att lawsuit (1)

8/19/2019 ATT Lawsuit (1)

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Cause No. __________

KENNETH ELAN, Derivatively on Behalfof AT&T INC.,

Plaintiff,

v.

RANDALL L. STEPHENSON, RAFAELDE LA VEGA, JOYCE M. ROCHÉ, JOHNB. MCCOY, LAURA D'ANDREA TYSON,JON C. MADONNA, MATTHEW K.ROSE, SCOTT T. FORD, MICHAEL B.MCCALLISTER, CYNTHIA B. TAYLOR,BETH E. MOONEY, JAMES H.BLANCHARD, GILBERT F. AMELIO,PATRICIA P. UPTON, LYNN M.MARTIN, REUBEN V. ANDERSON,JAIME CHICO PARDO, and JAMES P.KELLY,

Defendants,-and-

AT&T INC., a Delaware corporation,

Nominal Defendant.

§§§§

§§§§§§§§§§§§§§§§§§§§§§

IN THE DISTRICT OF

DALLAS COUNTY, TEXAS

_______ JUDICIAL DISTRICT

STOCKHOLDER DERIVATIVE PETITION FOR BREACH OF FIDUCIARY DUTY

AND UNJUST ENRICHMENT

Pursuant to Rule 190.1 of the Texas Rules of Civil Procedure, plaintiff Kenneth Elan

("Plaintiff") would show that discovery is intended to be conducted under Level 3 of this Rule

due to the complexity of the case. Plaintiff, by his attorneys, submits this stockholder derivative

petition for breach of fiduciary duty and unjust enrichment against the defendants named herein.

NATURE AND SUMMARY OF THE ACTION

1. This is a stockholder derivative action brought by Plaintiff on behalf of nominal

defendant AT&T Inc. ("AT&T" or the "Company") against certain of its officers and directors

for violations of law, breaches of fiduciary duty and unjust enrichment. This action arises out of

defendants' complete and utter failure to oversee the Company's business and ensure it complied

DC-16-02810Tonya P

DALLAS

3/11/2016 10

FELI

DISTRI

CIT ES



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with the law. For years, the Individual Defendants (as defined herein) breached their duty of

loyalty to the Company which has resulted in AT&T including unauthorized third-party charges

in its customers' wireless bills and failing to present such charges in a fair and comprehensible

manner. The Company's billing practices violated section 5(a) of the Federal Trade Commission

Act ("FTC Act"), 15 U.S.C. §45(a) ("Section 5(a)"), section 201(b) of the Communications Act

of 1934 ("Communications Act"), 47 U.S.C. §201(b) ("Section 201(b)"), section 64.2401 of the

Truth-in-Billing rules, 47 C.F.R. §64.2401 ("Section 64.2401"), and various state laws. As a

result of this wrongdoing, the Federal Trade Commission ("FTC"), Federal Communications

Commission ("FCC"), and state authorities fined the Company a record $105 million.2. Since the late 1980s, AT&T has charged its telecommunications customers for

third-party products and services that the customers did not authorize, a practice that is

commonly known as "cramming." As noted by regulators, cramming can only occur with the

approval of a telecommunications carrier. In particular, the carrier allows third-parties to place

charges on its customers' telephone bills. The carrier (which controls access to the consumers'

wireless bills) establishes such an arrangement (typically via contract) with a third-party vendor

that purportedly provides the service that the customer is being charged for and/or a billing

intermediary that the vendor has contracted with (also known as an aggregator). The third-party

vendors and billing aggregators have been able include charges on the bills of service carriers'

customers, including wireless bills, with or without authorization from the customer for those

charges. As revealed by numerous legal and enforcement actions related to cramming, as well as

regulatory investigations and reports, "proof of authori zation is not general ly provided to or

required by the bil li ng carr ier " and "[t]he billing carrier may not require the aggregator [or



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vendor] to clearly identify the good, product, or service for which the consumer is being

charged."1

3. AT&T's third-party billing practices generally follow this model. AT&T relies on

aggregators to ensure that the third-party vendors obtain authorization from AT&T's customers

for submitted charges. However, the third-party vendors and aggregators often did not obtain

such authorization. Consequently, AT&T's customers received bills with charges for services

they never agreed to or requested. Moreover, AT&T's telecommunication services bills failed to

present the third-party charges in a fair or legally compliant manner making it difficult for its

customers to decipher the erroneous charges. Even when customers were able to determine thatthe Company charged them for unauthorized third-party charges and notified AT&T accordingly,

the Company inconsistently provided assistance and refunds, at times refusing to provide any

refunds.

4. Initially, the Company engaged in cramming for both its landline and wireless

customers. It discontinued its landline cramming practice in early 2012, in the face of

overwhelming regulatory scrutiny and imminent legislative and enforcement action. AT&T

continued this practice on its wireless customers until at least 2014, even though there is no

substantive difference between landline and wireless cramming. Wireless cramming violates

substantially the same laws as landline cramming, and by the time AT&T agreed to stop landline

cramming, wireless cramming posed an equal or greater threat to AT&T and its customers.

5. Moreover, for over a decade, regulators and consumers have specifically and

negatively securitized wireless cramming. In fact, AT&T faced numerous lawsuits dating back

1 See 2012 Further Notice (as defined herein); see also 2014 Staff Report (as defined herein).



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to at least 2005 concerning wireless cramming. The Company and its management also received

ample warning establishing the serious threat posed by wireless cramming, including millions of

customer complaints, numerous alerts and reports from industry auditors, internal reports, and

repeated regulatory probing. While these warnings continued to pour into AT&T, the Company

(and other benefactors of cramming) misled regulators to believe that cramming was not a

serious threat. These efforts enabled AT&T to continue to collect the easy revenues provided by

third-party charges (including unauthorized charges) in violation of law.

6. Persistent consumer complaints drove ongoing investigations into wireless

cramming. By 2014, the Company could no longer deny that wireless cramming was a pervasive problem and significant threat. Consequently, on October 8, 2014, the Company settl ed with

federal regulators and state authori ties for $105 mill ion related to AT&T's improper wireless

billing practices and potential violations of law.

7. The Individual Defendants are ultimately responsible for the Company's improper

third-party billing practices and the resulting fine. As detailed herein, despite the importance of

its wireless segment and the magnitude and duration of the cramming issue at AT&T, the



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JURISDICTION AND VENUE

8. This Court has jurisdiction over each defendant named herein. AT&T is a

corporation that conducts business in and maintains operations in and throughout Texas. The

Individual Defendants also have sufficient minimum contacts with Texas so as to render the

exercise of jurisdiction by this Court permissible under traditional notions of fair play andsubstantial justice.

9. Venue is proper in this Court because one or more of the defendants either resides

in or maintains executive offices in this County, a substantial portion of the wrongs complained

of herein, including the defendants' primary participation in the wrongful acts detailed herein and

aiding and abetting and conspiracy in violation of fiduciary duties owed to AT&T occurred in

this County, and defendants have received substantial compensation in this County by doing

business here and engaging in numerous activities that had an effect in this County.

THE PARTIES

Plaintiff

10. Plaintiff was a stockholder of AT&T at the time of the wrongdoing complained

of, has continuously been a stockholder since that time, and is a current AT&T stockholder.

Nominal Defendant

11. Nominal defendant AT&T is a Delaware corporation AT&T is a leading provider

of telecommunications services in the United States and the world and offers products such as



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wireless communications, local exchange services, long-distance services, data/broadband and

Internet services, video services, telecommunications equipment, managed networking, and

wholesale services. The Company operates through wireless subsidiaries, wireline subsidiaries,

and other subsidiaries. As of December 31, 2014, AT&T served more than 120 million

subscribers. AT&T maybe served with process at 208 S. Akard Street, Dallas, Texas 75202.

Defendants

12. Defendant Stephenson is AT&T's CEO, President, and Chairman of the Board

and has been since June 2007 and a director and has been since June 2005. Defendant

Stephenson was also AT&T's Chief Operating Officer from 2004 to June 2007; Chief FinancialOfficer from 2001 to 2004; and held various other positions with the Company beginning in

1982. Defendant Stephenson breached his fiduciary duty of loyalty by knowingly or recklessly:

(i) failing to implement internal controls over Board-level reporting, compliance with applicable

law and the Company's own internal policies, and communications with regulators;

and (iii) causing or allowing the Company to bill its customers for unauthorized third-party

charges and present such charges on its bills in violation of applicable law. Defendant

Stephenson also breached his fiduciary duties by causing or allowing significant control gaps in

the Company's anti-cramming program. AT&T paid defendant Stephenson the following

compensation as an executive:



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Defendant Stephenson may be served with process at 5333 Edlen Drive, Dallas, Texas 75220.

13. Defendant Rafael de la Vega ("de la Vega") is AT&T's Vice Chairman, and Chief

Executive Officer of AT&T Business Solutions and International and has been since February

2016. Previously, Defendant de la Vega was President and Chief Executive Officer of AT&T

Mobile and Business Solutions from August 2014 until February 2016. Defendant de la Vega

was also AT&T's President and Chief Executive Officer of AT&T Mobility and Consumer

Markets from 2007 to 2014. Defendant de la Vega breached his fiduciary duty of loyalty by

knowingly or recklessly: (i) failing to implement internal controls over Board-level reporting,

compliance with applicable law and the Company's own internal policies, and communications

with regulators; and (ii) causing or allowing the Company to bill its customers for unauthorized

third-party charges and present such charges on its bills in violation of applicable law.

Defendant de la Vega also breached his fiduciary duties by causing or allowing significant

control gaps in the Company's anti-cramming program. AT&T paid defendant de la Vega the

following compensation as an executive:



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Defendant de la Vega may be served with process at 1210 Troon Court, Alpharetta, Georgia

30005.

14. Defendant Joyce M. Roché ("Roché") is an AT&T director and has been since

October 1998. Defendant Roché breached her fiduciary duty of loyalty by knowingly or

recklessly: (i) failing to implement internal controls over Board-level reporting, compliance with

applicable law and the Company's own internal policies, and communications with regulators;

and (ii) causing or allowing the Company to bill its customers for unauthorized third-party

charges and present such charges on its bills in violation of applicable law. Defendant Roché

also breached her fiduciary duties by causing or allowing significant control gaps in theCompany's anti-cramming program. AT&T paid defendant Roché the following compensation

as a director:

Fiscal Year Fees Paid in Cash Stock Awards

All OtherCompensation Total

2014 $157,600 $150,000 $13,646 $321,246

2013 $139,400 $150,000 $8,165 $297,565

2012 $116,600 $150,000 $19,352 $285,952

2011 $120,900 $150,000 $15,251 $286,151

Defendant Roché may be served with process at 2 Flowing Wells Lane, Savannah, Georgia

31411.

15. Defendant John B. McCoy ("McCoy") is an AT&T director and has been since

the October 1999. Defendant McCoy was AT&T's Lead Director from March 2007 to March

2008. Defendant McCoy breached his fiduciary duty of loyalty by knowingly or recklessly: (i)

failing to implement internal controls over Board-level reporting, compliance with applicable

law and the Company's own internal policies, and communications with regulators; and (ii)

causing or allowing the Company to bill its customers for unauthorized third-party charges and

present such charges on its bills in violation of applicable law. Defendant McCoy also breached



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his fiduciary duties by causing or allowing significant control gaps in the Company's anti-

cramming program. AT&T paid defendant McCoy the following compensation as a director:



2014 $151,900 $150,000 $15,102 $317,002

2013 $151,600 $150,000 $10,102 $311,702

2012 $132,900 $150,000 $23,746 $306,646

2011 $148,000 $150,000 $24,394 $322,394

Defendant McCoy may be served with process at 6767 N. Ocean Boulevard, Apt. 15, Boynton

Beach, Florida 33435.

16. Defendant Laura D'Andrea Tyson ("Tyson") is an AT&T director and has been

since October 1999. Defendant Tyson is also a member of AT&T's Audit Committee and has

been since at least March 2011; Chair of the Public Policy and Corporate Reputation Committee

and has been since May 2015 and a member and has been since May 2012. Defendant Tyson

breached her fiduciary duty of loyalty by knowingly or recklessly: (i) failing to implement

internal controls over Board-level reporting, compliance with applicable law and the Company's

own internal policies, and communications with regulators; and (ii) causing or allowing the

Company to bill its customers for unauthorized third-party charges and present such charges on

its bills in violation of applicable law. Defendant Tyson also breached her fiduciary duties by

causing or allowing significant control gaps in the Company's anti-cramming program. AT&T

paid defendant Tyson the following compensation as a director:

Fiscal YearFees Paidin Cash Stock Awards

Change inPension Value

and Non-QualifiedDeferred

CompensationEarnings


2014 $144,000 $150,000 $5,498 $102 $299,600

2013 $137,700 $150,000 $6,907 $102 $294,709

2012 $123,700 $150,000 $1,640 $7,739 $283,079

2011 $135,100 $150,000 $3,000 $6,957 $295,057



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Defendant Tyson may be served with process at 2015 Los Angeles Avenue, Berkeley, California

94707.

