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Business

Phoney business

Paytel figured out how to make money off prisoners' collect calls. Then the company ran up against Detroit and Ameritech.

Captive customers guarantee profits for the company that won Detroit's jail phone contract.
Doug Daroki stands before a Paytel phone installed in a Harper Woods Police Department jail cell.
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Published 11/10/1999

If you ask Doug Saroki what he considers to be his greatest business accomplishment, he will say designing a pay phone that makes police departments safer. If you ask him what he considers his biggest business folly, he will say introducing the product to the Detroit Police Department.

Saroki had been in the pay phone business about eight years in 1993 when he met former Wixom Police Chief Larry Holland, who suggested that Saroki devise an indestructible pay phone because inmates were using them as weapons against one another and officers.

"They would serrate the cord and use it as a knife," says Holland. Inmates also pulled the units off the wall to use as clubs.

About a month later, Saroki designed the product Holland wanted, an intercom-style phone. The only parts protruding from the wall are a key pad and an on/off button. The phones were installed in Wixom’s lockup so officers would not have to escort inmates to pay phones; this saved time and decreased chances of assault.

"Nobody else was doing it at the time, Ameritech, Michigan Bell, nobody," says Holland about Saroki’s jail cell phone. "He did that, and it was a giant step forward for law enforcement."

It was also a giant step forward for Saroki’s company, which over the next six years proceeded to install the phones in facilities of 48 police departments around the state.

"We have just about blanketed Wayne, Oakland and Macomb counties," says Saroki about his Bingham Farms-based business which generates just more than $1 million annually. "There is no small company in the country that has the penetration we have."

There also is no small company that has a product like Paytel – but there is a large one. Saroki says that after he introduced the phone to the Detroit Police Department, Ameritech copied it.

In 1995, Paytel, Ameritech and two other companies bid on a contract to install phones in DPD lockups. The DPD initially recommended Paytel, then rescinded the recommendation and later chose Ameritech, according to a lawsuit filed against the City of Detroit and the phone company which grossed $17 billion in sales last year.

Not only did Paytel object, but so did then-deputy police chief Benny Napoleon, according to a letter he wrote regarding the DPD’s decision to throw out the proposals and begin the process again. And the lawsuit alleges that Mayor Dennis Archer played a role in recommending Ameritech for the contract, which he denies. Ameritech says the lawsuit is groundless. It is a legal battle that some say could last years and may cost taxpayers and both companies hundreds of thousands of dollars.

"This is probably going to be a $250,000 battle from A-to-Z and the only thing we did wrong was introduce a product to the city of Detroit," says Saroki. "That was probably the biggest mistake of my life."

The proposals

In February 1995, Saroki showed Paytel’s jail cell phones to the then-Detroit Police Chief Isaiah McKinnon. The next month the police department asked for proposals for a jail cell phone system that was safe, efficient and generated revenue for the city.

Four companies responded, including Paytel and Ameritech. Paytel proposed the system that it had installed in 16 other departments at the time, a hands-free phone that is recessed in the wall and has an electronic eye that allows officers to watch inmates from the front desk. Calls are monitored and can be shut off at the department’s discretion.

Paytel also agreed to pay the city 20 percent of the revenue generated from collect calls, which Saroki says would have been about $192,000 annually.

"There was no cost to the city of Detroit," says Saroki, who installs the phones for free. The Police Department also was concerned that prisoners’ families could not afford the collect call rates, says Saroki, who proposed charging $2.16 for the first minute and 12 cents for each additional minute for collect calls made to numbers within Detroit city limits.

He says that he assured the Police Department that Paytel does not send creditors after customers for delinquent phone bills. Instead, the company pays half of high phone bills and works out a payment arrangement with customers for the other portion, he says.

Ameritech proposed its traditional box unit, which protrudes from the wall and was "made from heavy gauge steel with the handset connected to the telephone by an armored cord."

