Con Air

Travis Credle was intrigued.

The man sitting across the table from him was outlining the problems with local telephone service 1,800 miles away, in Denver. He was telling Credle about the entrenched provider, Qwest, and its dismal customer-service record. About how the Colorado Public Utilities Commission had ordered the Baby Bell to refund $12.7 million to its customers in 1998. How it was the perfect time for a new company to give Qwest some much-needed competition. How the investment group he represented -- Telecom Advisory Services Inc. -- would be doing just that in Colorado, Arizona, Minnesota, Iowa and other states. That Mile High Telecom would be a once-in-a-lifetime opportunity.

It was a performance Frank Southerland was putting on all over Morehead City, North Carolina. He had known Paul Meyer, one of Credle's best friends, for more than four decades, so when Southerland invited Meyer to invest, it was only natural that his friends would be interested as well. Word traveled fast in the close-knit, affluent coastal community, which serves as a jumping-off point for tourists heading to Cape Lookout National Seashore and a string of nearby beach towns.

"He took about ten of us out to dinner," Credle says in his thick Tarheel drawl. "He realized there was a gold mine here, and he courted us. He said he wouldn't put family and friends' money in his other partnerships in the oil-and-gas business, but this looked like a sure hit. Who would present something like this to friends of forty years without believing it?"

It didn't hurt that Southerland liked to recall his own upbringing in the small North Carolina town of Goldsboro: It offset his designer clothing, gold jewelry and Florida residence. He also brought in the big talent, having Tim Wetherald, Mile High's managing partner, and Marc Shiner, a partner in Telecom Advisory Services, meet with potential investors in the spring of 2001. Wetherald also posted a letter on the company's Web site, reminding investors just how badly he believed Colorado customers needed another local telephone-service provider.

"Just as the long-distance monopoly by AT&T was broken up and along came MCI, Sprint and the others, we will be in a position to compete head to head with Qwest for the millions of residential and commercial phone customers throughout the state of Colorado," he wrote. "Fortunately for us, Qwest has the worst customer service rating in the nation. We will capitalize on this trend by building a company that focuses on the customer. The timing is right, the industry is exploding, and with the right management team and partners, the sky is the limit!"

The trio's efforts sold Credle and nine other residents, who were told that fifty units worth $20,000 apiece would be available in Mile High Telecom and each of its sister companies being set up in a half-dozen other states. Credle picked up about ten shares, investing $200,000, and he estimates that Telecom Advisory Services eventually raised a total of $1.5 million just in Morehead City for the projects. (While Telecom Advisory Services was the group spearheading the sales pitch for all the states, each of the phone companies is an independent business with its own investors.)

"The timing was perfect for them, because the market was down, and people were seeing their 401(k)s go down," says investor Bernie Baake, a retired Morehead City engineer. "I thought, 'I'm losing money anyway -- what the heck.'"

Hundreds of miles away, a Minnesota man received a random fax about Mile High Telecom, which was scheduled to launch service in July 2001, and wanted to find out more; like Coloradans, Minnesota telephone customers are essentially Qwest-dependent.

"I called and talked to Southerland," says Steve Petersen. "He told me getting involved in this was like having a license to steal. I knew that people were dissatisfied with Qwest, and I knew we had a chance to land a lot of customers."

By March 2001, the suburban Minneapolis bill collector had invested a total of $200,000 in start-up telephone companies in Colorado, Arizona and Minnesota.

"Frank Southerland just called up one day out of the blue," says Robert Brown, who lives in Hannibal, Missouri, and runs a trucking company. "He said there were fifty units for sale, and he'd never get a dime until we all got our money back. Old Frank was pretty smooth. Southerland said that in a year and a half, we'd have our money back and then get monthly or quarterly checks. He said that when they got to 15,000 customers, that would be the magic number."

Brown figured that if an upstart phone company could be profitable with just a few thousand customers, it might be a gamble worth taking. He eventually anted up more than $100,000 in new telephone companies in Colorado, Arizona, Washington and Minnesota.

