Friendswood man ordered to pay back $2.4M in pay phone scam

Pay phones in front of a Gulf gas station on Hillcroft Street in southwest Houston photographed on July 13, 2018. These phones were surveilled with a pole camera after federal agents began investigating a fraud scheme involving automated calls to toll free numbers for state and federal agencies and private businesses. David Grudzinski, who owned 450 phones in the Houston area, admitted he collected the 49 cent reimbursements for each of roughly 4.8 million calls, raking in $2.4 million over a 10-year period in what a federal judge called “the most sophisticated fraud” he’d seen. (Elizabeth Conley/Houston Chronicle) less Pay phones in front of a Gulf gas station on Hillcroft Street in southwest Houston photographed on July 13, 2018. These phones were surveilled with a pole camera after federal agents began investigating a fraud ... more Photo: Elizabeth Conley, Staff / Houston Chronicle Photo: Elizabeth Conley, Staff / Houston Chronicle Image 1 of / 1 Caption Close Friendswood man ordered to pay back $2.4M in pay phone scam 1 / 1 Back to Gallery

Just as coin-operated pay phones began nearing the brink of extinction in the early days of the 21st century, David Grudzinski landed on what seemed like an easy way to keep himself solvent. The Friendswood man owned at least 450 pay phones in the Houston area and figured he absolutely would turn a profit if it worked.

From his home office, he set up a system for his multitude of phones to place periodic automated calls to toll-free numbers for state and federal agencies and private businesses. He then signed up for an online service that would collect the 49.4 cents in federally mandated payment for each of roughly 4.8 million calls made from phones in Houston, Tomball, Lake Jackson, League City, Dayton, Freeport and Friendswood over a 10-year period. The scheme raked in $2.4 million.

A federal judge on Friday sentenced the 61-year-old entrepreneur to 18 months in prison, plus three years of supervised release. U.S. District Judge Sim Lake also ordered Grudzinski to start paying back the $2.4 million immediately, beginning with half his prison income and then $500 monthly installments after he is released.

The judge allowed him to remain free on bail and surrender to prison authorities.

“This is one of the most sophisticated frauds I’ve ever seen and I’ve seen a lot of fraud,” said Lake, who was appointed to the bench 30 years ago by President Ronald Reagan and notably presided over the criminal trial of former Enron chief executives Ken Lay and Jeffrey Skilling.

Wearing a neatly tailored black suit and tie, Grudzinski apologized and accepted responsibility for the trouble he caused, thanking the federal prosecutor and agents who investigated him for their professionalism. He said he used the income from the illicit scheme to keep his business running.

“We are simple people,” he said, noting that his 2300-square-foot home was not in tip top condition. “I don’t have jewelry besides what I inherited.”

He told the judge he ran a legitimate telecommunication business for 10 years before cellphones became the rage. He explained that when business dropped off, another telecommunications professional gave him the idea and the details of how to make money on pay phones through automated toll-free calls.

Defense lawyer George “Mac” McCall Secrest, Jr., encouraged the judge to hand down a significantly reduced prison term so his client could begin paying back the money, which he felt “duty bound” to do.

Secrest said after court that cellphones put people like Grudzinksi in a financial bind.

“Nobody uses a pay phone anymore, and he’s got 450 of them,” Secrest said. “It’s a dying business. At the end of the day, you open up the box and there’s 50 cents in there.

“Obviously, he made a bad decision,” the lawyer said.

The dial-around scam

Grudzinski pleaded guilty on April 13 to two counts of mail fraud and making monetary transactions in criminally derived property. At his sentencing Friday, prosecutor Melissa Annis withdrew the remaining 16 charges.

The money-making scheme involved something called dial-around compensation, a Federal Communications Commission mandate requiring remuneration to payphone providers for long distance calls, prepaid phone card calls and toll-free calls made from a coin-operated machine. The compensation for those calls came from the federal and state agencies and private businesses that provided the toll free numbers. Grudzinski’s repayment will go to them.

According to court documents, Grudzinski ran a company called Coin Operated Systems out of his home in Friendswood. Beginning in 2005, he equipped his pay phones across the region with internal smart boards which could communicate through the telephone wires with a polling computer he had set up at home. The polling computer was set to automatically place toll-free calls — when the coin phones otherwise were not in use — to a variety of pre-programmed toll-free numbers, including such federal agencies as the Internal Revenue Service, the Securities and Exchange Commission, the General Services Administration, the Defense Department, the federal student aid office at the U.S. Department of Education and, of all places, the National Criminal Justice reference service at the Justice Department.

The phones also called federal conservatorship programs Fannie Mae and Freddie Mac and several state offices. Grudinski also set the phones to regularly call private businesses that had toll-free numbers for clients or customers, according to court documents.

Calls were traced

He used an aggregator, an online service that tracked the unpaid calls on all his pay phones, and collected quarterly electronic transfers through the Automated Clearing House, a financial transaction network, for the cost of the toll calls on his phones. The income from the aggregator service to Grudinski’s business in Friendswood amounted to unlawful interstate commerce, making the scheme a violation of federal law, according to court documents.

Grudinski took the quarterly funds and deposited them into bank accounts, in lump sums of up to $10,000 at a time, according to a plea agreement. Between 2005 and July 10, 2015, Grudinski had amassed $2.4 million in dial-around compensation.

He agreed to forfeit that amount as part of his guilty plea.

Federal law enforcement placed cameras near two of Grudzinski’s pay phones and got court authorization to trace the calls made on the two phones. In both cases nine calls were made in one month to toll free numbers at times no one was seen using the phone.

gabrielle.banks@chron.com

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