17. Defendant Jon C. Madonna ("Madonna") is an AT&T director and has been sinceSeptember 2002. Defendant Madonna is also Chair of AT&T's Audit Committee and has been

since at least March 2010. Defendant Madonna was AT&T's Lead Director from February 2010

to January 2012. Defendant Madonna breached his fiduciary duty of loyalty by knowingly or




charges and present such charges on its bills in violation of applicable law. Defendant Madonna

also breached his fiduciary duties by causing or allowing significant control gaps in the

Company's anti-cramming program. AT&T paid defendant Madonna the following

compensation as a director:



2014 $172,100 $150,000 $102 $322,202

2013 $172,100 $150,000 $1,102 $323,202

2012 $159,200 $150,000 $7,856 $317,056

2011 $195,300 $150,000 $8,962 $354,262

Defendant Madonna may be served with process at 27235 N. 103rd Street, Scottsdale, Arizona

85262.

18. Defendant Matthew K. Rose ("Rose") is an AT&T director and has been since

September 2010. Defendant Rose was also a member of the Public Policy and Corporate

Reputation Committee from at least November 2011 to May 2012. Defendant Rose breached his

fiduciary duty of loyalty by knowingly or recklessly: (i) failing to implement internal controls

over Board-level reporting, compliance with applicable law and the Company's own internal



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policies, and communications with regulators; and (ii) causing or allowing the Company to bill

its customers for unauthorized third-party charges and present such charges on its bills in

violation of applicable law. Defendant Rose also breached his fiduciary duties by causing or

allowing significant control gaps in the Company's anti-cramming program. AT&T paid

defendant Rose the following compensation as a director:



2014 $134,600 $150,000 $22,064 $306,664

2013 $138,300 $150,000 $15,102 $303,402

2012 $124,600 $150,000 $4,239 $278,839

2011 $128,100 $150,000 $15,801 $293,901

Defendant Rose may be served with process at 1110 Post Oak Place, Westlake, Texas 76262.

19. Defendant Scott T. Ford ("Ford") is an AT&T director and has been since June

2012. Defendant Ford was also a member of the Public Policy and Corporate Reputation

Committee from at least July 2012 to March 2014. Defendant Ford breached his fiduciary duty

of loyalty by knowingly or recklessly: (i) failing to implement internal controls over Board-level

reporting, compliance with applicable law and the Company's own internal policies, and

communications with regulators; and (ii) causing or allowing the Company to bill its customers

for unauthorized third-party charges and present such charges on its bills in violation of

applicable law. Defendant Ford also breached his fiduciary duties by causing or allowing

significant control gaps in the Company's anti-cramming program. AT&T paid defendant Ford

the following compensation as a director:



2014 $137,900 $150,000 $102 $288,002

2013 $134,000 $150,000 $102 $284,102

2012 $71,783 $150,000 $51 $221,834

Defendant Ford may be served with process at 22311 Highway 10, Little Rock, Arkansas 72223.



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20. Defendant Michael B. McCallister ("McCallister") is an AT&T director and has

been since February 2013. Defendant McCallister is also a member of AT&T's Audit

Committee and has been since February 2013. Defendant McCallister is also a member of the

Public Policy and Corporate Reputation Committee and has been since May 2013. Defendant

McCallister breached his fiduciary duty of loyalty by knowingly or recklessly: (i) failing to

implement internal controls over Board-level reporting, compliance with applicable law and the

Company's own internal policies, and communications with regulators; and (ii) causing or

allowing the Company to bill its customers for unauthorized third-party charges and present such

charges on its bills in violation of applicable law. Defendant McCallister also breached hisfiduciary duties by causing or allowing significant control gaps in the Company's anti-cramming

program. AT&T paid defendant McCallister the following compensation as a director:



2014 $142,000 $150,000 $17,876 $309,876

2013 $132,683 $150,000 $12,813 $295,496

Defendant McCallister may be served with process at 8644 N. Morning Glory Road, Paradise

Valley, Arizona 85253.

21. Defendant Cynthia B. Taylor ("Taylor") is an AT&T director and has been since

June 2013. Defendant Taylor is also a member of AT&T's Audit Committee and has been since

June 2013; and a member of the Public Policy and Corporate Reputation Committee and has

been since May 2015. Defendant Taylor breached her fiduciary duty of loyalty by knowingly or




charges and present such charges on its bills in violation of applicable law. Defendant Taylor



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also breached her fiduciary duties by causing or allowing significant control gaps in the

Company's anti-cramming program. AT&T paid defendant Taylor the following compensation

as a director:



2014 $147,400 $150,000 $5,102 $302,502

2013 $80,517 - $60 $80,577

Defendant Taylor may be served with process at 218 Terrace Drive, Houston, Texas 77007.

22. Defendant Beth E. Mooney ("Mooney") is an AT&T director and has been since

September 2013. Defendant Mooney is also a member of the Public Policy and Corporate

Reputation Committee and has been since at least September 2014. Defendant Mooney breached

her fiduciary duty of loyalty by knowingly or recklessly: (i) failing to implement internal

controls over Board-level reporting, compliance with applicable law and the Company's own

internal policies, and communications with regulators; and (ii) causing or allowing the Company

to bill its customers for unauthorized third-party charges and present such charges on its bills in

violation of applicable law. Defendant Mooney also breached her fiduciary duties by causing or

allowing significant control gaps in the Company's anti-cramming program. AT&T paid

defendant Mooney the following compensation as a director:



2014 $130,600 $150,000 $102 $280,702

2013 $39,367 - $15,034 $54,401

Defendant Mooney may be served with process at 11 Colony Lane, Cleveland, Ohio 44108.

23. Defendant James H. Blanchard ("Blanchard") was AT&T's Lead Director from

January 2012 to January 2014 and a director from December 2006 to April 2014. Defendant

Blanchard breached his fiduciary duty of loyalty by knowingly or recklessly: (i) failing to



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implement internal controls over Board-level reporting, compliance with applicable law and the

Company's own internal policies, and communications with regulators; and (ii) causing or

allowing the Company to bill its customers for unauthorized third-party charges and present such

charges on its bills in violation of applicable law. Defendant Blanchard also breached his

fiduciary duties by causing or allowing significant control gaps in the Company's anti-cramming

program. AT&T paid defendant Blanchard the following compensation as a director:






2014 $54,467 - $45,363 $261,469 $361,299

2013 $211,300 $150,000 $55,003 $27,240 $443,543

2012 $163,500 $150,000 $115 $8,640 $322,255

2011 $143,500 $150,000 $52,542 $23,737 $369,779

Defendant Blanchard may be served with process at 6929 Standing Boy Road, Unit 17,

Columbus, Georgia 31904.

24.

Defendant Gilbert F. Amelio ("Amelio") was AT&T's Lead Director fromFebruary 2008 to February 2010 and a director from February 2001 to July 2013. Defendant

Amelio was also a member of the Public Policy and Corporate Reputational Committee from at

least March 2011 to May 2012. Defendant Amelio breached his fiduciary duty of loyalty by





Defendant Amelio also breached his fiduciary duties by causing or allowing significant control



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gaps in the Company's anti-cramming program. AT&T paid defendant Amelio the following



Change in

Pension Valueand Non-QualifiedDeferred



2013 $118,200 $150,000 $218 $250,060 $518,478

2012 $149,600 $150,000 $83 $5,831 $305,514

2011 $156,500 $150,000 $1,087 $5,980 $313,567

Defendant Amelio may be served with process at 5940 Lake Geneva Court, Reno, Nevada

89511.25. Defendant Patricia P. Upton ("Upton") was an AT&T director from June 1993 to

April 2011. Defendant Upton was also a member of the Public Policy Committee from at least

March 2011 to April 2011. Defendant Upton breached her fiduciary duty of loyalty by





Defendant Upton also breached her fiduciary duties by causing or allowing significant control

gaps in the Company's anti-cramming program. AT&T paid defendant Upton the following


Fiscal Year Fees Paid in Cash

Change in

Pension Valueand Non-QualifiedDeferred



2011 $47,433 $4,490 $254,969 $306,892



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Defendant Upton may be served with process at 1019 Rock Ledge Road, Heber Springs, Arizona

72543.

26. Defendant Lynn M. Martin ("Martin") was an AT&T director from October 1999

to April 2012. Defendant Martin breached her fiduciary duty of loyalty by knowingly or




charges and present such charges on its bills in violation of applicable law. Defendant Martin

also breached her fiduciary duties by causing or allowing significant control gaps in theCompany's anti-cramming program. AT&T paid defendant Martin the following compensation

as a director:



2012 $37,067 - $254,536 $291,603

2011 $142,600 $150,000 $20,321 $312,921

Defendant Martin may be served with process at 6140 S.E. Morning Dove Way, Hobe Sound,

Florida 33455.

27. Defendant Reuben V. Anderson ("Anderson") was AT&T's Lead Director from

January 2014 to April 2015 and a director from December 2006 until April 2015. Defendant

Anderson was also Chair of the Public Policy and Corporate Reputation Committee from at least

March 2011 to April 2015. Defendant Anderson breached her fiduciary duty of loyalty by







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Defendant Anderson also breached his fiduciary duties by causing or allowing significant control

gaps in the Company's anti-cramming program. AT&T paid defendant Anderson the following







2014 $200,600 $150,000 $92,701 $102 $443,403

2013 $145,300 $150,000 $114,219 $102 $409,621

2012 $124,900 $150,000 $953 $3,792 $279,645

2011 $142,150 $150,000 $112,689 $13,636 $418,475

Defendant Anderson may be served with process at 1782 Fairwood Drive, Jackson, Mississippi

39213.

28. Defendant Jaime Chico Pardo ("Chico") was an AT&T director from September

2008 until April 2015. Defendant Chico was also a member of the Audit Committee from at

least March 2011 to March 2015. Defendant Chico breached his fiduciary duty of loyalty by





Defendant Chico also breached his fiduciary duties by causing or allowing significant control

gaps in the Company's anti-cramming program. AT&T paid defendant Chico the following




2014 $143,800 $150,000 $15,102 $308,902

2013 $145,100 $150,000 $15,102 $310,202

2012 $131,400 $150,000 $15,102 $296,502

2011 $136,300 $150,000 $102 $286,402



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Defendant Chico may be served with process at Miguel de Cerrvantes Saavedra 255, Colonia

Ampliación Granada, 11520 México, D.F., México.

29. Defendant James P. Kelly ("Kelly") was an AT&T director from December 2006until April 2015. Defendant Kelly was also a member of the Audit Committee from at least

March 2011 to March 2015. Defendant Kelly breached his fiduciary duty of loyalty by





Defendant Kelly also breached his fiduciary duties by causing or allowing significant control

gaps in the Company's anti-cramming program. AT&T paid defendant Kelly the following




2014 $140,000 $150,000 $102 $290,102

2013 $147,100 $150,000 $102 $297,202

2012 $126,000 $150,000 $3,419 $279,419

2011 $141,700 $150,000 $3,673 $295,373

Defendant Kelly may be served with process at 713 Moores Mill Road N.W., Atlanta, Georgia

30305.

30. The defendants identified in ¶¶12-13 are referred to herein as the "Officer

Defendants." The defendants identified in ¶¶12, 14-29 are referred to herein as the "Director

Defendants." The defendants identified in ¶¶16-17, 20-21, 28-29 are referred to herein as the

"Audit Committee Defendants." The defendants identified in ¶¶16, 18-22, 24-25, 27 are referred

to herein as the "Public Policy and Corporate Reputation Committee Defendants." Collectively,

the defendants identified in ¶¶12-29 are referred to herein as the "Individual Defendants."