Most of the 65 investors in Mile High Telecom were successful small-business men who were excited by the deregulation of the telephone industry and looking for investments outside of the tanking stock market. From them, Southerland raised $1.4 million for the Denver operations. But Credle says classic "boiler room" sales tactics were used to seduce backers, with a crew of salespeople working out of a small Boca Raton office and reading from a script. Seasoned telemarketers in such operations usually make large commissions pitching "can't miss" investments with big returns. They often target elderly people with money in 401(k)s or retirement accounts and exchange lists of potential prospects with other telemarketers.

"They'd want to know if you had the funds to invest within two weeks," says Credle, who is a successful tennis-court and recreational-facility contractor in Morehead City. "They would say, 'I only have a half a unit left' and then call back and say somebody backed out and they can sell you a whole unit. They were real slick talkers and could make you believe anything."

Telecom Advisory Services' promoters, including Southerland and Shiner, even flew several investors to Denver to see Mile High's busy headquarters building on Parker Road. "Everybody who went to Denver came back with a positive story on Mile High's employees and the phones ringing off the hook," Credle says. "They were doing a lot of telemarketing. They were putting ads in the papers. Mike Rosen was promoting it on his radio show. They had a whole floor in an office building, and 75 employees."

("I liked the idea that there was competition with Qwest for telephone customers," says Rosen, who was paid a standard fee for his services. "My producer signed up [with Mile High] and has been quite satisfied with the service." Rosen has recently done spots for 2U Wireless, another telecom venture promoted by Wetherald.)

The company was structured as a joint partnership, with 70 percent owned by the investors -- five of them, including Credle and Petersen, served as managing partners -- and 30 percent owned by On Systems Technology, the management company running Mile High's day-to-day operations. On Systems is owned by Wetherald, Shiner and several others; what investors weren't told was that it was once called Voice Networks Inc. and engaged in "toll-bridging," the practice of forwarding telephone calls to evade long-distance charges. In 1999, US West accused the company of defrauding it of more than $1 million. The PUC investigated and found that Voice Networks -- whose executive vice president was Tim Wetherald -- had deceived US West. The company declared bankruptcy and was reorganized as On Systems Technology.

Now Qwest (formerly US West) leases space on its telephone network to Mile High Telecom, essentially its former nemesis, under the terms of the federal Telecommunications Act of 1996, which required Baby Bells to open their systems to competitors. Mile High buys the space at wholesale prices and resells the service to residential and business customers, offering bargain rates of just $14.91 for a basic line and long distance for seven cents a minute. By last spring, the company, advertising itself as a spunky rival to Qwest, had more than 10,000 customers.

That growth convinced most investors that they had put their money in a promising venture that would ultimately reap big profits. Twice a month, they got e-mails from the company boasting about the number of new customers signing up for service.

"The original financial projections called for the first partnership [Mile High] to have its first profitable month in June," Southerland e-mailed investors in July 2002. "Actually, the first profitable month was April, two months ahead of projections. About 15,000 customers should be in billing by August, according to Tim... The first dispersal of funds to the Mile High partnership may occur at the end of the third quarter of this year. If you wish to be in the Iowa/Nebraska partnership, give me a call as it is filling up."

Steve Petersen was so impressed that he called Wetherald in June and told him he had a million dollars to invest. Wetherald jumped on a plane to Minneapolis. But Petersen, who hadn't met Mile High's managing partner in person before, became immediately distrustful. Even though he's soft-spoken and friendly in the way Minnesotans are famous for, Petersen prides himself on being able to see through lies. "Being a bill collector, you learn to read people pretty fast," he says. "I called my wife and said, 'These people are bad.'"

