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Another E-Rate Fraud. This Time It's in Indiana.
The Intelenet Commission, which manages the state's official Internet site and provides technology services to public agencies, has been involved in a federal criminal investigation since July 2004. We take a look back at the WIRED FOR WASTE investigation by reporters at the Atlanta Journal-Constitution.
Gov. Kernan says state agency may have violated federal law
South Bend Tribune, January 9, 2005
Associated Press

INDIANAPOLIS - Gov. Joe Kernan says a state commission that manages Indiana's official Web site may have broken federal law by accepting too much money from a national program that provides Internet equipment in schools and libraries.

Kernan's statement, issued Friday during his last full business day in office, comes after the law firm of Bose McKinney & Evans reported the problems with the Internet program, called e-rate.

The Intelenet Commission, which manages the state's official Internet site and provides technology services to public agencies, has been involved in a federal criminal investigation since July.

It began with the Indiana Web Academy, a state-run Internet program for schools, whose former director is under investigation.

The criminal investigation has been expanded to include Intelenet and the Indiana Higher Education Telecommunication System, which runs the state network. A network engineer with the higher education office was charged last month in federal court with grossly overcharging the state for computer equipment.

Together, the three entities provide technology services to governments, schools, libraries and other public entities.

"For some time, I have had concern about the operation of the e-rate program," Kernan said Friday in his statement. "If any harm has occurred, it is most likely that Indiana's Intelenet program received federal subsidies greater than the rules allowed."

Kernan, who appointed several members to Intelenet's board, has been working with an outside law firm hired by the state and an auditor to look into problems at the commission. He said he was providing the law firm's report to Intelenet and asking the commission to resolve any overpayment with federal officials.

Gov.-elect Mitch Daniels, who takes office Monday, has promised to abolish the "ineffective and scandal-ridden" Intelenet Commission.

The Intelenet Commission has refused requests made under the public records law to provide a copy of the report of its problems.

Officials at the U.S. attorney's office have declined to discuss the investigation.

The Federal Communications Commission, which administers e-rate, has launched a nationwide investigation, including audits, into groups involved with the program.

According to FCC reports, 135 audits have been completed, with 36 percent of them problematic. The FCC wants to recover more than $17 million from these groups.

An outside audit at Indiana's Intelenet Commission is not done yet, so it is unclear how much money the state might have to pay back, Kernan said.

Intelenet gets about $3.5 million a year from federal officials for the e-rate program, according to outgoing Intelenet Executive Director Sean Fahey.

Information from: The Indianapolis Star,

In New York City, Connect2 was allegedly de-frauding the E-rate Program, but the case disappeared from the news soon after:

Fund For Learning, LLP: E-Rate News


Federal prosecutors in New York City arrested the owner of Connect2 Internet Networks Inc., a Staten Island Internet services provider, and several company employees December 18 on federal criminal charges of fraud and obstruction of justice in connection with a scheme designed to defraud the E-rate program.

Prosecutors said the company targeted schools that were eligible to receive 90 percent discounts and then advised them that they would be able to qualify for the program without having to pay their portion of the cost. The case marks the first time that fraud accusations have led to the filing of formal criminal charges in the E-rate program.

A criminal complaint that was unsealed in the U.S. District Court in Manhattan charged that the defendants, including owner John Angelides, misrepresented to the government that the schools were paying their share. The complaint alleged that the company charged the schools nothing for the products and services they purchased, and then assured the schools, sometimes in writing, that they would never have to pay for the goods and services. The company then charged the E-rate program inflated costs for eligible services.

The complaint also said that defendants created phony invoices, "dummy" checks and other fake documents to make it appear as if the schools were paying a portion of their costs. Further, the complaint said that as government investigators began to uncover the scheme, company officials tampered with witnesses and concealed incriminating evidence.