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DUTIES OF THE INDIVIDUAL DEFENDANTS

Fiduciary Duties

31. By reason of their positions as officers and directors of the Company, each of the

Individual Defendants owed and owe AT&T and its stockholders fiduciary obligations of trust,

loyalty, good faith, and due care, and were and are required to use their utmost ability to control

and manage AT&T in a fair, just, honest, and equitable manner. The Individual Defendants were

and are required to act in furtherance of the best interests of AT&T and not in furtherance of

their personal interest or benefit.

32.

To discharge their duties, the officers and directors of AT&T were required toexercise reasonable and prudent supervision over the management, policies, practices, and

controls of the affairs of the Company. By virtue of such duties, the officers and directors of

AT&T were required to, among other things:

(a) conduct the affairs of the Company in an efficient, business-like manner in

compliance with all applicable laws, rules, and regulations; and

(b) remain informed as to how AT&T conducted its operations, and, upon

receipt of notice or information of imprudent or unsound conditions or practices, make

reasonable inquiry in connection therewith, and take steps to correct such conditions or practices

and make such disclosures as necessary to comply with applicable law.

Additional Duties of the Board Committees

33. The Audit Committee Charter imparts heightened duties on its members. In

relevant part, the Audit Committee Defendants were responsible for assisting the Board in its

oversight of the performance of the Company's internal audit function and the compliance by the

Company with legal and regulatory requirements. Likewise, the Public Policy and Corporate



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Reputation Committee has heightened duties pursuant to its Charter. Specifically, the Public

Policy and Corporate Reputation Committee Defendants were responsible for assisting the Board

in its oversight of policies related to protecting the Company's reputation, including its public

policy positions, social responsibility efforts, and the Company's brands.

Breaches of Duties

34. The conduct of the Individual Defendants complained of herein involves a

knowing and culpable violation of their obligations as officers and directors of AT&T, the

absence of good faith on their part, and a reckless disregard for their duties to the Company that

the Individual Defendants were aware or reckless in not being aware posed a risk of seriousinjury to the Company.

35. The Individual Defendants breached their duty of loyalty and good faith by failing

to establish internal controls at AT&T and allowing the Company to engage in systematic

overbilling of its customers for unauthorized third-party charges, improper practices that violated

applicable law, and caused AT&T to incur substantial damage.

36. The Individual Defendants, because of their positions of control and authority as

officers and/or directors of AT&T, were able to and did, directly or indirectly, exercise control

over the wrongful acts complained of herein. The Individual Defendants also failed to prevent

the other Individual Defendants from taking such illegal actions. As a result, and in addition to

the damage the Company has already incurred, AT&T has expended, and will continue to

expend, significant sums of money.

APPLICABLE LAW

37. Section 5(a) of the FTC Act, prohibits "unfair or deceptive acts or practices in or

affecting commerce." Misrepresentations or deceptive omissions of material fact constitute



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deceptive acts or practices prohibited by Section 5(a) of the FTC Act. Acts or practices are

unfair under Section 5 of the FTC Act if they cause substantial injury to consumers that

consumers cannot reasonably avoid themselves and that is not outweighed by countervailing

benefits to consumers or competition. 15 U.S.C. §45(n). The practice of placing unauthorized

charges on consumers' phone bills is prohibited by Section 5 as both a deceptive and unfair

practice. This is especially true where the format or presentation of the bill serves to disguise the

charges or otherwise does not conspicuously present the charges to the consumer.

38. Section 201(b) of the Communications Act outlaws communication service

providers engaged in interstate commerce (such as AT&T) from using unjust or unreasonablecharges or practices. Section 201(b) states, in pertinent part, that "[a]ll charges, practices,

classifications, and regulations for and in connection with [interstate or foreign] communication

service [by wire or radio], shall be just and reasonable, and any such charge, practice,

classification, or regulation that is unjust or unreasonable is declared to be unlawful…." The

inclusion of unauthorized charges on consumers' telephone bills is an "unjust and unreasonable"

practice under Section 201(b).

39. The FCC's Truth-in-Billing rules, Section 64.2401 require that wireless carrier

(such as AT&T) present their telephone bills in a clearly organized manner such that third-party

charges are separated from the carrier's charges for telecommunications services and provide "a

brief, clear, non-misleading, plain language description of the service or services rendered."

Specifically, Section 64.2401 of the Truth-in-Billing rules require, in part:2

2 The Truth-in-Billing rules were originally adopted in April 1999. They have been modified orrevised a number of times, including at times (such as in 2012) in direct response to thecramming threat. Since at least 2005, the Truth-in-Billing rules required wireless carriers to provide on bri ef, clear , non-misleading, and plain language descriptions on wireless bills. The



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(a) Bil l organization. Telephone bills shall be clearly organized, and must complywith the following requirements:

(1) The name of the service provider associated with each charge must beclearly and conspicuously identified on the telephone bill.

(2) Where charges for two or more carriers appear on the same telephone bill, the charges must be separated by service provider.

(3) Carr iers that place on their telephone bil ls charges fr om thi rd par ties

for non-telecommunications services must place those charges in a

distinct section of the bill separate from all carr ier charges. Charges ineach distinct section of the bill must be separately subtotaled. Theseseparate subtotals for carrier and non-carrier charges also must be clearlyand conspicuously displayed along with the bill total on the payment pageof a paper bill or equivalent location on an electronic bill. For purposes ofthis subparagraph "equivalent location on an electronic bill" shall mean

any location on an electronic bill where the bill total is displayed and anylocation where the bill total is displayed before the bill recipient accessesthe complete electronic bill, such as in an electronic mail messagenotifying the bill recipient of the bill and an electronic link or notice on aWeb site or electronic payment portal.

(4) The telephone bill must clearly and conspicuously identify any

change in service provider, including identif ication of charges fr om any

new service provider. For purpose of this subparagraph "new service provider" means a service provider that did not bill the subscriber forservice during the service provider's last billing cycle. This definition shall

include only providers that have continuing relationships with thesubscriber that will result in periodic charges on the subscriber's bill,unless the service is subsequently canceled.

(b) Descriptions of bil led charges. Charges contained on telephone bil ls must

be accompanied by a br ief, clear, non-mi sleading, plain language description of

the service or services rendered. The descript ion must be suf f ici ently clear in

presentation and specif ic enough in content so that customers can accur ately

assess that the services for which they are bi l led corr espond to those that they

have requested and received, and that the costs assessed for those services

conform to their understanding of the pri ce charged .

FCC explicitly reminded wireless carriers of the applicability of the Truth-in-Billing rules towireless billing during revision processes in at least 2011-2012.



- 23 -

40. Various state laws also prohibit or strictly regulate unauthorized charges on

telephone bills. For example, Texas Utilities Code section 17.151, which, in part, prohibits

"charges for a new product or service to be billed on a customer's telephone or retail electric bill"

unless "the customer has clearly and explicitly consented to obtain the product or service offered

and to have the associated charges appear on the customer's telephone or electric bill and the

consent has been verified as provided by Subsection (b)." Section 17.151 further requires that

third-party vendors and billing aggregators contract with the billing utility (e.g., AT&T) to place

charges on the billing utility's customers' bills and provide a toll-free number and address for the

consumer to dispute charges. Further, third-party vendors and billing aggregators "may not useany fraudulent, unfair, misleading, deceptive, or anticompetitive marketing practice to obtain

customers."

41. In addition, California's anti-cramming statute, Public Utility Code section 2890

prohibits the inclusion of unauthorized charges on consumers' telephone bills and requires the

telephone bill clearly identify and include a separate billing section for each third-party biller,

include the amount being charged for each product or service, include a clear and concise

description of the service, product, or other offering for which a charge has been imposed, and

include information regarding how to resolve any dispute about that charge. California's anti-

cramming statute further requires comprehensive refunds for affected California customers.

42. California's ant-cramming regime also requires quarterly reporting to the

California Public Utilities Commission (the "CPUC") regarding cramming. In 2000, CPUC

adopted in Decision D.00-03-020 (as modified by D.00-11-015) which requires all billing

telephone companies and billing agents to create and submit a summary report for each calendar

month that includes:



- 24 -

(a) the total number of consumer complaints received each month for each service provider and billing agent;

(b) …the name, address, and telephone number of each entity receivingcomplaints;[3]

(c) the total number of working telephone numbers billed for each entity forwhich complaints were received;

(d) for billing agents, the total number of subscribers billed by each service provider for which complaints were received; for billing telephone companies, thetotal number of subscribers billed by each service provider for which the billingtelephone company directly bills and each billing agent;

(e) for billing agents, the total dollars billed by each service provider; for billingtelephone companies, the total dollars billed by each service provider for whichthe billing telephone company directly bills and each billing agent.

43. In 2006, the CPUC adopted General Order 168, Part 4 (then strengthened it in

2010) to clarify and buttress California's anti-cramming regime.4 General Order 168, Part 4,

reinforces that "[t]he Billing Telephone Corporation is ultimately responsible for refunding all

unauthorized charges" presented in its bill, and places affirmative duties on the billing telephone

corporation. These duties require the billing telephone corporation to "conduct a reasonable

inquiry of [the third-party vendor's] history of violations of state or federal [consumer protection]

law," to "monitor[] the billings it controls for the purpose of preventing and detecting

unauthorized charges," and to "have in place and comply with a protocol for identifying

unauthorized charges and suspending or terminating billing services to any Billing Agent or

Service Provider that has submitted unauthorized charges." They also require "the prompt

3 This requirement is not applicable to billing agents.

4 In March 2006, the CPUC adopted General Order (G.O.) 168 Part 4, Market Rules to EmpowerConsumers and to Prevent Fraud – Rules Governing Cramming Complaints. On November 2,2010, in response to recurring unauthorized charges despite extensive consumer efforts tocombat cramming, the CPUC issued Decision D.10-10-034 revising G.O. 168 Part 4.



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termination of billing services to Billing Agents and Service Providers that present unauthorized

charges" by the billing telephone corporation. In particular, General Order 168, Part 4 requires:

Billing Telephone Corporations shall bill Subscribers only for authorized charges.

Billing Telephone Corporations shall adopt protocols which prohibit BillingAgents and Service Providers from submitting, directly or indirectly, charges for billing through a Billing Telephone Company that the Subscriber has notauthorized. Billing Telephone Corporations must monitor or cause to bemonitored, either directly or through a Billing Agent, or other entity, each ServiceProvider's continuing compliance with this requirement. Such monitoring shallinclude review of the Service Provider's marketing materials, scripts, customerverification records, or other such information as may be necessary todemonstrate that the Service Provider is obtaining valid Subscriber authorizations.

* * *

Responsibilities of Billing Telephone Corporations : … Prior to approving aService Provider or Billing Agent for the provision of billing services, the BillingTelephone Corporation shall directly or through another entity conduct areasonable inquiry of the Service Provider's or Billing Agent's history ofviolations of state or federal law or rules relating to consumer protection andcurrent ability to operate lawfully.

California's anti-cramming regime, including quarterly reports to the CPUC, explicitly applies to

both wireline and wireless telephone corporations.

AT&T ILLEGALLY BILLS ITS WIRELESS CUSTOMERS FORUNAUTHROIZED THIRD-PARTY CHARGES

44. AT&T is a leading provider of telecommunications services in the United States

and the world. The Company' s wireless segment i s its largest segment and easi ly its most

profitable segment in terms of operating income . In 2011, wireless segment revenues

accounted for about 50% of AT&T's revenues and have steadily grown by 2% each year since.

The wireless segment's operating income accounted for 166%, 127%, and 145% of AT&T's total

operating income in 2011, 2012, and 2014, respectively. Without its wireless segment, AT&T

would have operated at a loss in each of those years as its other corporate expenses exceeded its

wireline segments operating income in each of those years.



- 26 -

45. For decades, AT&T has been charging its customers for third-party products and

services that the customers did not authorize, a practice that is commonly known as "cramming."

As a result, on October 8, 2014, the FTC filed a complaint against AT&T for its unlawful

wireless cramming and billing practices (the "FTC Complaint"). That same day, the FCC

announced that it, the FTC, and the attorney generals for the fifty states and District of Columbia

had settled their investigations of AT&T's illegal wireless cramming and billing practices. The

settlement requires AT&T to pay more than $105 million, the largest enforcement action in FCC

history. Under the settlement, AT&T must pay $80 million to be distributed to current and

former AT&T customers who were billed for third-party services they did not authorize, $20million to state governments participating in the settlement, and $5 million as a penalty payment

to the U.S. Treasury. The settlement also imposed additional compliance reporting and

recordkeeping requirements on the Company relating to billing and cramming.