He started doing a search on the backgrounds of many of the people involved in Mile High, and what he found was stunning. Genesis Telecommunications, a long-distance service provider that Wetherald had promoted in Washington state, had collapsed amid allegations of fraud, and a 1995 consent decree effectively barred him from doing telecom work in that state. And in 1991, Oregon obtained a three-year injunction against Wetherald, preventing him from doing business there after two telecom firms he promoted declared bankruptcy.

Last March, the U.S. Securities and Exchange Commission filed charges in federal court against Shiner, alleging that he promoted investments in a bogus California energy company that defrauded 580 investors of more than $10 million. He had also spent four months in federal prison for tax evasion.

But Petersen says rather than deny any bad intentions, Telecom Advisory Service's sales team invited him to join them. "I flew to Denver in July, and they took me out and wined and dined me."

At Morton's steakhouse in lower downtown, Petersen shared dinner and a cigar with Shiner. As he recalls, "When I said, 'I have a million bucks to invest,' [Shiner's] eyes glazed over, and he said, 'We have a good use for that; we need to get you involved.'"

Petersen says he thinks Shiner believed he was on their side; instead, he began trying to contact other investors, some of whom didn't want to believe they'd been had.

"I e-mailed some of the investors," he recalls. "I got this nasty e-mail back from Travis. He said, 'Why are you sending out this unsubstantiated stuff?'"

But others had also begun to suspect that Mile High Telecom and the other companies were frauds. Engineer Baake says he became suspicious after meeting the 58-year-old Shiner, who lives in Boca Raton and fancies black turtlenecks, dark suits and plenty of hair gel. "He wore ostentatious gold rings. I wasn't born yesterday," he says.

Baake began inquiring about how the money raised for the telecom companies was being used; he says he elicited different responses depending on whom he asked. "One said the money went into software development, and another said it went into sales, and someone else said it went to recoup money he expended personally. There were three different stories about where the money went. That was in June, and I knew we were in trouble."

In July, just after Southerland's upbeat e-mail seeking additional investments, Baake called the Colorado Public Utilities Commission and discovered that Mile High Telecom had never been properly licensed to operate in Colorado and was at risk of being shut down. He tape-recorded his conversation with the PUC staffer and took it to a meeting of investors in Morehead City.

"I played the tape for several of the investors, and their jaws dropped open," Baake says. "You could see the realization start to sink in, but even then, people were reluctant to admit they'd been scammed."

Credle was devastated.

"They steal your trust and make you feel like an idiot," says the former commercial fisherman. "This has disrupted my life and my business."

Petersen and Credle vowed not to creep away and lick their wounds. Instead, they're trying to wrest control of Mile High Telecom from Shiner and Wetherald.

"I think we can still salvage this thing," Petersen says. "A lot of customers have told us they want to stay with us. We could pick up the pieces and move forward. That's the only way the investors have any hope of recovery."

But the company's current management isn't giving up, either. Shiner claims he's being slandered. "There's a group of people out of Morehead City spearheading this attack," he says. "It's character assassination. This is a conspiracy to steal our 30 percent interest in the project."

Southerland says he's being unfairly smeared as the bad guy when he was just a salesman working on commission who genuinely thought the phone companies were a good investment.

"I had some close friends involved in this," he says. "I thought it was as good as anything I'd ever seen, at least on paper. I thought it had virtually no downside. Until Steve Petersen and Travis Credle started this, Mile High had 10,000 customers, and everybody seemed satisfied. Now I can't get any information from either side. I'm not able to participate and find out what's going on, even though I was the person who sold most of them their units."

Regardless of who has control, Mile High Telecom is in trouble with the PUC. The company never filed the proper documents to offer telephone service in the state, and the PUC now says Mile High used fraudulent behavior when interacting with it. Plus, Qwest says the company owes it more than $4 million for the use of its network and has asked the PUC for permission to discontinue service.

However, Wetherald contends that Qwest overbilled Mile High for $1.8 million and owes the company $3 million in "quality of service credits" for "subpar" service.

