AT&T supervisors encouraged sales reps to create fake DirecTV Now accounts to make the online video service seem more successful than it really was, a class-action complaint alleges.

AT&T "promot[ed] and reward[ed] account fraud" such as creating the fake accounts and signing AT&T customers up for DirecTV Now "without the customer knowing," the lawsuit claims.

The new allegations were made Friday in an amended complaint as part of a lawsuit filed against AT&T in April in US District Court for the Southern District of New York. The lawsuit alleges that AT&T lied to investors in order to hide DirecTV Now's failure.

"AT&T misrepresented the true condition of DirecTV Now and hid the associated risks," the amended complaint says. DirecTV Now's inevitable failure was subsequently made clear when subscriber numbers began to drop, the amended complaint says:

The dramatic decline in DirecTV Now subscriber numbers was a materialization of the risks associated, including: improper sales practices, such as the creation of fake accounts, which predictably led subscribers to cancel these accounts, upon realizing they were being billed for a service they did not use; the aggressive use of promotional campaigns to artificially sustain subscriber levels; and selling the product at irrationally low prices that would ultimately need to increase.

The lawsuit seeks certification of a class consisting of all people who acquired AT&T common stock in connection with the Time Warner Inc. acquisition and all people who acquired AT&T stock between September 21, 2016 and January 30, 2019. When AT&T bought Time Warner in June 2018, Time Warner shareholders' stock was converted into AT&T stock. The lawsuit claims that AT&T issued those shares pursuant to a registration statement with the SEC that lied about DirecTV Now's performance.

AT&T TV biz in freefall

When contacted by Ars yesterday, AT&T said it will "fight these baseless claims in court," but it did not provide any specific response to the new allegations.

AT&T must defend against the lawsuit while its TV business is in rapid decline despite the acquisitions of DirecTV and Time Warner. AT&T told shareholders last week that it expects to lose about 1.1 million TV customers in the third quarter in its DirecTV satellite and U-verse wireline TV services. That doesn't include DirecTV Now, which was recently renamed "AT&T TV Now."

AT&T launched DirecTV Now in November 2016 with discount pricing starting at $35 a month. DirecTV Now built a subscriber base of 1.86 million by the end of Q3 2018, but that number dropped to 1.34 million by June 2019 after a series of price increases.

The complaint says that AT&T and executives including CEO Randall Stephenson violated the Securities Act by making false and misleading statements about the performance of DirecTV Now. Plaintiffs are asking for compensatory damages for investors.

Ex-employees allege shady tactics

The amended complaint quotes 17 confidential witnesses who used to work for AT&T and one other who worked for an AT&T contractor. The witnesses include sales reps and consultants, sales managers, an assistant vice president of sales, members of DirecTV Now's product analytics team, a lead financial analyst, a regional director of sales operations, an operations director, a product developer, a financial analyst, and a lead strategic pricing manager. They worked for AT&T in various parts of the US, including: Hawaii; Michigan; Pennsylvania; New Jersey; California; an AT&T regional office covering Alabama, Louisiana, and Mississippi; Georgia; Oregon; and Idaho.

CW-1 (confidential witness 1), a sales rep for AT&T in Hawaii from 2015 to June 2018, described a practice of creating fake DirecTV Now accounts for customers. The complaint says:

CW-1 reported that he was "taught to manipulate" sales of DirecTV Now when customers were activating new mobile phones. According to CW-1, when a wireless customer would come into the store to get a new phone, the customer traditionally had to pay an activation fee to upgrade their phones. After the launch of DirecTV Now, CW-1 and his colleagues were taught to convert the activation fee into up to three subscriptions of DirecTV Now and covertly waive that fee.

CW-1 and other sales reps told customers that there was a $35 activation fee and that their purchase came with one to three months of DirecTV Now for free, the complaint said. CW-1 and fellow AT&T employees "would then waive the activation fee on AT&T's system but would not tell the customer they were doing this. Instead, CW-1 and his colleagues would charge the amount of the activation fee to the customer but apply that money to the DirecTV Now subscription."