46. AT&T's settlement with state and federal authorities centered on one prevalent

wireless cramming method that involves unauthorized charges for monthly subscriptions to

Premium Short Messaging Services ("PSMS"). Third-party PSMS providers distribute content

such as ringtones, wallpaper, and text messages that include horoscopes, flirting tips, celebrity

gossip, and other information to consumers, typically at a price of $9.99 per month. To do so, a

PSMS provider obtains a "short code" from the Cellular Telecommunications & Internet

Association ("CTIA") that allows it to distribute content to consumers through Short Messaging

Services ("SMS"). The PSMS vendor or its billing aggregators also uses the short code to apply

charges (purportedly for such content) to the wireless bills of wireless carriers' customers,

including AT&T's customers. AT&T's customers' wireless bills often included charges for



- 27 -

PSMS products or services that the customer never requested, never received, or both. Wireless

cramming, however, extends beyond unauthorized PSMS charges.

47. AT&T relies on the third-party vendors and/or aggregators to obtain authorization

from AT&T's customers for the third-party charges. These third parties, however, have in many

cases failed to obtain valid authorization from AT&T's customers, but AT&T still included those

charges on those customers' wireless bills. AT&T gave its customers no reason to expect

unauthorized charges on their bills. The Company's communications with potential customers

rarely (if ever) involve discussion of third-party services and charges. AT&T's wireless

contracts make prominent representations about the voice and data services the Company provides, but buries information about third-party services in lengthy and complicated terms and

conditions clauses.

48. Indeed, AT&T's wireless billing practices were deceptive during the relevant

period. The first page of both AT&T's online and hard copy wireless bills contained a summary

of charges. The third-party charges were included under the generic descriptor "New Charges"

though the charges were not always "new." The "New Charges" descriptor also included charges

for phone and data services provided by AT&T. The third-party charges were not separated

individually or included under a more accurate and descriptive heading. The "New Charges" line

item in the summary was included in the "Total Amount Due" that AT&T represented was "Due

in Full by" a specific date, leading many of its customers to believe that they were obligated to

pay for any unauthorized third-party charges included in their bills. Also, at times during the

relevant period, other parts of AT&T's wireless bills further deceived its customers into believing

they were responsible for unauthorized third-party charges. Both online and hard copy wireless

bills included a section titled "Monthly Charges." The line items included within this category



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were primarily AT&T charges for its data services. This category, however, also included a line

item for "AT&T Monthly Subscriptions" which deceptively included third-party charges.

49. AT&T's customers remained largely unaware that the Company would (or even

could) channel unauthorized third-party charges to them through its monthly billing for its voice

and data services. Even those customers that noticed that their bill was overstated would have to

decipher AT&T's misleading bill format/presentation to determine that unauthorized third-party

charges caused the overstatement. Then, in the context of PSMS charges, the customer would

have to locate the PSMS text corresponding to the unauthorized subscription charge and respond,

"STOP" in order to prevent future third-party charges. The customer would have to do this foreach unauthorized third-party charge. Further, if a customer was able to stop new third-party

charges, the customer was still on the hook for previous unauthorized charges. As detailed by

the FTC Complaint:

[I]n some instances, beginning in March 2013, Defendant has sent text messagesto consumers regarding subscriptions. In many instances, these messages did notmention charges at all. In numerous instances, consumers receiving these textmessages thought they were spam and ignored the messages. Even if consumersnoticed and opened the text messages, they would still have to take action to stopthe charges from appearing on their bills.

50. To obtain a refund for past unauthorized charges, an AT&T customer would have

to contact AT&T directly. However, when AT&T's customers sought refunds for unauthorized

third-party charges from AT&T, the Company often refused to provide the refunds. As

explained in the FTC Complaint:

In some instances, Defendant has told consumers that there is nothing it can doabout the unauthorized charges. …In other instances, Defendant's customerservice representatives have instructed consumers to seek a refund directly fromthe third-party merchant. At times, however, Defendant's representatives havefailed to provide accurate contact information for the third-party merchant. …Inyet other instances, Defendant has asserted that consumers authorized the charge,despite the fact that Defendant has not had records of the purported authorizationand … AT&T went so far as to inform consumers who called to complain about



- 29 -

unauthorized charges that the consumers had authorized the charges by notresponding to text messages sent by the third-party merchants. …In otherinstances, Defendant has refused to grant a full refund.… In numerous instances,AT&T has charged consumers for at least a year for third-party subscriptionservices yet only offered a two month refund. Further, if a consumer previously

had complained about an unauthorized third-party charge, AT&T instructed itscustomer care representatives not to offer any refund.

51. Worse, "in October 2011, AT&T notified its third-party merchants that it was

changing its refund policy to 'help lower refunds,' and AT&T's customer service representatives

would be 'blocked' from offering more than a one-time two month refund."

52. AT&T's cramming practices violated state and federal law. AT&T violated

Section 5(a) of the FTC Act by misrepresenting that certain charges appearing on its wireless

bills were for services provided by AT&T and authorized by the customer, when those charges

were unauthorized and provided by third-parties, if provided at all. AT&T overbilled its

customers for unauthorized charges and, therefore, caused financial harm to those customers that

did not provide any countervailing benefit and that AT&T could have reasonably avoided had

the Board instituted the necessary internal controls (discussed in more detail below).

53. In addition, AT&T's inclusion of unauthorized charges on its customers' wireless

bills was "unjust and unreasonable" in violation of Section 201(b). AT&T violated the FCC's

Truth-in-Billing rules because, during the relevant period, AT&T's wireless bills failed to

provide a brief, clear, non-misleading, and plain language description of the third-party charges.

Further, AT&T's inclusion of the third-party charges in its wireless bills was not sufficiently

clear in presentation and specific enough in content so that AT&T's customers could accuratelyassess that the third-party subscriptions for which they were billed corresponded to services

actually requested and received, and that the costs assessed for those services conform to their

understanding of the price charged. The Company's third-party billing practices also violated



- 30 -

state anti-cramming laws for the same or similar reasons, including failing to list third-party

charges separately, and violated various other state laws that prohibit unlawful, unfair, deceptive,

and misleading business practices, such as section 17200 of California's Unfair Competition

Law.

THE BOARD COMPLETELY DISREGARDED ITS DUTIES

TO PREVENT ILLEGAL BILLING PRACTICES AT AT&T AND

OVERSEE THE COMPANY'S BUSINESS IN GOOD FAITH

54. AT&T's ongoing illegal billing practices and resulting $105 million fine were

entirely preventable had the Board instituted reporting and compliance controls at AT&T. As

discussed in more detail herein, the Company was privy to repeated and abundant warnings that

its wireless bills included rampant unauthorized charges and otherwise violated applicable law.

The unauthorized charges and unlawful billing practices, however, persisted for years as a result

of the Board's failure to implement any semblance of a system of reporting and compliance

controls at AT&T.

55. In particular, the Board failed to implement any controls to monitor, detect, and

report noncompliance with internal policies and applicable law, including controls to monitor

AT&T compliance with the FTC Act, the Communications Act, the Truth-in-Billing rules, and

various state laws and regulations.

The Board also failed to implement controls over the Company's

communications with regulators, including those that require full, fair, and accurate

communications.



- 31 -

AT&T and Company Management Possessed Abundant Information Establishing the

Impropriety of Its Third-Party Wireless Billing Practices Including Repeated Warning that

Its Wireless Bills Included Unauthorized Charges

56. Cramming grew out of the 1984 divestiture of AT&T and de-tariffing of

telephone billing and collection in 1986.5 Following the break-up of AT&T, regional bell

operating companies, also known as local exchange carriers, began providing billing collection

services to AT&T and other companies that offered long-distance services for landlines. Id.

With time, AT&T (and other telephone companies) realized it could leverage these billing

platforms to bring in additional revenues via third-party products and services not directly related

to phone service.

57. By the late 1990s, cramming on landlines began to receive increasing negative

attention from regulators, legislators, and enforcement agencies. In response, William E.

Kennard ("Kennard"), then-Chairman of the FCC, held a meeting on May 20, 1998, with

industry constituents, including the third-party providers of billing and collection services, to

develop a set of guidelines to combat cramming. In his opening remarks, Kennard described

cramming as a serious problem likely to become even more serious in the near future. Other

regulators/legislators echoed Kennard's concerns. For example, then-Congressman Barton J.

Gordon of Tennessee characterized cramming as the fastest growing consumer fraud, and one

that affects the most vulnerable consumers. Following the conference, the FCC released an

agreed upon set of guidelines meant to protect consumers' rights to: "(1) a clear, concise

description of services being billed, (2) full disclosure of all terms and conditions, (3) billing for

5 U.S. Senate Committee on Commerce, Science, and Transportation – Office of Oversight andInvestigations Majority Staff Report, Cramming on Mobile Phone Bills: A Report on Wireless

Billing Practices (July 30, 2014 (the "2014 Staff Report"); see also U.S. Senate Committee onCommerce, Science, and Transportation – Office of Oversight and Investigations Majority StaffReport, Unauthorized Charges on Telephone Bills (July 12, 2011) (the "2011 Staff Report").



- 32 -

authorized services only, and (4) prompt and courteous treatment of all disputed charges."

Industry constituents successfully combated further regulatory action against landline cramming,

including potential additional probing and federal legislation, by downplaying the extent of

cramming and pledging to follow the FTC's cramming guidelines. Still, at least one state

legislator enacted legislation to combat cramming at that time — in December 1999, California

passed its anti-cramming statute, Public Utility Code section 2890.

58. Despite heightened regulatory attention surrounding landline cramming and

industry pledges to self-regulate, AT&T failed to include necessary consumer protections in its

third-party billing practices and continued to subject its customers to fraudulent charges andsubstantial financial risk. Over the next decade, wide reports of unauthorized charges on

landline bills swept across the industry and resulted in dozens of state and federal enforcement

actions and tens of millions of dollars in liability against third-party crammers.6 That decade

also saw an uptick in legislation in response to ongoing consumer complaints. For example, the

CPUC reinforced California's anti-cramming statute via commission decisions and additional

6 See, e.g., Office of the Attorney Gen. v. Email Disc. Network , No. 372006CA2475, SettlementAgreement (Fla. 2d Cir. Feb. 15, 2007) (settlement of 2006 lawsuit brought by the FloridaAttorney General against third-party vendor, Email Discount Network, for charging 20,000Florida consumers' landline telephone bills for e-mail accounts and coupons they did not requestor use); Office of the Illinois Attorney General, Madigan Reaches Agreement with US Credit

Find to Prevent Phone Cramming (June 18, 2009) (discussing settlement of 2009 lawsuit brought by the Illinois Attorney General against, third-party vendor, US Credit Find, forcharging (without authorization) more than 9,000 Illinois consumers' landline telephone bills fora purported online credit tutorial); FTC v. Inc21.com Corp., 745 F. Supp. 2d 975, 982-83 (N.D.Cal. 2010) (awarding the FTC a $37.9 million judgment against third-party vendors, includingInc21.com Corporation, for charging up to 97% of their customers' landline telephone billswithout obtaining express authorization); FTC v. Hold Billing Services, Ltd., No. 5:98-cv-00629-FB (W.D. Tex. 1998); FTC v. Nationwide Connections, Inc., No. 9:06-cv-80180-KLR (S.D. Fla.2006) (involving $30 million of fabricated collect call charges on the landline bills of millions ofconsumers).



- 33 -

implementing regulations. The CPUC explicitly extended California's anti-cramming regime to

wireless carriers (such as AT&T) and required monthly tracking and quarterly reporting to the

CPUC regarding third-party charges included on the carrier's telephone bills. Additional state

legislatures also enacted statutes prohibiting or strictly regulating cramming on telephone bills. 7

For example, on September 1, 2009, Texas amended Texas Utilities Code section 17.151, which,

in part, prohibits placement of charges for a new products or services on a customer's telephone

bill without clear and explicit consent from the customer and the "use any fraudulent, unfair,

misleading, deceptive, or anticompetitive marketing practice."

59.