Qwest insists there were no service-quality problems -- although its own recordkeeping has been in the news with a potential bankruptcy, restated financials and government investigations of its accounting practices. "We absolutely dispute the fact that we owe them any service-quality credits," says Qwest spokeswoman Rebecca Tennille.

To further complicate matters, Mile High filed for Chapter 11 bankruptcy protection before Christmas, which Wetherald says he did so that the company would have a chance to reorganize and delay Qwest's request to disconnect them from its network. And On Systems Technology is suing Credle, Petersen and Premier Communications -- another upstart phone carrier that had agreed to absorb Mile High's operation -- claiming they've conspired to seize control of the business. They have countersued, alleging that Wetherald, Shiner and the other promoters conspired to defraud investors.

"The counterclaims against me are laughable and outright lies," Wetherald says. "When this gets in front of a judge, they'll have a lot of problems. As far as Credle, he may be an ignorant redneck who is totally pissed off about things he doesn't know about. Steve Petersen saw an opportunity to get his fingers in this. He has a motivation to do this that has nothing to do with benefiting the investors. They've destroyed a business that had 14,000 customers. These guys have created a lot of damage; they're spreading disinformation. Most of what they tell you is horse crap. Mile High is where it is because of their interference."

Shiner agrees, insisting that "they set out to destroy the joint-venture agreement. This is a case of simple greed. They wanted to steal our 30 percent interest. We were billing over half a million dollars a month. We had 14,600 customers in eleven months. That doesn't seem like a scam. Petersen and Credle were both in the office numerous times to see if we were for real. We had over 100 people working there. This was a very real business."

A very real business about to lose its customers back to Qwest. In December, the utilities commissioners delivered a blow to investors when they ruled that Mile High's customers should be reassigned to Qwest once the company shuts down. Credle and Petersen hoped the agency would assign them to Premier Communications, but the commissioners were skeptical that Premier would have the financial backing to operate a phone company for long.

All of this has created a legal tangle that leaves even lawyers scratching their heads. And that, Credle says, was exactly Shiner and Wetherald's strategy. He thinks they plan to drag out Mile High's demise as long as possible to continue pocketing the revenues from customers without paying Qwest.

After investors contacted the PUC, the agency began examining Mile High's dealings with it. In a report issued in October, the PUC staff charged Wetherald and others involved in operating Mile High with deceiving the agency into believing they had authority to sign documents on behalf of the Mile High partnership.

"This case presents a unique situation because of the potential that misrepresentations to and fraud upon the commission have been committed by an individual, under the watch of, and perhaps with the complicity of, a law firm and its attorneys," wrote the staff.

The report accuses Wetherald and his attorney, Michael Glaser, of intentionally misleading the PUC by submitting a letter on behalf of the Mile High Telecom partners signed by Leon Swichcow, one of the company's promoters. The letter stated that the partners had given Wetherald permission to enter into agreements with the PUC on their behalf, even though Petersen and Credle say that they never approved anything of the sort and that Swichcow misrepresented himself as a partner in Mile High Telecom.

"It now appears that Mr. Swichcow was not in a position to provide actual authority to Mr. Wetherald and that the Swichcow letter was a sham designed to mislead staff and the commission," reads the report, adding a recommendation that the commissioners reprimand Glaser and his firm, Lottner Rubin Fishman Brown & Saul.

But Glaser's attorney, Paul Cooper, says the PUC is targeting his client unfairly, since there was no way for Glaser to know that Swichcow didn't have signatory authority. "They're mad at the wrong people," Cooper says. "It's a kill-the-messenger kind of thing."

(Glaser no longer works for Lottner Rubin, and a spokesman for the firm says they have been advised not to discuss the matter publicly.)

But the commission saved most of its venom for Wetherald, with the report even suggesting that the Denver district attorney be asked to file criminal charges against him.

