June 3 (Bloomberg) -- Clearwire Corp. distributors lowered credit standards to attract thousands of new customers and inflate subscriber numbers starting in 2009, according to three former dealers.
Clearwire employees told distributors to sign up customers with credit scores below the company’s standard or bypass credit checks altogether, according to dealers including Joe Cruz and AK Kurji. Though the practice pulled in new customers, many soon left Clearwire, often without paying a bill, they said. In e-mails obtained by Bloomberg News, one former Clearwire salesman offered to override any failed credit checks to add customers.
“We would take a copy of their driver’s license and a two-month utility bill and we would send it in for a credit override,” said Kurji, who said he had 19 stores in Texas, Florida and the West Coast. “Our numbers jumped.”
Clearwire has never authorized the practices described by Kurji and Cruz and hasn’t had systematic problems with them, said Mike DiGioia, a spokesman for the company.
Kurji’s staff used lower credit standards from late 2009 until this year to sign up thousands of customers, with about 60 percent of all new customers qualifying for service only through overrides, he said. He closed his business this year after losing money on customers who canceled their contracts, he said.
High customer turnover may make it more difficult for interim Chief Executive Officer John Stanton to move the money-losing company toward profitability and compete against the two largest U.S. wireless operators, AT&T Inc. and Verizon Wireless. Revenue growth and earnings could be hurt if the Kirkland, Washington-based company still has a high percentage of low-credit customers, said Jonathan Chaplin, an analyst with Credit Suisse Group AG.
“These are customers you have to replace every month before you grow,” Chaplin said. “The company would be growing at a faster rate if they didn’t have churn rates as high as they do.”
Clearwire’s revenue is projected to double to $1.26 billion this year, as the net loss widens to $902.2 million, according to average estimates from analysts surveyed by Bloomberg.
The company reported 6.15 million subscribers at the end of the first quarter, up from 688,000 at the end of 2009. The percentage of retail customers who leave each month, or churn, rose from 2.6 percent in the first quarter of 2009 to 3 percent or more for the past seven quarters. Verizon’s retail churn was 1.33 percent in the first quarter.
Clearwire has fraud investigators to deal with salesmen or independent dealers who engage in unauthorized credit practices, said DiGioia, who wouldn’t comment on whether the company has taken steps to tighten its credit oversight recently. The company does have “flexibility” in its credit system so it can offer Clearwire’s contract service to a wide group of potential customers, he said.
“I can’t say that we had a specific program directly set up to address this, but I can say, as a matter of corporate governance, we do have a fraud department that works to look for and address abuses like that,” DiGioia said. “Everything was set up with the best of intentions.”
Clearwire fell 30 cents, or 6.9 percent, to $4.04 in Nasdaq Stock Market trading at 4 p.m. New York time. The shares have dropped 22 percent this year.
The company was reshaped into a high-speed wireless provider offering 4G technology in 2008. Sprint Nextel Corp. took a majority equity stake in the company after folding assets into Clearwire as part of a $3.2 billion investment in the company with Google Inc., Comcast Corp., Time Warner Cable Inc., Intel Corp. and Bright House Networks LLC.
Wholesale and Retail
Clearwire sells capacity on its network wholesale to companies including Sprint and Time Warner Cable so they can resell to consumers, and markets its own Clear service through its own stores and independent distributors like Cruz and Kurji. The company’s wireless service can be used to connect laptops and smartphones to the Internet.
The company, which has lost money for the last ten quarters, has backed away from building its own retail stores after cash shortages. The wholesale business accounted for 4.86 million subscribers at the end of March, more than three quarters of Clearwire’s total.
Cruz started selling Clearwire service at one store in 2009 and later partnered with David Raponi at a few others. They would check credit reports for potential customers with companies like Equifax Inc. and then assign each one a letter grade, from A to E, or N if the customer didn’t have enough information for a score.
A manager for Clearwire encouraged their staff to lower standards to sign up customers who scored D, E or N, covering those with the worst credit, Cruz said. The manager confirmed the practice in an interview and agreed to discuss it on the condition he wouldn’t be identified.
“As time went on, it became more lenient,” said Cruz, who was a distributor for Clearwire for about a year starting in November 2009. “It was just a time bomb.”