In August 2009, the FCC began a long and comprehensive investigation intocramming. On August 27, 2009, the FCC adopted the Consumer Information and Disclosure,

Truth-in-Billing and Billing Format, IP-Enabled Services, Notice of Inquiry, (the "2009 NOI")

to explore ways to protect consumers against cramming and empower them to protect

themselves. The 2009 NOI noted ongoing complaints regarding cramming despite the

representations by industry constituents that they would voluntary adopt best practices to combat

cramming. The 2009 NOI sought comment on the extent to which cramming remained

a problem for consumers and why. In response to the 2009 NOI, several state and federal

regulatory and law enforcement entities, as well as consumer organizations, filed comments

stating that unauthorized charges continue to be a substantial problem for consumers. For

7 See, e.g., Texas Utilities Code section 17.151 (first effective Aug. 30, 1999, and as amendedSept. 1, 2009); Virginia Code section 56-479.3 (effective July 1, 2010); Title 9 Vermont Statutesection 2466 (effective May 27, 2011); Michigan Compiled Laws section 484.2502 (firsteffective 1991, and as amended Mar. 25, 2014); Chapter 815 Illinois Compiled Statute505/2HHH (first effective Nov. 30, 2009, and as amended Jan. 1, 2013); Title 52 PennsylvaniaAdministrative Code section 64.23.



- 34 -

example, the FTC filed comments citing increased consumer complaints and specific instances

of cramming that resulted in tens of millions of dollars in damages to consumers.

60. By 2011, U.S. regulators stepped up their scrutiny of cramming and telephone

services carriers received repeated warnings regarding cramming. On May 11, 2011, the FTC

held a cramming forum entitled '' Examining Phone Bill Cramming: A Discussion."8 Throughout

the nearly seven-hour public conference, various panels discussed the serious, persistent, and

harmful nature of phone bill cramming, as well as steps that the telephone billing industry could

take to detect, monitor, and prevent cramming. AT&T management did not just attend the

conference, it presented at it. Among the speakers at the conference was AT&T Assistant VicePresident Kent Wardin. Mr. Wardin acknowledged that cramming has been a known,

recurr ing issue at AT& T since at least January 2010 .9 The FTC warned the forum attendees

that it treats cramming as both "deceptive" and "unfair" conduct under the FTC Act and that

courts have upheld its authority to do so.

61. On June 16, 2011, in response to consumer complaints that they had been

crammed, the FCC announced the issuance of Notices of Apparent Liability for Forfeiture

("NALs") in four cases. The NALs addressed unauthorized charges on thousands of telephone

bills and proposed an aggregate of $11.7 million in forfeitures. In each case, the FCC concluded

that a long distance reseller operated a constructively fraudulent enterprise in which it billed

8 Federal Trade Commission, Forum Transcript (May 11, 2011) available at https://www.ftc.gov/sites/default/files/documents/public_events/phone-bill-cramming-discussion/10511phoneworkshop.pdf.

9 In actuality, as described herein, the issue was known to the Company well before January2010.



- 35 -

consumers via a billing aggregator for services the consumer did not request or authorize (or in

some cases even receive).

62. On July 12, 2011, the Senate Committee released its 2011 Staff Report, which

reported the results of an investigation into landline cramming initiated by Rockefeller in 2010.10

The 2011 Staff Report confirmed the existence of widespread cramming on landline telephone

bills that had likely cost consumers billions of dollars over the preceding decades. Specifically,

it found that:

third-party billing on wireline telephone bills was a billion-dollar industry, with over

$10 billion in charges placed on consumer bills over a five year period;

a substantial percentage of the charges placed on consumers' telephone bills were

likely unauthorized;

telephone companies profited from cramming, generating over $1 billion in revenue

from placing third-party charges on customer bills over preceding years;

cramming affected every segment of the landline telephone customer base, from

individuals to small businesses, non-profits, corporations, government agencies, and

educational institutions;

many third-party vendors were illegitimate and created solely to exploit third-party

billing;

many telephone customers who were crammed did not receive help from their

telephone companies; and

10 Prior to launching the investigation, in June 2010, the Senate Committee sent letters to threecarriers, AT&T, Verizon Communications Inc. ("Verizon"), and Qwest CommunicationsInternational Inc. ("Qwest"), requesting information about their awareness of cramming and thesteps they had taken to address it.



- 36 -

telephone companies were aware that cramming was a major problem on their

thi rd-party bil li ng systems .11

The 2011 Staff Report also concluded that the telephone companies' anti-cramming safeguards

have largely failed, and that carr iers inaccurately used low complain t statistics to show

cramming was not a problem . The 2011 Staff Report cited significant evidence for its findings.

For example, the underlying investigation involved calls to approximately 1,700 randomly

selected individuals billed for third-party services which led to discussion with approximately

500 of these individuals. According to the report, "[n]ot a single individual or business owner

reported that they had authorized the third-party vendors' charges on their telephone bills." Thereport also noted that, in preceding five years, more than 500,000 consumers contacted Qwest,

Verizon, and AT&T to complain about unauthorized third-party charges, but received little to no

assistance.

63. Also on July 12, 2011, the FCC released a Notice of Proposed Rulemaking

seeking to update the 2009 NOI and further comment on proposed rules designed to

assist consumers in detecting and preventing unlawful and fraudulent cramming (the "2011

NPRM"). In short, the proposed rules would require carriers to, inter alia, notify subscribers

clearly and conspicuously, at the point of sale, on each bill, and on their websites, of the option

to block third-party charges from their telephone bills and place charges from non-carrier third

parties in a bill section separate from carrier charges. The 2011 NPRM explained that "[t]hird-

party charges appear on a telephone bill only as a result of carriers' practice of placing them

there, and that the problem of crammed third-party charges depends on and arises from the

relationship between the common carrier and its consumer." The 2011 NPRM also noted that

11 See also 2014 Staff Report.



- 37 -

the proposed rules were rooted in the existing Truth-in-Billing rules that required clear,

conspicuous, non-misleading, and unambiguous billing, and that failure to identify the purported

service underlying the charge and the service provider may be misleading to the consumer,

especially when that failure leads the consumer to believe that the charge was for a

telecommunications service provided by the carrier. The FCC therefore asserted its authority

over cramming issues pursuant to applicable law.

64. In support of the proposed rules, the 2011 NPRM cited evidence of growing

consumer complaints related to cramming and that the number of complaints likely substantially

understates the actual extent of the problem, as well as efforts made by benefactors of crammingto avoid drawing attention to unauthorized charges. The 2011 NPRM also referenced evidence

of wireless cramming and sought further comment on whether the proposed protections should

also apply to that practice, while asserting the FCC's authority to do so. Numerous consumer

protection groups and government agencies submitted initial and reply comments in support of

the FCC's proposed rules, as well as their application to wireless cramming. For example,

twenty-five state Attorneys General submitted joint comments stressing the extent and

seriousness of the cramming problem. Their joint comments stated that, "despite both the

success of state-federal regulatory cooperation in fighting cramming and Attorney General

lawsuits against crammers for violations of consumer protection laws, cramming remains a

problem." The joint comments also astutely noted that cramming remains an attractive business

model because it is profitable and easy to submit unauthorized charges.

65. The CPUC's reply comments to the 2011 NPRM stressed the importance of

applying cramming rules to wireless carriers in addition to wireline carriers. The CPUC

explained that the industry practices voluntarily adopted by many wireless carriers, including the



- 38 -

"double opt-in" mechanism for PSMS charges, do not meet California's anti-cramming

requirements . The CPUC then described California's anti-cramming requirements pertaining to

wireless carriers.12 The CPUC also noted that it had "successfully prosecuted twelve formal

cramming cases [to date] under [California's] anti-cramming statutes and rules, resulting in total

fines of more than $60 million and total restitution of more than $13 million for California

consumers."

66. AT&T was well aware of the 2011 NPRM and even submitted initial and reply

comments of its own. AT&T, in its initial comments filed October 24, 2011, took the position

that its existing policies over third-party billing, including for its wireless customers, sufficientlyaddressed the cramming problem and thus further regulation was unnecessary. These comments,

however, included certain misrepresentations in furtherance of campaign of deceit undertaken by

the benefactors of cramming and meant to dissuade further scrutiny or regulation of wireless

cramming. Similar misrepresentations regarding the seriousness of landline cramming and the

industry's ability to self-regulate had successfully placated federal regulators for close to a

decade (until recently). For example, in its initial comments, AT&T stated that it "separately

identifies third-party monthly charges" in its wireless bills. However, as revealed by the FTC

Complaint, the first page of AT&T's wireless bills included third-party charges within the same

descriptor as charges for phone and data services provided by AT&T.

67. In support of its initial comments, the Company also attached the comments it

submitted in connection with the FTC's May 11, 2011 forum and a presentation, that overviewed

its anti-cramming policy. Those comments correctly stated that "[c]ramming is a complex

12 See supra, Applicable Law section, pp. 21-26.



- 39 -

problem, the causes of which change constantly" and that an "anti-cramming program must

employ multiple strategies to be effective." However, it incorrectly asserted that AT&T's

program was effective because it employed multiple strategies and responded to changes in

cramming practices.

68. AT&T's reply comments to the 2011 NPRM filed December 5, 2011, further

misrepresented that "cramming is not a significant issue for the wireless industry," that "the vast

majority of third-party charges on their bills are authorized, conclusions supported by audits

and/or complaint monitoring processes," that "the number of reported cramming complaints is

low, especially wireless-related complaints," and that the Company's practices were effective in protecting against cramming. In actuality, AT&T was well aware that wireless cramming was a

growing trend and represented a significant threat to the Company and its wireless customers.

69. In fact, by the time AT&T submitted its reply comments to the 2011 NPRM in

December 2011, the Company had already been entangled in numerous lawsuits surrounding its

wireless cramming practices. Since at least 2005, victims of wireless cramming filed numerous

(at least sixteen) class action lawsuits against AT&T and other defendants in at least sixteen

states. Many of those actions were consolidated in the Southern District of California in the In re

Jamster Marketing Litigation (MDL No. 1751) (the " Jamster MDL"). In May 2008, AT&T

attempted to settle the mobile cramming class actions via settlement of an action in Georgia that

had not been consolidated, McFerren v. AT&T Mobility, No. 2008 CV151322 (Ga. Sup. Ct.

Fulton Cnty.) (the " McFerren action"). Plaintiffs successfully motioned to enjoin settlement of

the McFerren action to the extent it involved claims underlying the Jamster MDL and criticized

AT&T for its failure to disclose the McFerren action. The Jamster MDL settled in 2010. The

settlement of these numerous class action lawsuits cost AT&T as much as millions of dollars.



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70. On February 27, 2008, AT&T resolved a separate investigation by the Office of

the Attorney General for the state of Florida into its wireless cramming practices. AT&T agreed

to pay $2.5 million for attorney's fees and costs of the investigation, disclose to its Florida

consumers that for the next six months they are eligible to receive a credit or refund for third-

party charges on their mobile bills, pay up to millions more to credit or refund the full amount of

the third-party charges, and make substantial changes to its third-party billing practices in

Florida. In terms of changes to its third-party billing practices, the settlement agreement required

that AT&T provide its customers via its online billing portal information concerning third-party

charges on their account and their ability to seek refunds, as well as provide monthly wirelessservice bills with clearly, conspicuously, and separately listed third-party charges and a readily

accessible phone number to dispute such charges. AT&T also had to offer a free purchase

blocker feature to any customer that disputed a third party-charge. In connection with any

internet-based purchase of third-party content, the settlement agreement required that AT&T

include certain provisions in all of its contracts with third-party vendors and billing aggregators.

Such provisions included prohibitions on certain deceptive practices, for example backdoor

authorizations obtained through inclusion of pre-checked boxes, and requirements that third-

parties clearly and conspicuously disclose certain information, such as offer price and how to

cancel a charge.

71. Numerous consumer complaints and auditor alerts specific to mobile cramming

also predated the Company's December 2011 reply comments to the 2011 NPRM. As revealed

by the FTC Complaint, in 2011 alone, AT&T received over 1.3 million calls alerting the

Company that its billing practices caused or allowed rampant unauthorized third-party charges.

In 2011, complaints specific to wireless cramming had increased to about 30% of all cramming



- 41 -

complaints from only about 16% between 2008 and 2010. Many of these complaints implicated

the same or similar issues and violations of law underlying the mobile cramming lawsuits filed

against AT&T between 2005 and 2008.

72. In addition to receiving numerous and ongoing warnings via customer complaints,

AT&T also received alerts from industry auditors regarding deceptive third-party wireless

charges and third-party failures to obtain authorization for wireless charges. The CTIA audits

third-party content providers (particularly PSMS providers) for compliance with industry

standards. In 2010, the CTIA began providing carriers (like AT&T) and billing aggregators

access to online reports that provided the results of these audits, including the details and severityof each violation it encountered. In addition, carriers receive e-mail notification of new audit

findings and weekly reports of all discovered violations. The weekly reports are also compiled

into monthly reports to the carriers which identify the PSMS billing aggregators with the most

failures. Industry alerts continued to implicate the same or similar mobile-cramming issues

underlying the lawsuits filed against AT&T between 2005 and 2008, ongoing customer

complaints, and even previous industry reports/alerts.

