Phone Company Banned From State for 2 Years
An Illinois telephone company accused of illegally switching the long-distance service of more than 7,000 Californians has been ordered to stop doing business in the state for two years.
The harsh penalty, believed to be the first of its kind in the United States, will cost Cherry Communications Inc. millions of dollars in lost revenue during its two-year suspension, regulators said Friday. The company must also send $20 refunds to every customer it switched.
“The commission wanted to send a loud message that ‘slamming’ is illegal in California,” said Larry McNeely, chief investigator for the Public Utilities Commission.
Slamming is the practice of switching telephone customers from one long-distance company to another without their authorization and often without their knowledge. State and federal regulators estimate that more than a million American telephone users have been slammed in the last two years, including several hundred thousand in California.
More than 400,000 California phone customers are projected to become victims of the illegal practice this year.
Cherry Communications, a company with about 500,000 customers in 36 states, built its business through high-pressure telemarketing and aggressive door-to-door sales techniques, officials say. Regulators say Cherry’s agents frequently misrepresented themselves as employees of other phone carriers such as Pacific Bell, forged customer signatures on forms authorizing the changes, and made thousands of improper switches.
State regulators estimate that 2,800 customers were slammed by Cherry in the Los Angeles area and about 700 to 800 in Orange County, many of them Vietnamese and Latinos. Customers will be given their choice of a new long-distance firm once Cherry ceases operation.
Cherry was started in 1991 by James R. Elliott, 43, a former real estate whiz whose Westchester, Ill., company had been in the business of leasing bank-card-processing equipment before it ventured into pay phones and, finally, residential long-distance service.
Elliott, who owns Cherry, was convicted of mail fraud in June 1984 for defrauding two federal loan programs of $135,000. He was sentenced to three months in jail and five years’ probation, according to records. In February 1986, he pleaded guilty to single counts of mail and wire fraud in connection with loans made to him by an Illinois savings and loan on whose board he served. He was sentenced to six months in jail and 4 1/2 years of probation, records show.
Elliott would not comment. But company President David Giangreco acknowledged the company’s marketing problems, which he attributed to growing pains.
“All the problems that we encountered are pretty much a microcosm of the failings of the industry,” he said. “It came to our attention late last year that in the course of our sales activity, a small percentage of field representatives have engaged in conduct improper in nature, and the situation was [aggravated] by a lack of controls.”
Giangreco said the firm, which he estimated has monthly revenue of $40 million to $45 million, has since reformed its practices and no longer uses commission sales agents, whom he blamed for the high volume of slamming complaints.