Ameritech offered the Police Department an annual commission of $251,300 with a $105,000 signing bonus upon execution of a five-year contract. The company would also provide and install its phones for free.

To address the high cost of collect calls, Ameritech proposed charging 90 cents for the first minute and 8 cents for each additional minute. But according to the Michigan Telecommunications Act, Ameritech is legally prohibited from offering the 90-cent rate. The act states that phone companies cannot charge less than the cost to run its service; this is called the operator service tariff.

When Ameritech submitted its proposal to the Police Department in April 1995, its operator service tariff was $2.10 for collect calls, according to court records. Ameritech’s proposal not only violated the Michigan Telecommunications Act by undercutting the tariff, the company offered a lower rate for jail inmate calls than the general public pays – $1.20 less. Paytel listed its service tariff as $2.10. Ameritech attorneys did not return calls from the Metro Times.

Napoleon steps in

In August 1995, Second Deputy Police Chief Al Miller, who oversaw the bid process, told attorney Melvin "Butch" Hollowell Jr., who represented Paytel at the time, that all the proposals would be thrown out because they did not conform with the department’s requests, according to a letter Hollowell wrote the Detroit City Council.

Miller said that Paytel’s proposal did not conform because the company did not provide "audited" financial statements. Hollowell not only objected to this in the same letter to the council, but so did then-Deputy Police Chief Benny Napoleon.

In a letter to Miller in February 1996, Napoleon recommended that Miller not reject the bids since "it could give rise to unfair competition." He also pointed out that Paytel’s proposal met the department’s requirements.

"The equipment offered by (Paytel) is the equipment the DPD wants," wrote Napoleon. "According to letters from some of the Michigan Police Departments who currently have the (Paytel) equipment installed, their equipment appears to be more than ‘satisfactory’ as you have stated. The chiefs in these cities are raving about it."

Napoleon also stated that Paytel had attached two years of financial reports to its proposal; though they were not "audited" statements, Napoleon pointed out that this was not a department requirement.

Napoleon questioned why Miller stressed the commission Ameritech would pay the city when its equipment is "barely satisfactory," and its bid "may contain legal flaws," such as undercutting the service tariff. He added that "the DPD has experienced significant problems with the current Ameritech phone equipment due to vandalism, phones being used as weapons, and the amount of staff time dedicated to escorting prisoners to and from the cells." Throwing out the bids, wrote Napoleon, will extend the process by months, "jeopardizing safety, and prolonging inefficiency and liability."

Rather than rescind the bids, Miller led a committee of police officers from each precinct who evaluated the proposals. Paytel received the highest score with 202 points and Ameritech rated 190; the other two compaines scored less than 80, according to court records.

"After due consideration," wrote Miller in a memorandum to McKinnon on April 16, 1996, "the committee recommends that the vendor whose proposal is in the Detroit police Department’s best interest is the Michigan Paytel Joint Venture."

In July 1996, Miller told Hollowell that Paytel was selected and that a contract would be sent, according to court records. Saroki says that Miller also told him this. However, with no explanation, Miller told Hollowell a few weeks later that he was throwing out all the bids and the process would begin again, according to court records.

Miller, who retired from the police department last year, says he did not tell Hollowell or Saroki that Paytel’s proposal was chosen. Miller says that the reason Paytel’s proposal did not measure up is that the company did not provide financial reports of any kind. "That was the major thing," he says. "Who were they and what were their assets and could they perform on the contract or not?"

But Paytel’s proposal, as included in the court files, does include financial reports.

"Thanks, mayor"

The new proposals were due Feb. 28, 1997, and Ameritech offered a phone system very similar to Paytel’s.

"Ameritech has two types of inmate speaker phones in their product line ... one model is surface-mounted and the other is recessed into the wall," the proposal states. "Both models are built without any parts that can be removed and used as a weapon." Ameritech also offered a percentage commission over five years and altered the collect call rate from 90 cents to $3.14 for the first minute and 8 cents for each additional minute in the Detroit city limits.