73. One alert circulated in March 2011, highlighted a Facebook application that

claimed it allowed users to see who looks at their Facebook profiles most frequently for free.

The application required users to complete a short "survey" that included entering their mobile

phone number. The application never revealed who looked at the users' Facebook profiles, but

users were charged for a third-party subscription despite the application's claim of being free.

AT&T received this alert by no later than March 2011, but continued to charge its customers for

this subscription until at least February 2012 and other subscriptions purportedly offered by the

same third-party merchant until at least August 2012.



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74. AT&T was also privy to substantial information surrounding lawsuits against

third-party content providers and aggregators. For example, in 2009, the Washington Attorney

General entered into a consent decree with Tatto Inc. ("Tatto"), a PSMS provider, for cramming

practices. The Company, nonetheless, continued to charge its customers for subscriptions

offered by Tatto and its related entities until at least August 2012.13 Similarly, in March 2011,

the Texas Attorney General settled its case against Eye Level Holdings, LLC d/b/a Jawa alleging

deceptive practices in marketing its subscriptions (specifically a PSMS scheme) that cost

consumers in Texas millions in unauthorized wireless charges (the " Jawa action"). Jawa paid

nearly $2 million to settle the charges. The Jawa action alerted the Company to theineffectiveness of the double opt-in requirement and unreliability of aggregators to obtain or

verify consumer authorization for third-party charges.

75. Even internal reports and the Company's own data called attention to the alarming

rise of unauthorized third-party charges at AT&T. For example, pursuant to California's anti-

cramming regime, the Company prepared reports to the CPUC that supported ongoing

unauthorized third-party charges included on its customers' wireless bills. In addition, pursuant

to internal policies in effect since at least 2010, AT&T calculated and monitored refund rates of

each subscription on its network. The Company derived a refund rate by calculating the dollar

amount of monthly refunds for each third-party subscription as a percentage of the revenue

charged that month for that subscription. As explained in the FTC Complaint, the Company

believed that, "[i]n [its] experience, customer refund rates are a good indication of a problem

13 See also FTC v. Tatto, Inc., No. 2:13-cv13-8912-DSF-FFM (C.D. Cal. Dec. 5, 2013) (in whichthe FTC alleged that defendants placed millions of dollars on consumers' wireless phone bills fortext messages that consumers did not authorize; and defendants ultimately agreed to surrenderover $10 million in assets to settle these charges).



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with [third-party subscription] service." Still, AT&T continued to charge its customers for third-

party subscriptions with repeatedly high refund rates, some as high as 40% in a single month.

For example, despite suspending Tatto-related subscriptions at least eight times between

February 2011 and June 2012 due to excessive refund rates or noncompliant marketing, AT&T

continued charging existing "subscribers" during each suspension and did not terminate third-

party subscriptions offered by Tatto.

76. By March 2012, AT&T buckled under the weight of intense regulatory pressure

regarding landline cramming and agreed to stop placing third-party charges on its customers'

landline telephone bills. Many of the warnings specific to mobile cramming (as detailed above)concerned the same or similar issues underlying the regulatory pressure that led the Company to

terminate third-party landline billing. Mobile cramming also implicated substantially the same

violations of law as landline cramming. AT&T nonetheless failed to heed these warnings,

including the significant warnings inherent in the circumstances surrounding the Company's

termination of third-party landline billing. The Company continued its illicit wireless billing

practices, including allowing the placement of unauthorized third-party charges on its wireless

customers' bills.

77. AT&T also continued to deceive regulators regarding the seriousness of the

wireless cramming threat. On April 27, 2012, the FCC issued a Report and Order and Further

Notice of Proposed Rulemaking (the "2012 Further Notice") seeking comments on additional

measures to prevent landline cramming as well as measures to address wireless cramming. The

2012 Further Notice largely tracked the 2011 Staff Report. The 2012 Further Notice also further

reinforced the similarities between landline cramming and wireless cramming. For example, it

described third-party billing arrangements and deceptive schemes of third-party landline billers



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consistent with the mobile-cramming schemes described herein. The 2012 Further Notice (as

well as the substantial regulation, legislation, and enforcement actions surrounding landline

cramming during the preceding years) also alerted AT&T that voluntary industry anti-cramming

"standards" were not effective.

78. Comments submitted in response to the 2012 Further Notice specific to wireless

cramming were also predictable. Consumer groups and state agencies argued that cramming was

a serious problem and called for required stringent regulation. Benefactors of cramming

continued to mislead regulators by downplaying mobile cramming. For example, AT&T

submitted initial and reply comments in response to the 2012 Further Notice that misleadinglydownplayed the seriousness of the mobile cramming threat. AT&T's comments represented that

wireless cramming complaints were few, that voluntary measures adequately combatted wireless

cramming, and that there was no basis for rules specific to wireless cramming.14 In its reply

comments filed July 20, 2012, AT&T went as far as stating that "many wireless customers enjoy

the convenience of … having [third-party] charges appear on their wireless bill."

79. The FCC ultimately adopted certain measures more explicit in their protection of

consumers against landline cramming, but relying, in part, on the misrepresentations of industry

constituents, including AT&T, the FCC did not explicitly apply those protections to wireless

consumers. Still, the 2012 Further Noti ce emphasized that the proposed rules are rooted in

existing law and that wir eless carr iers remain subject to its legal duti es . The FCC explicitly

warned wir eless carr iers that it has the author ity to and wi ll take enforcement action against

wir eless carr iers that engage in cramming practices .

14 The 2014 Staff Report contradicts these representations.



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80. Consumer complaints regarding wireless cramming continued to rise in 2012,

driving continued regulatory investigations of the practice. On June 12, 2012, then-Chairman of

the Senate Committee, Rockefeller, sent defendant Stephenson a letter expressing serious

concern regarding the rise of mobile cramming (the "June 2012 Letter"). Rockefeller explained

that the Senate Committee's investigation into landline cramming:

[S]howed that cramming on wireline telephone bills was a problem of epidemic proportions, costing American consumers and businesses billions of dollars inunauthorized third-party charges over the past decade. I am now concerned that

cramming on wir eless bil ls has the potenti al to become a simil ar problem.

While acknowledging AT&T's decision to stop allowing the placement of third-party charges on

landline telephone bills, he asserted that that action is "meaningless if cramming simply

migrates from wir eli ne telephone bil ls to wireless bil ls ."

81. Rockefeller then warned defendant Stephenson and AT&T of increasing

complaints regarding unauthorized third-party charges on wireless bills, many of which related

to the monthly PSMS charges for purported text message content. Rockefeller aptly commented

that "[ t] hese so-call ed 'services' are remarkably similar to some of the so-called 'services' the

Commit tee uncovered through i ts investigation of cramming on wir eli ne telephone bil ls ."

82. The June 2012 Letter specifically alerted defendant Stephenson and AT&T to the

fact that the "double opt-in process is not work ing properly " and "the opt-out processes for

these services are not functioni ng properly either " and directed him to numerous media reports

related to mobile cramming. It also called attention to the Company's failure to heed the

concerns of "state attorneys general, consumer groups, and Congress" and the "alarmingly

similar[ity]" of this response to the industry's response to concerns related to landline cramming

in the late 1990s. In the late 1990s, landline carriers downplayed landline cramming as an



- 46 -

insignificant concern, though that practice ultimately resulted in billions of dollars in losses to

consumers from unauthorized charges.

83. Before requesting that AT&T provide information to help the Senate Committee

better understand wireless cramming and prevention efforts, Rockefeller ominously stated that

"we would be remiss to ignore the lesson that were learned fr om the fai lu res of th ir d-party

billi ng through wireline bills ." Specifically, the June 2012 Letter requested that defendant

Stephenson provide responses to the following questions by July 11, 2012:

1. Identify each billing aggregator that has had an agreement with AT&T to place third-party charges on wireless bills at any time during the last two

years.2. Identify each third-party vendor that has had third-party charges placed on

AT&T's customers' wireless phone bills at any point during the last twoyears. For each such third-party vendor, provide the followinginformation:

a. All d/b/a's, addresses, and telephone numbers used by the third- party vendor;

b. The billing descriptors for the third-party vendor and for each ofthe third-party vendor's products or services, as they appeared on

AT&T's customers' bills;

c. The name and contact information for the officers, directors, orother principals of the third-party vendor;

d. A description of the products or services the third-party vendorwas providing to AT&T's customers and the amount the third-partyvendor charged AT&T's customers for the products or services ona monthly basis; and

e. The total dollar amount the third-party vendor charged AT&T's

customers through third-party charges on AT&T's bills, for each ofthe last two years.

3. Explain why AT&T places third-party charges on its customers' wirelesstelephone bills.

4. Does AT&T have a process for vetting potential third-party vendors before permitting them to place charges on customers' wireless telephone bills? If so, please explain this process.



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5. Explain AT&T's "double opt-in" process and its "opt-out" process forthird-party charges on wireless bills.

6. Identify the steps that AT&T is taking to monitor and control theoccurrence of unsolicited text messages.

7. How should consumers respond to unsolicited text messages?

84. On July 23, 2012, the FTC issued a press release entitled "FTC Calls Wireless

Phone Bill Cramming a Significant Consumer Problem." In the press release, the FTC identifies

cramming as a growing concern and stated that "[m]obile cramming is likely to continue to grow

as cramming schemes expand beyond the landline platform and mobile phones are more

commonly used for payments." The FTC further posited that industry best practices may not be

effective in stopping mobile cramming.

85. In November 2012, AT&T wrongly assured the Senate Committee that "double

opt-in procedures of all then existing Billing Aggregators were reviewed and certified" as

compliant with the company's consent management program." See 2014 Staff Report.

86. On March 1, 2013, Rockefeller sent defendant Stephenson a second letter which

referenced further evidence of increasing wireless cramming and AT&T's ineffective consumer

protection against unauthorized third-party charges (the "March 2013 Letter"). The additional

evidence included (without limitation): reviews on consumer complaint websites regarding

unauthorized charges on wireless bills; comments filed with the FCC by the National

Association of State Utility Consumer Advocates ("NASUCA") that involved study findings

establishing an increase in wireless cramming; and data obtained from the CPUC revealing a

high refund rate to California consumers for third-party charges. The March 2013 Letter

indicated that AT&T representatives had met with the Senate Committee and represented that the



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Company is addressing wireless cramming. In light of the stark contradiction between the

Company's representations and the Senate Committee's ongoing investigation, Rockefeller

expressed concern that AT& T " has not been supportive of [hi s] efforts to address" " the

ongoing problems with wir eless cramming."

87. The March 2013 Letter also called attention to Rockefeller's introduction of the

Fair Telephone Billing Act of 2012 and its attempt to include provisions related to wireless

cramming. It later reasserted concerns that certain industry constituents (such as AT&T) were

inappropriately downplaying wireless cramming, as they had done with landline cramming in the

late 1990s. Rockefeller then commented on inevitable legislation related to wireless cramming,and requested defendant Stephenson and the Company assist in the process by providing the

following information:

1. The wireless billing data your company provided to the California PublicUtilities Commission in 2012; and

2. Since July 2012, all documents and communications related to customercomplaints or inquiries about third-party charges on your customers'wireless telephone bills.

The March 2013 Letter requested defendant Stephenson provide this information by March 22,

2013.

88. On April 16, 2013, the FTC filed a formal action against a major third-party

merchant, Wise Media, LLC ("Wise Media"), alleging unauthorized charges to mobile

consumers.15 The complaint charged Wise Media with placing over $10 million on consumers'

15 See FTC v. Wise Media, LLC, N.D. Ga. No. 1:13cv1234 (N.D. Ga. Apr. 16, 2013) (the "Wise Media action").



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wireless bills for unauthorized charges for PSMS containing horoscopes, love and flirting tips,

and other information.

89. On April 17, 2013, the FCC held a workshop on wireless cramming which

warned of the dangers of mobile cramming.16 AT&T representatives attended and even served

as a panelist at this workshop. On May 8, 2013, the FTC held a forum, referred to as the ''Mobile

Cramming Roundtable," which further warned of the dangers of mobile cramming.17 For

example, this forum called attention to the parody between the wireline and wireless cramming

issues, as well as state anti-cramming laws and previous lawsuits against mobile crammers,

including the Wise Media action and the Jawa action.