In one example, captured by investigators in a recorded conversation, Angelides urged two administrators of the Islamic Elementary School in South Ozone Park, NY., to lie to investigators and say that the school had agreed to pay its part of the costs, even though Angelides had promised school officials in writing that they would not have to pay anything. Angelides, according to the complaint, also allegedly suggested that the school's administrators say that the school was now financially unable to pay its share because of the September 11, 2001, terrorist attacks. He suggested that the school could "use 9/11 as a wedge," asserting that investigators would "understand because" the school was "Islamic." Angelides continued to assure school officials that they would not have to pay, according to the complaint.

The U.S. Attorney said that if convicted, Angelides could face a maximum penalty of 60 years in prison and a fine of $2 million or twice the gross gain or gross loss from the offenses. Company employees could face penalties ranging from 30 to 15 years in prison. The Federal Bureau of Investigation assisted in the investigation of the case.

According to the SLD's public records, Connect2 received $9,072,854.60 in discount payments in the program's first three years. For the 2001 funding year, it was approved for $490,089 worth of commitments on more than $25 million in funding requests. Only $17, 039.20 of that amount has actually been disbursed. For the 2002 funding year, close to $30 million worth of funding requests were pending.

The SLD's public records indicate that 203 different billed entities, including the New York City Board of Education, had requested funding for Connect2 since the start of the program. The list of the schools, and the status of their requests, can be reviewed by clicking here.

Then in Wisconsin, 5 are indicted

Related Stories:

Abuses tarnish E-rate program
Investigators target lapses in oversight around U.S.

By KEN FOSKETT in Atlanta, JEFF NESMITH in Washington
Published on: 05/24/04, The Atlanta Journal-Constitution

Since 1998, millions of American schoolchildren have tapped into the Internet thanks to a national program that has invested $12 billion on technology in classrooms and libraries.

The E-rate program has poured $2.25 billion a year into communities around the country, from Indian reservations and the inner city to the most rural areas. Americans everywhere share the costs through a monthly surcharge on their telephone bills.


Abuses tarnish E-rate program
Atlanta contract spurs bid questions

• $73 million spending spree
At just one school, $1 million outlay
Photo gallery: Behind-the-scenes tour

But increasing evidence of fraud, wasteful spending and mismanagement has dimmed the early promise of the program, which is operated by a consortium of telephone companies, Internet providers and public officials. The abuses underscore years of inadequate oversight, prompting some critics to question the telecommunications industry's role in distributing the money.

At least 40 criminal investigations into E-rate spending are under way, and isolated audits have found millions of dollars of waste.

In 2002, auditors for E-rate uncovered more than $644,000 in overpayments for E-rate work in Atlanta schools.

But, in a report published Sunday, The Atlanta Journal-Constitution found more extensive abuses: The school district paid too much for goods and services, billed for equipment that can't be accounted for, and stored unused electronics worth millions of dollars.

The consequences of insufficient oversight are surfacing in other districts as well:

• The Federal Communications Commission ruled IBM Corp.'s aggressive business tactics thwarted competitive bidding in eight school districts. Rejecting more than $250 million in claims, the agency found in December that IBM advised the districts to seek more E-rate work than was justified, greatly inflating the value of IBM's contracts.

• In Milwaukee, a grand jury charged two people with billing E-rate for $1.2 million for services that were never delivered. Three others were accused of laundering half the money to Pakistan.

• A salesman in Fresno, Calif., pleaded guilty to conspiring with other vendors to win E-rate work. A criminal investigation is ongoing.

• A New Mexico school billed E-rate $2 million for Internet access for three times as many classrooms as the school had, auditors said.

• SBC Communications Inc. refunded $8.8 million to E-rate for equipment that was never installed in Chicago's public schools.

Congressional investigators have found the latest evidence of abuse in Puerto Rico - $23 million in warehoused computer gear waiting to be installed, U.S. Rep. James C. Greenwood (R-Pa.) told the Journal-Constitution. The investigators also found that tens of millions of dollars were spent for high-speed Internet connections at Puerto Rican schools that could not use them, Greenwood said.