"Staff believes that Mr. Wetherald has shown a disdain and contempt for the authority of the commission that is unmatched and unprecedented," the report reads. "Therefore, staff believes that the commission would be well justified in...ordering that Mr. Wetherald has lost the privilege of holding a {license} issued by the commission to operate in this state, and that his involvement in any manner with a commission-regulated public utility in this state so taints such utility that it should be forbidden from operating in this state."

For his part, Wetherald maintains he's been wrongly accused by the agency.

"The PUC staff did not act properly in any of this," he says. "The staff took things at face value and didn't bother to read the agreements, which give me the authority to do what I did."

Despite the PUC staff report's angry tone, the agency has little enforcement power. To crack down on scam operators, under current law the PUC has to go through the courts, a process that could take two years, and the agency lacks the authority to impose fines without a court order. The report itself alludes to this weakness, saying, "It is imperative that however incapable the commission feels it may be of imposing a sanction or meaningful remedy against bad actors, that it not refrain from identifying who the bad actors are for future reference."

Part of the problem is that the PUC is still operating under laws from the days of heavily regulated monopolies and is unprepared to deal with potential swindlers who see the opening of the telephone market to competition as a field day for fraud. "The commission staff is made up of analysts and attorneys who are experts in rate cases, but they don't have a staff of investigators and enforcement folks who can investigate these kinds of activities," says Dian Callaghan, director of administration for the state Office of Consumer Counsel. "What would be useful is for the commission to have authority to issue a cease-and-desist order. They don't have that. There's little they can do in a short period of time."

In the future, Callaghan predicts situations like Mile High Telecom's will become more common, and the PUC's role will have to change.

"The commission's role will become more and more that of enforcement as the market becomes less regulated," she says. "Some of what is happening is a by-product of a competitive marketplace. The PUC needs to have the tools to deal with this."

Especially with con artists moving into the deregulated utility business all over the country. California's deregulated energy market has produced the best-known scams, with huge companies like Enron playing leading roles. But small-scale operators have also used the promise of big profits in the California power market to separate investors from their cash.

In the U.S. Securities and Exchange Commission case against Shiner and several other Florida-based promoters over a bogus plan to sell electricity in California, the complaint indicates that "one investor was told that the only risk was that Los Angeles could fall into the Pacific Ocean. Many investors were elderly and rolled over money from IRA and 401(k) accounts."

Shiner claims that his involvement in the deal never went beyond providing sales leads.

"I was not involved in sales. I sold leads, period," says Shiner. "I did not have any contact with investors. That case will go to trial in two years, and we believe we will prevail."

But he hasn't always. Aside from his 1998 stint in federal prison for tax evasion, in 1986 the SEC barred Shiner from association with any stockbroker or investment company for five years, saying he had failed to disclose a 1984 Massachusetts conviction for insurance fraud and larceny.

"About eight states have taken action against Shiner for the sale of unregulated securities in their states," says Daniel Sotler, an investigator for the Florida Office of the Comptroller. "For the last ten years, Shiner has created three new companies every year, and they always have the same address. After the deals collapse, there's nothing left."

The money raised goes to hefty sales commissions for the boiler-room staff and to Shiner and his associates, Sotler says. They usually lease office equipment, cars, and even their own homes so there are no hard assets, and the paper trail left behind is invariably complex and almost impossible to make sense of.

Shiner refuses to discuss his other projects.

"I have several different business ventures," he says. "To discuss what I do is not germane. Suffice it to say I'm a businessman and have been in business for several years."

Florida has filed charges against several of the people who worked with Shiner on the California power-company promotion, but Sotler says most of Shiner's deals are intentionally smaller. Usually about 100 shares are being hawked at $20,000 each. (Mile High had only fifty shares available at that price.)

"They've formed a half-dozen partnerships all along the same lines," Sotler explains. "They try to limit it to 80 to 120 [investors] and a million and a half dollars."

By setting up operations in multiple states and keeping the amount raised below a certain level, the promoters hope to evade the attention of federal law enforcement, Sotler says.