18

90. The FTC continued its scrutiny of cramming in the wireless industry by launching

formal investigations against the major wireless carriers, including AT&T. The FCC and state

authorities also launched investigations of cramming and billing practices of mobile carriers,

including AT&T. As a result of these investigations, authorities undertook at least six

enforcement actions against carriers for alleged cramming that ultimately resulted in hundreds of

millions of dollars in fines.

91. On June 12, 2013, Rockefeller sent defendant Stephenson a third letter (the "June

2013 Letter"). In the June 2013 Letter, Rockefeller warned AT&T that the information

16 See Federal Communications Commission, Workshop: Bill Shock and Cramming (Apr. 17,2013) available at https://www.fcc.gov/events/workshop-bill-shock-and-cramming.

17

See Federal Trade Commission, Mobile Cramming, An FTC Roundtable (May 8, 2013)available at https://www.ftc.gov/news-events/events-calendar/2013/05/mobile-cramming-ftc-roundtable.

18 See Federal Trade Commission, Mobile Cramming Roundtable Transcript (May 8, 2013)https://www.ftc.gov/sites/default/files/documents/public_events/Mobile%20Cramming%20Roundtable/30508mob.pdf.



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previously provided by the Company as well as public information indicate that AT&T knows

about the ongoing customer complaints concerning unauthorized third-party charges on their

wireless bills. He also asserted new evidence of wireless cramming, including (without

limitation) a report from the Vermont Office of the Attorney General showing that 60% of

consumers surveyed believed they had received unauthorized third-party charges on their

wireless bills, as well as referenced the Texas Attorney General's Jawa action and the FTC's

Wise Media action against third-party vendors for wireless cramming. Rockefeller astutely

observed that, "[ t]hese and other accounts … should have put the wireless industry on alert

regarding the need to vigil antly moni tor compliance with the double opt-i n requirements ." Hethen requested the following additional information regarding AT&T's double opt-in process:

1. Explain AT&T's process for verifying that a customer has authorizedthird-party billing on AT&T's wireless billing platform through the doubleopt-in process, and provide illustrative customer authorization records.

2. Does AT&T have a system for maintaining customer authorization recordsfor each customer? If so, please describe this system in detail. If AT&Tdoes not keep such records, please indicate what entity maintains theserecords and explain how AT&T is able to verify individual customerauthorizations without these records.

3. Does AT&T have a system under which it accesses and reviews customerauthorization records relating to third-party vendors? If so, pleasedescribe this system in detail.

4. How many times has AT&T accessed and reviewed customerauthorization records upon learning of an allegation of unauthorized third party billing on a customer wireless account? How many of thoseinstances resulted in a penalty to the vendor? How many of thoseinstances resulted in a refund to the consumer? Please describe any other

follow-up steps AT&T took as a result of such review.

5. Describe any consumer query, complaint, or refund threshold AT&T usesto identify problematic practices of third-party vendors who chargeconsumers for services through AT&T's wireless billing system, and any procedures AT&T has in place for addressing situations where vendorsexceed such thresholds. In your response, please discuss how any such procedures apply to aggregators who contract with such vendors.



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6. Does AT&T have a system for categorizing by subject matter thecustomer queries, complaints, or request for refunds AT&T receivesregarding wireless bills? If so, please state those categories and the percentage of customer refunds in 2012 associated with each category.

7. Explain any routine auditing processes that AT&T has in place to verifythat third-party vendors who charge consumers through AT&T's wireless billing system are obtaining appropriate consumer consent. In yourresponse please state how often these audits are conducted and provide theCommittee with documents sufficient to show what materials are receivedfrom the third-party vendors to prove a valid consent process occurred.

8. What steps, if any has AT&T taken to improve its processes to protectconsumers from unauthorized charges on their wireless phone bills sinceAT&T's July 2012 letter outlining wireless cramming mitigation procedures?

92. Enforcement actions against third-party crammers continued throughout 2013.

Some of these actions even involved third parties that had been subject to previous litigation

regarding their wireless cramming practices. For example, the FTC brought a lawsuit against

Jesta Digital, LLC d/b/a Jamster ("Jamster") on allegations that it crammed unwanted charges on

consumers' cell phone bills for ringtones and other mobile content. Jamster settled the case for

millions, including significant refunds to consumers and a $1.2 million fine. 19 Jamster was

previously a named defendant alongside AT&T in the Jamster MDL which involved

substantially similar allegations. That action settled for millions of dollars in 2012 including

19 Federal Trade Commission, Jesta Digital Settles FTC Complaint It Crammed Charges onConsumers' Mobile Bills Through "Scareware" and Misuse of Novel Billing Method (Aug. 21,2013) available at https://www.ftc.gov/news-events/press-releases/2013/08/jesta-digital-settles-ftc-complaint-it-crammed-charges-consumers (requiring Jamster provide refunds to AT&Tcustomers for unauthorized charges occurring in August-December 2011).



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substantial cost to AT&T. AT&T continued to allow Jamster to bill its wireless customers even

after the Jamster MDL settlement.

93. As revealed in the 2014 Staff Report, in November 2013, the Attorney General of

Texas filed a complaint against Mobile Messenger U.S. Inc. ("Mobile Messenger"), one of the

major wireless billing aggregators, alleging that the company had engaged in a deceptive scheme

with third-party vendors to cram wireless consumers. The allegations raised questions regarding

representations Mobile Messenger had made to the Senate Committee about the company's

commitment to consumer protection and the assurances major carriers had given the Senate

Committee that aggregators worked with carriers to promote consumer protections in the third- party wireless billing process. In late November, Rockefeller wrote to Mobile Messenger

seeking additional information concerning a subset of vendors whose conduct had raised

concerns and pressing for production of previously requested information. When Mobile

Messenger refused to provide key information requested in Rockefeller's March 2013 and

November 2013 letters, the Senate Committee on March 14, 2014, issued a subpoena to Mobile

Messenger.

94. Documents received by the Senate Committee from Mobile Messenger indicated

instances where AT&T did not oversee or enforce its own internal policies (the "subpoena

documents"). The subpoena documents revealed that short codes that significantly exceeded

AT&T's refund threshold in one month continued billing on the AT&T's platform during the next

month. In particular, eleven Mobile Messenger short codes billing on AT&T's platform in

October 2012 had exceeded AT&T's 18% refund threshold in the previous month, and had

refund rates as high as 56.8% and total refunds over $600,000. The subpoena documents also

revealed that short codes continued billing on AT&T's platform despite exceeding AT&T's



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refund threshold for a number of months at a time. For example, short code 67145 exceeded

AT&T's threshold in February 2012 (with a refund rate of 33.9%), March 2012 (with a refund

rate of 40.6%), and May 2012 (with a refund rate of 18.1%).

95. In addition, an October 2013 e-mail chain between AT&T and Mobile Messenger

demonstrated control failures at AT&T that allowed Anacapa Media LLC ("Anacapa") to

continue to improperly bill on AT&T's platform until October 2013. To start, in November

2012, Anacapa "did not pass [AT&T's] internal vetting process … and [AT&T] rejected them

from running PSMS campaigns." AT&T, however, allowed at least one Anacapa short code

access to its billing platform because it had "failed to reject" that short code. Worse, fromOctober 2012 to October 2013, Anacapa was the subject of twenty "Severity 1" audit findings,

including two "Severity 1" findings on the short code that was erroneously allowed on AT&T's

billing platform.20 In addition, AT&T had suspended that Anacapa short code twice in the first

part of 2013, and, in May 2013, "drafted" a termination notice but again "failed to deliver" it. As

a result, Anacapa was able to continue to bill wireless consumers on AT&T's platform well into

2013. AT&T had access to all the foregoing information in real time via the reports it received

from industry auditors.

The Board Failed to Implement Critical Controls and Oversee the Company in Good Faith

96. The Individual Defendants are ultimately responsible for the Company's improper

third-party billing practices and the resulting fine. Had the Board overseen the Company in good

faith and not completely disregarded its duties, AT&T would have substantially mitigated its

unlawful cramming practices, brought its billing practices in compliance with applicable law,

20 An audit finding is designated "Severity 1" if it involves "serious consumer harm."



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and avoided the $105 million fine. The importance of its wireless segment, the magnitude and

duration of the cramming issue at AT&T, regulatory reports and ongoing investigations,

demonstrate that the Board failed to implement controls to

monitor, detect, and report to the Board noncompliance with internal policies and applicable law,

and expose the significant control gaps in AT&T's anti-cramming program. In addition, the

Board failed to institute controls over the Company's communications with regulators as

evidenced by the Company's repeated misrepresentations to regulators

97. On June 2, 2015, an AT&T stockholder sent the Company a demand to inspectcertain of the Company's books and records, including Board minutes and materials (the

"Inspection Demand").21 In response to the Inspection Demand, AT&T sent a letter, dated June

10, 2015, in which it agreed to make available for inspection, the "(i) non-privileged portions of

minutes of meetings of the AT&T Board and of AT&T Board committees, (ii) non-privileged

portions of materials delivered to the Board or Board committees, and (iii) policies" concerning

"the Third-Party Billing Issue, including compliance, detection and prevention efforts" from

"January 1, 2011 to the present." Pursuant to the Inspection Demand, the "Third Party Billing

Issue" entailed AT&T's inclusion of unauthorized charges in its customers' bills, as detailed

herein. A true and correct copy of the June 10, 2015 letter is attached hereto as Exhibit A.

98. Plaintiff's counsel inspected these documents on September 17, 2015, at AT&T's

corporate headquarters located in Dallas, Texas. On September 24, 2015, Plaintiff's counsel sent

21 The demanding stockholder and Plaintiff are represented by the same counsel. AT&T agreedthat Plaintiff's counsel could share the information gathered from the Inspection Demand withPlaintiff.



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AT&T a follow up letter to, among other things, confirm that AT&T is not in possession of any

other Board materials concerning the cramming issue. A true and correct copy of the September

24, 2015 letter is attached hereto as Exhibit B. In a letter, dated September 28, 2015, counsel for

AT&T "confirm[ed] that it made available at the September 17, 2015 inspection … all of the

materials that it agreed to make available." A true and correct copy of the September 28, 2015

letter is attached hereto as Exhibit C.

99.

Regardless, by that time, the Company had already agreed (in late 2013) to phase



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out third-party PSMS billing (and a substantial fine was forthcoming).23

100. The Board's attempt to stick its head in the sand is especially obvious in light of

the repeated warnings received by the Company (including previous lawsuits against the

Company) over the course of more than a decade regarding unauthorized third-party charges and

its third-party billing practices. In particular, during the relevant period, there was an abundance

of information known to AT&T establishing that: (i) the Company improperly charged its

customers billions of dollars for third-party services that those customers never authorized; (ii)

there existed significant control gaps in the Company's anti-cramming policy; and (iii) AT&T

failed to oversee and enforce its anti-cramming policy. As established above, AT&T and its

management were well aware that cramming was an industry-wide and AT&T-specific problem

throughout the relevant period.

101.

Regulatory findings are also consistent with a lack of such controls.24 Generally, regulators

23 While the Company agreed to stop PSMS cramming, it did not pledge to stop wirelesscramming altogether and additional ways beyond PSMS cramming do exist.

24 See, e.g., 2014 Staff Report.



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uncovered that the Company did not reliably or consistently apply its anti-cramming policies.

For example, the FTC's investigation revealed that, "[AT&T] took no steps to ensure that

consumers actually authorized the services that the merchant has alleged they signed up for." 25

The FTC also determined that the Company's thi rd-party subscription monitoring policy " was

meaningless because [AT& T] did not always abide by it – it continued to bill consumers for

subscriptions" with excessive refund rates (even repeat offenders).26 Enforcement actions

against third-party billers and regulatory findings (for example, the Mobile Messenger subpoena

documents) further demonstrate that AT&T did not reliably or consistently enforce its

certification, periodic testing, and refund rate requirements for third-party subscriptions.

102 regulatory findings also revealed significant control gaps

in AT&T's anti-cramming policies. For example,

The control gaps are especially troubling given that AT&T

"acknowledged in its internal communications that third party authorizations are 'often

25 See FTC Complaint.

26 Id.



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unreliable.'"27 The Board purposefully, knowingly, or recklessly failed to implement controls

necessary to eliminate these significant gaps.

