us, we cannot definitively reconcile this accounting information.

For our purposes, we will rely only on the admissions made by OAN and Accutel as to the amounts they retained from Coral's billings to California customers. As shown in Attachment 1, OAN retained $288,690 from the billings to California customers for Accutel charges labeled "Coral." Accutel states that it retained $147,603.95.¹⁶ The accounting thus shows that OAN, Accutel, and Coral shared amounts collected from California customers as follows:

Accutel $147,603.95

OAN $288,690.00

Coral $308,959.19

Total $745,253.14

Unbillables (per OAN) $ 51,253.00

LEC Adjust. (per OAN) $ 35,165.00

LEC Chrgs/Reserves (per OAN) $ 30,940.00

Total $117,358.00

Total Accounted For $862,611.14

Total Billings Less Refunds $986,709.80

Unaccounted for $124,098.66

OAN and Accutel claim that, as provided in their contracts, the advance payments that Accutel made to Coral and that OAN made to Accutel justify their respective retention of the amounts collected from California customers. We address this contention in section V of today's decision.

3. CCPI and TBS

The record shows that Accutel and OAN did no billing for Coral after July 3, 1998. After that time, Coral contracted with CCPI as its first level billing agent.¹⁷ CCPI combined Coral's billings with those of other carriers and service providers and presented the aggregated billings to TBS, the second-level billing agent, which then presented the billings to the LECs. TBS provided this billing service indirectly to Coral via CCPI from August 17, 1998, to September 28, 1998. TBS was apparently aware that Coral was a client of CCPI, because TBS discontinued such billing when one of its officers read an article in the trade press about Coral's regulatory issues.¹⁸ TBS billed 24,831 telephone numbers in California a total of $461,010.75. Coral presented billings to TBS (via CCPI) only for GTEC and its affiliates; Coral did not present any billings for Pacific Bell. In supplemental information, TBS stated that it billed a nationwide total of $1,799,737.25 for Coral, of which it actually collected $338,084.01. In its accounting, TBS states that it retained $143,978.97 as fees, and $260,000 as reserves.¹⁹

C. Coral's Relationship with Easy Access

In D.98-12-010, based on a motion and supporting declaration by CSD, the Commission added Easy Access, Edward Tinari, and Celestine Spoden as respondents to this proceeding. CSD contended that Easy Access had purchased the calling card business from Coral, and that Easy Access had a business and familial relationship with Coral since Edward Tinari is Michael Tinari's father.

At the April 1999 hearing, CSD presented evidence regarding the alleged purchase. CSD argued that in an agreement dated October 16, 1997, Easy Access agreed to buy, and Coral agreed to sell, Coral's voice mail and domestic long distance calling card business. CSD further stated that numerous Easy Access documents support this interpretation of the agreement. For example, on April 28, 1998, Easy Access issued a Confidential Private Offering Memorandum which contained numerous references to its "acquisition" of the Coral business. CSD also offered internal memoranda which show an Easy Access officer exercising business planning and implementation authority over Coral's operations.

Spoden, Chief Financial Officer of Easy Access, testified that contrary to CSD's contention, Easy Access did not purchase the Coral calling card business. Spoden stated that pursuant to the agreement between the two companies, Coral assigned its accounts receivable, less a 10% management fee, to Easy Access. Easy Access, a publicly traded company that had been in existence for two years or more, was able to obtain a more favorable factoring agreement for the accounts receivable. Easy Access also granted Coral options to purchase stock in Easy Access at a set price. Spoden pointed out that the agreement also stated: "Coral shall be responsible for: generating, coordinating, interpreting and processing in their entirety all sales leads, negative verification postcards, customer service, . . . billing and collection, . . . customer complaints . . . and the filing of all federal and state telecommunications tariffs."

Regarding the day-to-day operations of Easy Access and Coral, Spoden testified that the two companies were located in the same building but in separate, nonadjoining suites, and that there was little business interaction between the officers and employees of each. Spoden explained that the internal documents which appeared to show that Easy Access was exercising business control over Coral actually related to attempt by a corporate subsidiary of Easy Access to implement a calling card business similar to Coral's.

Pursuant to the agreement, Spoden concluded, Easy Access provided factoring-like services to Coral. Coral assigned its accounts receivable, less certain expenses and a management fee, to Easy Access. Easy Access retained the funds collected. Based on the amount collected, Coral accrued rights to purchase Easy Access stock at a set price. At the end of this series of transactions, and after paying all LEC, billing agent, and factor fees and reserves, about 75% of the remaining funds went to Coral, 15% to sales expenses, and 10% to Easy Access.²⁰ Easy Access did not identify the factor.

⁹ Accutel is a Commission-certificated interexchange carrier. It is currently under investigation by the Commission for charging customers for unauthorized services. Investigation into Accutel Communications, Inc., d.b.a. Florida Accutel Communications, Inc., I.99-04-023.