"It's a minimalist approach. If you walk into an FBI office and say, 'They took over a million from us,' they'll say, 'Sorry, but we don't have a lot of resources.'"

When state and federal politicians deregulated the telephone industry in the mid-1990s (Colorado started the process in 1995), they promised that consumers would soon enjoy bargain rates for local telephone service as old monopolies disappeared and new competition emerged.

It hasn't worked out that way. While businesses in places like downtown Denver and the Denver Tech Center are courted by several phone companies that spent millions putting fiber-optic lines in place to serve those areas, most small-business and residential customers in Colorado are still at the mercy of just one phone carrier.

Callaghan says only about 7 percent of residential customers in Colorado have a choice for their local phone service. "It's discouraging," she says. "It's fair to say that competition for the residential market is nascent competition at this point."

While a few companies -- notably AT&T Broadband and McCleod USA -- offer residential telephone service in some parts of Colorado, there has been no rush to provide consumers with a real alternative to Qwest. The recent financial crisis in the telecom industry has meant that money to build new networks has disappeared.

"If the money's not available for investment, it's not going to happen," notes Callaghan.

The Baby Bells are bitterly opposed to having to open their networks and have lobbied in Washington against the requirement for years. The Bush administration appears ready to give them what they want, as the Federal Communications Commission is reportedly preparing to abolish the requirement. FCC Chairman Michael Powell -- son of U.S. Secretary of State Colin Powell -- has said he thinks it's wrong for the established phone companies to have to share their lines with competitors. Powell is adamant that would-be telecom companies need to build their own facilities rather than depend on the lines built up over decades by government-sanctioned monopolies. However, with the telecom industry decimated by the bursting of the Internet bubble, the money to build rival networks is nowhere in sight, and many believe that excluding competitors from using Qwest's lines would be a huge mistake.

"That could wipe out residential competition," Callaghan warns.

While the odds are against Mile High, Petersen and Credle still believe it can be a viable company.

"The customers are the only equity we have to try to recoup our investment," Credle says. "The original money we put in has long since disappeared, and there's $4 million unaccounted for in non-payment to Qwest."

However, the PUC's December decision to shut down Mile High and transfer its customers back to Qwest may end all hope for the investors. They thought the deal they had negotiated with Premier was a good one for customers and are angry that the utility commissioners wouldn't go along with the idea.

"I'm disappointed in the whole process with the PUC," Credle says. "We were hoping Premier would be made the default carrier. We felt like they were a viable group to handle the customers."

Mile High is still operating, and the bankruptcy filing may allow it a respite before Qwest finally pulls the plug, but it seems unlikely that the company will last much longer.

The investors are still hoping to get control of start-up companies in other states; Petersen believes they may soon win a license to operate the Minnesota Phone Company, which has about 800 customers. However, that may be a mixed blessing, as the company is being sued by several customers who allege that they found hundreds of dollars in bogus charges on their bills.

"It's a really screwed-up mess," Petersen says. "I think the Minnesota Phone Company can survive with what little they have left. When I invested, I didn't expect to wind up running the company."

In Iowa, the state utilities board, which has greater enforcement power than the Colorado PUC, shut down the Iowa-Nebraska Phone Company last August after finding that the company had advertised local telephone service without obtaining a license to operate. The Arizona Corporation Commission has also scheduled hearings this month on the Arizona Phone Company, looking at allegations of improper licensing and a failure to pay Qwest $2.8 million.

In Morehead City, Credle often concludes his construction deals with a handshake and doesn't bother to draw up contracts. Now he feels like he's had an education in the seamy side of business. "I've looked at a lot of crooks the last few months," he says.

But to Credle, the lowest point in the whole affair may have come in November 2001. That's when Mile High promoters faxed many of the investors a copy of a $5,000 check they claimed to have sent to a fund set up to benefit the widows and children of the New York City firefighters who lost their lives at the World Trade Center.

"I called the firefighters' association, and they said they never got the check," he says.

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Stuart Steers
Contact: Stuart Steers