Paytel submitted the same proposal as earlier and again did not include audited reports because, says Saroki, the Police Department did not ask for them.

The bidding process is supposed to be secret, with none of the bidders provided inside information before the outcome is officially announced. However, two weeks before the bids were due, Hollowell wrote a letter to the City Council noting that a former Ameritech executive, Chuck Boyce, publicly thanked Mayor Dennis Archer for the jail cell phone contract at a reception at the federal courthouse in Detroit.

"I want to thank the mayor for blessing me with this contract for jail-cell phones," said Boyce, according to Hollowell’s letter.

Boyce did not return Metro Times phone calls, but denied making the statement to the mayor in court records. The documents state that Boyce had no involvement in the jail-cell phone contract and had been retired from Ameritech about two years before the first proposals were submitted.

"Someone has a lively imagination," says attorney James McGinnis, who represents Boyce.

Archer press secretary Greg Bowens says that the mayor did not tell Boyce that Ameritech was granted the contract.

"People say lots of things to bring public pressure, to make the public think something is true when it’s not," says Bowens. "The mayor would not publicly berate somebody who would go out on a limb. People say a lot of stuff that is not true."

Bowens also says that the mayor has nothing to do with the contract-bidding process.

"It goes straight from the department ... to the City Council and they approve it," he says. "If (Paytel) did have concerns regarding the contract why not go before the City Council?"

Saroki did contact the council to protest the bid process. The council twice scheduled public hearings in spring 1998, but postponed both of them. In July, before a third hearing was scheduled on the Paytel issue, City Council President Gil Hill, a former Detroit police division commander, presented the Ameritech contract to the council which approved it 5 to 4. Saroki says that he was not present the day of vote because he didn’t know it was going to take place.

"There were four people there from Ameritech and we didn’t know anything about it," says Saroki.

Hill told the Metro Times that he could not discuss the issue due to pending litigation.

Last May, Paytel filed its lawsuit in U.S. District Court against the City of Detroit, Ameritech and Boyce for breach of contract, antitrust violations and other alleged infractions.

"It’s a strong case," says Paytel’s current attorney, Gordon Gold, who has practiced for 28 years. "I do civil litigation and get a lot of complaints but this has more backing with Napoleon’s letter. It is more than just a disgruntled client," says Gold.

Napoleon did not return Metro Times’ faxed questions or phone calls.

Attorney Morley Witus represents the City of Detroit. He says that the city chose Ameritech over Paytel because it had the better proposal. He also disputes Saroki’s claim that the city originally agreed to grant Paytel the contract.

"The plaintiffs say they were chosen, but I don’t think that is true. I think the determination was that none of the bids measured up, then they rebid it and Ameritech scored significantly higher."

Out of 1,000 points, Ameritech scored 960 and Paytel 937, according to court records.

Bowens says that, "So far as the city is concerned the claims made are baseless." He says that it is not unusual for contracts to be rebid and that the city reserves this right.

Ameritech spokesperson Chris Gronkiewicz says that the lawsuit is groundless and would not comment further.

The city filed a motion to dismiss Paytel’s lawsuit and to postpone the discovery process until Judge George E. Woods, who is presiding in this case, renders a decision on the proposed case dismissal.

Last month, the courts determined that a decision could not be rendered on the motion to dismiss without more information, and ordered that the discovery process begin. Saroki does not expect that the lawsuit will result in the city granting Paytel the jail cell contract, but he expects monetary compensation for the lost business, which he says amounts to millions of dollars.

According to Detroit Deputy Police Chief John Stark, Ameritech has nearly finished installing phones in most of the cells at the department’s 13 precincts. Stark says it is too soon to tell how well the Ameritech system will work.

"We are still kind of feeling our way through this. ... By and large, performance is as advertised." he says. "It is a little early to say if this thing is a resounding success."

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