He plans hearings next month that will highlight E-rate abuses and examine how some companies have taken advantage of the program.

"When you spend this kind of money in a program that doesn't have much in the way of oversight, you're going to attract some pigs to the trough," said Greenwood, chairman of a House subcommittee on investigations. "We're going to look into it, one pig at a time."

Critics charge that E-rate oversight has been problematic because the fund is partly administered by the industries that collect - and receive - the money: telephone companies and Internet service providers.

The nonprofit corporation that manages the fund is the Universal Service Administrative Co., a wholly owned subsidiary of the National Exchange Carrier Association, which represents nearly 900 U.S. telephone companies. The FCC sets rules for E-rate and other programs run by the nonprofit.

USAC's bylaws require that board members come from the telephone and information services industries, along with members representing schools, rural health systems and consumers.

Verizon, AT&T and Atlanta-based EarthLink are among the companies with officials on the USAC board. Cox Communications, which is controlled by Cox Enterprises, the parent company of the Journal-Constitution, also has a representative on the board.

The industry's involvement is "almost a formula for fraud and abuse," said Bob Williams of the Center for Public Integrity, a Washington watchdog group that reported on E-rate fraud last year.

E-rate's program director, George McDonald, placed most blame for serious violations on consultants and companies that take advantage of school districts, persuading them to buy goods and services they don't need.

"Service providers . . . sort of lead applicants astray, take over the process, or consultants . . . take over the process," said McDonald.

The inspector general of the FCC, which has federal oversight of USAC, is involved in or monitoring 40 criminal investigations of possible E-rate abuse, but will not say where. The investigations cover equipment and services that were never delivered, procurement fraud and "potential kickback issues," the inspector general's most recent report to Congress said.

The findings of wrongdoing represent only a thin fraction of the program's overall activity, said Mel Blackwell, vice president for governmental affairs for USAC.

"You can't extrapolate from the fact that there have been a few problems and a few people have gone to jail to tens of thousands of funding applications by over 100,000 schools and school systems," Blackwell said.

Yet E-rate administrators concede that no one has audited the program enough to provide a statistically valid indicator of how well or poorly E-rate money is being spent.

"Everybody wants to know what is the level of waste, fraud and abuse in the program," said Tom Bennett, an assistant inspector general at the FCC. "We can't answer that question yet because we haven't done enough oversight."

USAC did not commission the first audits of E-rate until the program's third year. Even then, it reviewed only a handful of school districts.

The agency is now finishing up more than 110 audits, almost three times as many as were published in the program's first four years.

So far, auditors have discovered compliance problems in about one in three school districts and library systems.

"The results are ugly," conceded USAC board member James Jackson.

While helpful in identifying abuse and waste, the audits cannot substitute for independent oversight, the FCC's Bennett said.

Bennett noted that dozens of federal auditors are typically assigned to a $1 billion defense contract, while he and his staff of two audit $5.5 billion dispensed by E-rate and other programs.

Last year, President Bush recommended an extra $3 million to beef up FCC oversight - a bit less than the value of unused E-rate electronics that the Journal-Constitution found in two Atlanta warehouses. In January, the Senate removed the money from the agency's 2004 appropriation.

"We would love to be doing more audits than we are doing," Bennett said.

USAC has taken steps recently to curb abuses. It adopted new rules to limit the frequency with which schools and libraries can request subsidies in an effort to discourage them from seeking more than they really need.

In another change, the FCC said equipment bought with E-rate funds cannot be moved for at least three years, unless a school closes. The FCC noted that some districts have been buying equipment for low-income schools and then transferring it to wealthier schools that would not have qualified for funding.

This practice "undermines the intent" of the rules, the FCC said.

Staff writer Paul Donsky contributed to this article.

Related articles:

E-Rate Fraud: 40 Cases So Far in the Corruption Scandal

Another E-Rate Fraud, This Time In Atlanta

Computer Technology Does Not Work in Most Schools: the Story of the E-rate Fraud

© 2003 The E-Accountability Foundation