Naming rights and wrongs
Donor's troubles put CSUF on spot.
By JOHN GITTELSOHN, MARLA JO FISHER and BRIAN JOSEPH
THE ORANGE COUNTY REGISTER, Sunday, February 25, 2007

LINK

When Hamid Tavakolian assigned his students at Cal State Fullerton to research Steven G. Mihaylo, the professor expected a glowing report on the 1969 alumnus and telecom tycoon who pledged $4.5 million to get his name on the campus's new business school building.

But their research raised questions about Mihaylo as a role model.

In December 2004, seven months after pledging the largest gift in campus history, Mihaylo signed a guilty plea admitting that his company, Inter-Tel Inc., had committed federal mail fraud and antitrust violations.

Mihaylo was not personally accused of any wrongdoing. But his company paid $9 million in fines and restitution after admitting salesmen helped rig bids and defraud the San Francisco Unified School District and a U.S. government program that subsidizes Internet service for schools in low-income neighborhoods.

"I wanted my students to know by graduating from Cal State Fullerton that they could be somebody. He was an example," said Tavakolian, a professor of management who has taught at Cal State Fullerton since 1989. "The irony of the situation is they're naming a building after somebody whose company pleaded guilty to taking money from poor students."

But Anil Puri, dean of Cal State Fullerton's College of Business and Economics, said Mihaylo is a positive role model. "He is so committed to the college," Puri said. "He has no criminal record. His life is very public."

Mihaylo – pronounced My-HAY-lo – said he did nothing wrong personally. Others were indicted later, but he wasn't. Rather, as his company's chief executive officer, Mihaylo says he took responsibility for rogue employees.

"My company didn't bilk schools with poor kids. Two individuals decided to do something illegally. We fired both of them. We made restitution," Mihaylo said in an interview.

Asked what he thinks of people concerned about his name being on the building, he replied: "If they want me to take my money back, I'll be happy to do that."

Cal State Fullerton President Milton Gordon said he received a copy of the Inter-Tel case settlement this month from a professor and forwarded it to the university's lawyer.

"It's been recent news to me and a number of us, so we will do our due diligence on it," Gordon said. "But I suspect when we get through looking at it, nothing will change."

Due for completion in 2008, the $87.5 million building that will house the College of Business and Economics is already dubbed the Steven G. Mihaylo Hall.

The naming rights agreement, dated April 9, 2004, says the university can remove Mihaylo's name if he fails to pay up or if another donor outbids him for the naming rights. But it does not include a morals clause allowing removal of Mihaylo's name if, for example, he commits a crime.

Mihaylo's case raises an old question: When do donors' histories disqualify them from getting their name on a building?

Many philanthropists have checkered histories. Microsoft founder Bill Gates' company was found to have violated civil antitrust laws. Michael Milken, the 1980s "junk bond king," became a philanthropist after paying a $200 million fine and serving 10 months in prison for criminal violations of securities laws. Richard Scrushy, the former HealthSouth CEO, became a big donor to religious causes in Alabama while facing trial for corporate fraud and conspiracy.

NEC Business Network Solutions, a subsidiary of a Japanese electronics giant, pleaded guilty in the same scheme as Inter-Tel, paying a $20 million fine without the company suffering much damage to its reputation. A U.S. congressional committee investigated IBM Corp. for breaking rules in the same federal program.

Michael Josephson, founder and president of the Josephson Institute of Ethics in Los Angeles, said the standard for naming rights should be higher than for other donations because a permanent monument is involved. But he warned against condemning a CEO for problems at his company.

"You have to be careful of a knee-jerk, self-righteous reaction that this is wrong," Josephson said.

But Nell Minow, co-founder of the Corporate Library, said CEOs are paid a lot when their company does well, so they should pay a price when something goes wrong.

"The captain goes down with the ship," she said. "It doesn't matter whether the CEO is a crook or a snook. The fact is they're supposed to prevent bad behavior."

Mihaylo, 63, founded Inter-Tel in 1969. Starting from a one-man shop, he built a publicly traded corporation with more than 2,000 employees and annual revenue of $458 million in 2006. Headquartered in Tempe, Ariz., with 70 offices in North America and Europe, Inter-Tel sells business communications and networking systems.