103.

To the extent

the Board maintains it was unaware that AT&T's anti-cramming program involved significant

control gaps, the Board would have been aware had it instituted controls to monitor, detect, and

report to the Board noncompliance with internal policies and applicable law. In fact, the anti-

cramming control gaps, the Company's failure to enforce its anti-cramming policies, the lack of

controls to monitor, detect, and report to the Board noncompliance with internal policies and

applicable law, and other control failures effectively eliminate any actual control or oversight

over third-party billing and applicable law at AT&T.

104. In addition,

repeated

misrepresentations the Company made to regulators, establishes that the Board failed to institute

controls over the Company's communications with regulators.

27 See FTC Complaint.



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DAMAGES TO AT&T

105.

As a result of the Individual Defendants' improprieties, the Company misled

many of its customers on their telephone bills and improperly billed their landline customers for

billions of dollars and their wireless customers for at least millions of dollars more in

unauthorized third-party charges. To resolve the potential violations of law and improper

practices arising from this misconduct, the FTC, FCC, fifty states, and District of Columbia fined

the Company $105 million.

106. AT&T's improper billing also damaged its reputation within the wireless market,

the Company's largest business segment. In addition to price, AT&T's current and potential

customers consider a company's ability to bill fairly and comply with the law. Customers are

less likely to award contracts to companies that bill deceptively and violate law. AT&T's ability

to maintain and/or grow its customer base is now impaired, which could lead to billions of

dollars in additional losses to the Company.

107. Further, as a direct and proximate result of the Individual Defendants' actions,

AT&T has expended, and will continue to expend, significant sums of money. Such

expenditures include, but are not limited to:

(a) costs incurred from cooperating with, defending, settling regulatory and

other investigations and enforcement actions;

(b) costs incurred from implementing and maintaining the requirements of its

settlements with regulators and enforcement agencies, including, inter alia, the training program

related to cramming and refunds that must be in place for six years, the additional compliance

reporting and record-keeping requirements, and providing notification to the AT&T customers

affected by cramming;



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(c) costs incurred from defending, settling, or paying any adverse judgment in

any other legal actions pertaining to cramming; and

(d) costs incurred from compensation and benefits paid to the Individual

Defendants who have breached their duties to AT&T.

DERIVATIVE AND DEMAND FUTILITY ALLEGATIONS

108. Plaintiff brings this action derivatively in the right and for the benefit of AT&T to

redress injuries suffered, and to be suffered, by AT&T as a direct result of breaches of fiduciary

duty and unjust enrichment, as well as the aiding and abetting thereof, by the Individual

Defendants. AT&T is named as a nominal defendant solely in a derivative capacity. This is not

a collusive action to confer jurisdiction on this Court that it would not otherwise have.

109.

Plaintiff will adequately and fairly represent the interests of AT&T in enforcing

and prosecuting its rights.

110. Plaintiff was a stockholder of AT&T at the time of the wrongdoing complained

of, has continuously been a stockholder since that time, and is a current AT&T stockholder.

111.

The current Board of AT&T consists of the following fourteen individuals:

defendants Stephenson, Roché, McCoy, Tyson, Madonna, Rose, Ford, McCallister, Taylor,

Mooney, and non-defendants Glenn H. Hutchins, Samuel A. Di Piazza, Jr., Richard W. Fisher,

and William E. Kennard. Plaintiff has not made any demand on the present Board to institute

this action because such a demand would be a futile, wasteful, and useless act, as set forth below.

112. Each of the current Director Defendants is disqualified from fairly evaluating the

derivative claims, let alone vigorously prosecuting them, because they are each responsible for

damages suffered by AT&T as a result of the Company's improper billing practices. The Board

failed to implement internal controls designed to detect or prevent the improper billing practices.



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The Board also failed to create or implement controls over Board-level reporting and monitoring

of AT&T's compliance with applicable law. Instead, as detailed herein,

FIRST CAUSE OF ACTION

Against the Individual Defendants for Breach of Fiduciary Duty

113. Plaintiff incorporates by reference and realleges each and every allegation

contained above, as though fully set forth herein.

114. The Individual Defendants owed and owe AT&T fiduciary obligations. By

reason of their fiduciary relationships, the Individual Defendants owed and owe AT&T the

highest obligation of good faith, fair dealing, loyalty, and due care.

115. The Individual Defendants, and each of them, violated and breached their

fiduciary duties of candor, good faith, and loyalty. More specifically, the Individual Defendants

violated their duty of good faith by creating a culture of lawlessness within AT&T, and/or

consciously failing to prevent the Company from engaging in the unlawful acts complained of

herein.

116.

The Officer Defendants either knew or were reckless in disregarding the illegal

activity of such substantial magnitude and duration. The Officer Defendants either knew or were

reckless in not knowing that: (i) the Company included unlawful, unauthorized third-party

charges in its customers' wireless bills and did not provide compliant billing statements; and (ii)

the Company failed to implement and maintain necessary internal controls. Accordingly, the

Officer Defendants breached their duty of loyalty to the Company.

117. The Director Defendants either knew or were reckless in disregarding the illegal

activity of such substantial magnitude and duration. The Director Defendants either knew or



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were reckless in not knowing that: (i) the Company included unlawful, unauthorized third-party

charges in its customers' wireless bills and did not provide compliant billing statements; and (ii)

the Company failed to maintain adequate internal controls. Accordingly, the Director

Defendants breached their duty of loyalty to the Company.

118. As a direct and proximate result of the Individual Defendants' breaches of their

fiduciary obligations, AT&T has sustained significant damages, as alleged herein. As a result of

the misconduct alleged herein, these defendants are liable to the Company.

119. Plaintiff, on behalf of AT&T, has no adequate remedy at law.

SECOND CAUSE OF ACTION

Against the Individual Defendants for Unjust Enrichment

120. Plaintiff incorporates by reference and realleges each and every allegation

contained above, as though fully set forth herein.

121. By their wrongful acts and omissions, the Individual Defendants were unjustly

enriched at the expense of and to the detriment of AT&T. The Individual Defendants were

unjustly enriched as a result of the compensation and director remuneration they received while

breaching fiduciary duties owed to AT&T.

122.

Plaintiff, as a stockholder and representative of AT&T, seeks restitution from

these defendants, and each of them, and seeks an order of this Court disgorging all profits,

benefits, and other compensation obtained by these defendants, and each of them, from their

wrongful conduct and fiduciary breaches.

123. Plaintiff, on behalf of AT&T, has no adequate remedy at law.

PRAYER FOR RELIEF

WHEREFORE, Plaintiff, on behalf of AT&T, demands judgment as follows:



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A. Against all of the defendants and in favor of the Company for the amount of

damages sustained by the Company as a result of the defendants' breaches of fiduciary duties and

unjust enrichment;

B. Directing AT&T to take all necessary actions to reform and improve its corporate

governance and internal procedures to comply with applicable laws and to protect AT&T and its

stockholders from a repeat of the damaging events described herein, including, but not limited to,

putting forward for stockholder vote, resolutions for amendments to the Company's By-Laws or

Articles of Incorporation and taking such other action as may be necessary to place before

stockholders for a vote of the following Corporate Governance Policies:

1. a proposal to strengthen the Company's controls over its billing practices;

2. a proposal to strengthen the Company's controls over its refund practices;

3. a proposal to strengthen the Company's controls over Board-level

reporting;

4. a proposal to strengthen the Company's controls over monitoring and

detecting noncompliance with applicable law;

5. a proposal to strengthen the Company's controls over monitoring and

detecting noncompliance with or inconsistent application of AT&T's own internal policies;

6. a proposal to strengthen the Company's controls over its communications

with regulators and other state and federal authorities;

7. a proposal to strengthen the Board's supervision of operations and

develop and implement procedures for greater stockholder input into the policies and guidelines

of the Board;



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8. a provision to institute a Board committee responsible for compliance

issues and elect three Board members to that committee; and

9. a provision to permit the stockholders of AT&T to nominate at least three

candidates for election to the Board;

C. Extraordinary equitable and/or injunctive relief as permitted by law, equity, and

state statutory provisions sued hereunder, including attaching, impounding, imposing a

constructive trust on, or otherwise restricting the proceeds of defendants' trading activities or

their other assets so as to assure that Plaintiff on behalf of AT&T has an effective remedy;

D. Awarding to AT&T restitution from defendants, and each of them, and ordering

disgorgement of all profits, benefits, and other compensation obtained by the defendants;

E. Awarding to Plaintiff the costs and disbursements of the action, including

reasonable attorneys' fees, accountants' and experts' fees, costs, and expenses; and

F. Granting such other and further relief as the Court deems just and proper.

JURY DEMAND

Plaintiff demands a trial by jury.

Dated: March 11, 2016 KENDALL LAW GROUP, PLLC

JOE KENDALLState Bar No. 11260700JAMIE J. MCKEYState Bar No. 240452623232 McKinney Avenue, Suite 700Dallas, TX 75204

Telephone: (214) 744-3000Facsimile: (214) 744-3015E-mail: [email protected]

[email protected]

ROBBINS ARROYO LLPBRIAN J. ROBBINSKEVIN A. SEELYASHLEY R. RIFKINLEONID KANDINOV600 B Street, Suite 1900San Diego, CA 92101



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Telephone: (619) 525-3990Facsimile: (619) 525-3991E-Mail: [email protected]

[email protected]@[email protected]

KAUFMAN, COREN & RESS, P.C.DEBORAH R. GROSSTwo Commerce Square2001 Market Street, Suite 3900Philadelphia, PA 19103Telephone: (215) 735-8700Facsimile: (215) 735-5170E-mail: [email protected]

Attorneys for Plaintiff

1058178



Exhibit A



EXHIBIT A

CONFIDENTIALITY AGREEMENT

grees to be bound by the terms

(Name of person)

of the Confidentiality Stipulation dated June , 2015 between AT T Inc. and Allan Finer.

(Signature of person)



Exhibit B



Exhibit C



SULLIVAN & CROMWELL LLP

TELEPHONE:

1-212-558-4000

FACSIMILE: 1-212-558-3588

www.suLLCROM.COM

125 A octi heeet

}11 e u

Wo4A P Y10004-24 98

LOS ANGELES • PALO ALTO • WASHINGTON D.C.

FRANKFURT • LONDON • PARIS

BEIJING • HONG KONG • TOKYO

MELBOURNE • SYDNEY

September 28, 2015

Via Federal Express

Gregory E. Del Gaizo, Esq.,

Robbins Arroyo LLP,

600 B Street, Suite 1900,

San Diego, California 92101.

Deborah R. Gross, Esq.,

Law Offices Bernard M. Gross, P.C.,

100 Penn Square East, Suite 450,

Philadelphia, Pennsylvania 19107.

Re: Allan Finer Books and Records Demand

Dear Greg and Debbie:

I write on behalf of AT&T Inc. ( AT&T ) in response to your September

24, 2015 letter.

AT&T confirms that it made available at the September 17, 2015

inspection conducted by Ryan Civiello all of the materials that it agreed to make

available in my June 10, 2015 letter. The documents consisted of, among other things,

109 pages of AT&T Board minutes and materials from seven meetings of the AT&T

Board, as well as 60 separate responsive policies. We reject your assertion of the

scarcity of documents made available for inspection.

As requested, enclosed are copies of (i) the documents made available at

the inspection that were bates-stamped ATT-FINER220-0000110 to ATT-FINER220-

0000163, ATT-FINER220-0000196 to ATT-FINER220-0000205, and ATT-FINER220-

0000242 to ATT-FINER220-0000304, and (ii) the privilege log that was also made

available at that inspection.' Unless otherwise indicated in the enclosed privilege log, all

Pursuant to Paragraph 5 of the Confidentiality Stipulation, please provide us with a

signed Exhibit A from any Qualified Person (other than you and Mr. Civiello, from

whom we have already received a signed Exhibit A) with whom you intend to share these

materials.



Gregory E. Del Gaizo, Esq.

2-

Deborah R. Gross, Esq.

of the redactions in the documents made available for inspection were for

nonresponsiveness, not privilege.

The other documents identified in your September 24 letter were marked

as Highly Confidential, and therefore your client is not entitled to copies under the

terms of the Confidentiality Stipulation. AT&T would be willing to make those

documents available for a second inspection at a mutually convenient time.

Sincerely,

William B(11?nahan

(Enclosures)