Cruz said the Clearwire manager approved certain customers with low credit scores, while his employees handled others. The practice increased commissions for salesmen and helped Clearwire representatives meet sales goals for bonuses, Cruz said.
“Wanted to check with you and see if there’s ANY CREDIT OVERIDES I can help you get in TODAY?” the Clearwire representative wrote in the e-mail obtained by Bloomberg News.
“I always hear from reps ‘I’m not selling because no one can pass credit checks’,” he wrote. “The time has come for you to call BS and on your reps (and yourself if needed!) and for the credit excuse to END now! I will personally enter in the credit overrides under your dealer code.”
“PS, you can thank me later for DOUBLING YOUR COMMISSIONS!” he said in the e-mail dated March 2010.
The Clearwire manager said he thought salesmen were using failed credit tests as an excuse for low sales numbers when, in reality, they weren’t approaching enough potential customers. He left the company last month, he said.
It’s up to general managers for specific Clearwire regions to override failed credit checks, company spokesman DiGioia said. Outside dealers like Cruz would have to send applications to a Clearwire regional manager for approval.
Howard Kim, an independent dealer who runs 12 stores and 21 mobile kiosks in Texas and other states, said he has had a different experience with Clearwire. Kim, who has been selling the wireless service since May 2009, said about 90 percent of his requests for credit overrides are rejected.
Clearwire gave managers leeway to sign up customers with low credit or no credit score under certain circumstances, said Rick Baughman, a former regional vice president for the company.
In Texas, where he and Cruz worked, many people have low or no credit scores, because they’re immigrants without social security numbers or lower-income workers who use cash instead of credit cards. Because of that, people who showed they pay rent or other bills on time could have a credit score overridden.
“In some cases, managers had the ability to override some credit scores,” said Baughman, who said he was laid off in November. “Depending on the day of the month and the month of the quarter, it was encouraged.”
The overrides were practiced nationwide and were sometimes used too often, Baughman said. After hearing about the e-mail to Raponi and Cruz, Baughman said he tightened the credit override policies in his market.
Raponi said his staff signed up thousands of customers by lowering credit standards, and about 80 percent qualified for service only through overrides.
AT&T does at times sign up customers who don’t meet its credit standards, said Mark Siegel, a company spokesman, though it then typically requires extra security such as a deposit. Clearwire would override credit standards if potential customers showed steady payments for utilities or other bills, Cruz said.
Last year, Clearwire installed updated software that made it easier for dealers to sign up customers without social security numbers, which are used in credit checks, said Cruz.
A new button appeared on Clearwire’s credit-check system that allowed salespeople to skip the step of entering a social security number. Instead, dealers could do a “soft” credit check by reviewing names and birth dates, which made it easier to approve customers, he said. Employees could also use the records of people with similar names and better credit to pass a prospective customer, he said.
Baughman confirmed the social-security override software, though he didn’t know of any examples of people using it to enter false information. The button was put in because some users were uncomfortable giving out their number, he said.
DiGioia said the option to skip the social security check was installed because customers expressed privacy concerns.
Cruz, Raponi and Kurji say the credit practices ended up costing them money, though they didn’t realize at the start that would be the case. Customers who signed up for service often left after a few months or weeks, frequently without paying any bills. Cruz and Raponi say as many as 60 percent of their customers were defecting in some months.
Such departures meant that dealers had to pay Clearwire what the company called “chargebacks,” according to Cruz. They had to repay commissions received for new customers and make up Clearwire’s marketing costs if the customer quit his contract within six months, Cruz said.
Dealers began discussing their problems on a website called clearwiresucks.com last year. The three decided to speak publicly this year for the first time, as they heard about others having similar issues.
Kurji, who was told he was one of Clearwire’s top two dealers in the nation, said he closed shop after losing more than $500,000. He is considering a lawsuit against Clearwire, he said. Raponi estimated he lost between $75,000 and $80,000, while Cruz said he still owes Clearwire about $28,000.
The rising payments to Clearwire in chargebacks made it impossible to stay in business, said Kurji.
“How am I supposed to pay for my employees?” he said. “Now I’m bleeding money.”
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