The complaint continues:

CW-1 added that when DirecTV Now was running a promotion, Sales Representatives were taught to create up to three accounts with that $35 activation fee, and would do so by using "bogus" email addresses for the extra accounts, and "sneakily run" the customer's credit card for each account. CW-1 added that AT&T's system was designed to allow this and did not require the email accounts to be verified, so the personnel in the store could "put any" email address into their systems and run the same credit card for multiple accounts. CW-1 further advised that once the supposed trial period had passed, he and his colleagues were supposed to manually cancel those subscriptions so the customer would not get charged. CW-1 explained that they would do this through a "back end" system, without the customer ever knowing. CW-1 added that they would keep a "log" which detailed the customer's information, the fake email addresses, and the date that they needed to cancel. According to CW-1, the log was kept on the notepad function on an iPad so he could manually go in and cancel the accounts. CW-1 added that sometimes the customers would continue to be charged on their credit cards without their knowledge, but most times, CW-1 and his colleagues would go into the accounts and cancel them manually to remove the recurring charge.

CW-1 said this practice began in 2017 and "that he and his colleagues were able to make the subscriber growth 'explode' by using these sales tactics," the complaint said. Each sales rep was originally given a target of 8 to 10 new DirecTV accounts each month, but that "quickly increased to 20-30 new accounts per sales representative, each month," the complaint said.

CW-1 further claimed "that he heard from AT&T employees from both the west and east coasts of the US stating that they had been directed to create fake accounts in the same way that he had," the complaint says.

Same tactic reported in other states

Other confidential witnesses told similar stories, according to the complaint.

CW-2, who worked for AT&T as a senior sales consultant in Michigan, "said that they would try to pitch DirecTV Now but it was a 'very hard sell' and that sometimes the customer would say that they did not want the product, but that they would go ahead and add it to the account anyways without telling them," the complaint said.

CW-5, a retail sales consultant at AT&T stores in New Jersey, reported that "in December 2017, a Store Manager sat him down and explained that management followed a certain sales pitch to get customers to sign up for DirecTV Now, even if the customer did not understand what they were signing up for," the lawsuit said. "CW-5 explained that this included telling the customer they were being charged for one thing, but in actuality assigning that charge in the system to DirecTV Now."

Alleged false statements to investors

The lawsuit lists what it calls numerous "false and misleading statements and omissions" in statements to investors between September 2016 and September 2018. With these false and misleading statements, AT&T "created an impression of a state of affairs related to DirecTV Now that differed in a material way from the one that actually existed," the complaint said.

For example, AT&T continued touting the supposed success of DirecTV Now throughout most of 2018 even after "AT&T had conducted an internal investigation into fraudulent sales practices and DirecTV Now which found widespread fraudulent account creation by AT&T employees," the complaint said. In September 2018, Stephenson told investors that "the [DirecTV Now] customer base has been very resilient to the price moves as we put new functionality in the platform, cloud DVR and multiple streams."

AT&T finally began to reveal the truth about DirecTV Now's performance in October 2018, the lawsuit said. That's when AT&T "announced a dramatic reversal in the DirecTV Now business which it claimed was the result of a decision to 'rationalize' the pricing of the product," the complaint said. Further disclosures allegedly made it clear "that AT&T had engaged in aggressive promotional activity and amassed a massive group of highly promotional customers that all but assured DirecTV Now would not be profitable."

The new results and disclosures "partially revealed the falsity of AT&T’s prior statements about DirecTV Now and constituted a materialization of previously concealed risks regarding DirecTV Now," the complaint said.

Despite those disclosures, Stephenson told investors in December 2018 that the service had 2 million customers, the complaint said. But DirecTV Now hadn't actually reached 2 million customers, since it lost 267,000 customers in Q4 2018 after hitting a peak of 1.86 million, the complaint said.

"Defendants were conveying to the market that DirecTV Now was continuing to grow while the opposite was true," the complaint said.