But problems were brewing. In May 2002, San Francisco Unified sued Inter-Tel for bid rigging and conspiracy over its federally subsidized Internet program called E-Rate.

U.S. prosecutors took over the lawsuit and spent two years investigating Inter-Tel and others involved in the E-Rate program. A charging document says that between 1999 and 2001, Inter-Tel conspired with two consultants working for San Francisco Unified to inflate the cost of Internet service contracts, thereby depriving other needy schools of limited federal funding.

A federal grand jury indicted six companies and five individuals – a sixth was indicted later – on criminal fraud charges in April 2005, including Earl Nelson, former branch manager of Inter-Tel's offices in Emeryville. Neither Mihaylo nor Inter-Tel was named in the indictment.

Mihaylo had made several large donations to other charities, but he had no contact with Fullerton until 2003, when Puri asked him about giving to the business school.

In May 2005, Cal State Fullerton awarded Mihaylo an honorary doctorate of humane letters in recognition of his success as a business leader and philanthropist.

"Mr. Mihaylo epitomizes the promise of a California State University graduate: hardworking, entrepreneurial, ethical and committed to giving back to the community," Gordon said at the time.

But federal officials and Inter-Tel board members were not happy about the company's conduct. In January 2005, the Federal Communications Commission moved to bar Inter-Tel's subsidiary from participation in the E-Rate program for three years. It ultimately barred the company from participating in the program for 12 months starting in June 2006.

In a 2005 filing with the Securities and Exchange Commission, Inter-Tel noted: "The existence and disclosure of the Civil Settlement, Plea Agreement and FCC Notice may have already caused competitive harm to Inter-Tel, and these matters may further harm Inter-Tel's business."

In February 2006, Inter-Tel's board chairman Alexander Cappello told Mihaylo to resign or face a "vote on terminating" his employment, according to a company proxy statement.

Mihaylo said there was no connection between the guilty plea and his ouster, which he attributed to a new board that wanted a new "strategic direction" at the company he founded.

Mihaylo, who still owns 19 percent of Inter-Tel's stock, spent most of last year trying to regain control of the company. As part of that bid, Inter-Tel agreed to Mihaylo's demand to increase its board to 11 members from eight, adding Mihaylo and two nominees he picked: Kenneth Urish, an accountant from Pittsburgh, and Puri, the Cal State Fullerton business school dean.

Puri said he joined the board because Mihaylo was a friend of the school. As a board member, Puri receives a $24,000 salary plus $2,000 per meeting, as well as stock options on 10,250 Inter-Tel shares.

In October, shareholders narrowly rejected Mihaylo's bid to regain the company.

Steven G. Mihaylo: A man, a company, a building

May 16, 2002: San Francisco Unified Schools sue several companies for fraud in connection with a federal program that subsidizes Internet services to low-income schools. Among the defendants: Inter-Tel Inc., an Arizona-based company founded by Cal State Fullerton grad Steven G. Mihaylo,

May 19, 2004: Cal State Fullerton announces that Mihaylo, class of 1969, has pledged $3 million for the new college of business building, which will bear his name.

Dec. 8. 2004: Mihaylo signs Inter-Tel's guilty plea on federal charges of bid rigging and fraud and agrees to pay $9 million in fines.

April 7, 2005: Federal prosecutors indict six companies and six individuals, including a former Inter-Tel employee on criminal charges of conspiracy to defraud the federal government.

May 29, 2005: Mihaylo receives honorary doctorate from Cal State Fullerton for his support of the business school.

July 28, 2005: Mihaylo increases his pledge to $4.5 million, payable in installments through 2012.

Feb. 22, 2006: Under pressure from his board, Mihaylo resigns as Inter-Tel CEO and is replaced by Norman Stout. He launches takeover bid.

May 6, 2006: Inter-Tel's board bows to Mihaylo demand to increase its size from eight to 11 members, including Cal State Fullerton's business school dean Anil Puri.

Oct. 20, 2006: Shareholders of Inter-Tel narrowly reject Mihaylo's takeover bid.

April 2, 2007: Trial date for San Francisco criminal conspiracy case.

Contact the writer: 714-796-7969 or jgittelsohn@ocregister.com