While no one was watching, the Federal e-rate program was robbed; fraud, waste and corruption took over, and the consequences will effect everyone in the US. Is this a public school ENRON?

Suppliers accused of fraud in US educational programme

ComputerWeekly.com, IT Management: Politics and Law, September 23, 2004

IBM and other IT suppliers have been accused of breaking the rules set down in US law for supplying internet equipment to libraries and schools.

Members of Congress said the much-criticised E-Rate programme had been subject to widespread fraud and abuse.

Critics accuse schools and IT suppliers of circumventing competitive bidding requirements, charging E-Rate for equipment that does not qualify and asking for millions of dollars worth of equipment that schools did not need.

The programme, with an annual budget of $2.25bn (£1.24bn), is designed to help schools to buy technology equipment such as broadband modems and routers.

IBM scheme examined

An IBM scheme was a major topic of questioning during a hearing on the E-Rate programme before the House Energy and Commerce Committee's Subcommittee on Oversight and Investigations.

IBM was accused of circumventing competitive bidding requirements by signing consulting contracts with about nine school districts before the schools had decided what equipment they would apply to receive funding for.

"A programme that serves such an important role has been derailed by incompetent administration, greedy suppliers and, in some cases, ill-prepared local school officials," said congressman Peter Deutsch.

IBM denied it has broken E-Rate rules. In the early stages of the programme the US Federal Communications Commission (FCC) asked suppliers to help school districts to take advantage of the programme and IBM's continued consulting role does not circumvent bidding rules, said Christopher Caine, vice-president of government programmes for IBM.

Consulting expertise can help to move multimillion-dollar technology projects forward in a cost-effective way, Caine told the subcommittee. "It is important the schools get the right technical and project management help," he said.

In the case of an IBM contract with the El Paso Independent School District in Texas, IBM's expertise helped the projects come in on time and on budget, Caine said. IBM was selected as a consultant after a two-step bidding process.

Investigations into E-Rate funding for El Paso's contract with IBM led the FCC to reject funding requests from El Paso and seven other school districts with similar IBM contracts for the 2002 funding year.

In addition, the Universal Service Administrative Company, which administers the programme, may seek to recover a substantial portion of $55m given to the El Paso district in 2001, said George McDonald, vice-president of the schools and libraries division at the company.

McDonald questioned the IBM contract with El Paso and other districts. "There was only one supplier at the table," he said.

A number of allegations of E-Rate fraud were made at the hearing, including that suppliers offered schools expensive "bonus" equipment not authorised under the programme in return for doing business with them. Such bonus packages are often financed through inflated prices suppliers charge to the E-Rate programme, McDonald said.

NEC accused

Robert McCain, a program manager at NEC-Business Network Solutions, testified that he believed NEC had used E-Rate funds to build a television studio at the Ecorse Public School District in Michigan, even though lawmakers said E-Rate rules prohibited funding for television studios.

Douglas Benit, former facilities director at the Ecorse district, said it was his understanding that NEC donated the $750,000 studio to the school district.

Video and documentary evidence was brought to show that Video Network Communications (VNCI), NEC and IBM were technology partners of the National Alliance of Black School Educators (NABSE), which encouraged schools to use its expertise in getting E-Rate funding in return for a payment of 1.5% of the E-Rate contracts.

Two former employees of VNCI, including former president and chief executive Carl Muscari, were subpoenaed to appear at the hearing but refused to testify, asserting their Fifth Amendment rights against self-incrimination.

One superintendent told the subcommittee that NABSE advised his district to accept a "bonus package" of computer-related equipment not eligible for E-Rate funding.

William Singleton, superintendent at Jasper County Schools, in South Carolina, said NABSE advised his district that it was not against E-Rate rules to accept $3m-worth of equipment as a substitute for the district's obligation to pay 10%of its $9.5m E-Rate projects in 2000.

Quentin Lawson, executive director of NABSE, also refused to testify, but the group issued a press release, saying it supports "fair and just investigative procedures".

In May, NEC pleaded guilty to defrauding the E-Rate programme and agreed to pay $20.6m in fines and restitution. Earlier this year, SBC Communications agreed to return $8.8m to the FCC after equipment was not installed in Chicago schools.

Grant Gross writes for IDG News Service

Fraud threatens Internet program for U.S. schools By Marguerite Reardon
Staff Writer, CNET News.com
June 17, 4:00AM PT

Most Americans probably don't realize that the 8.7 percent tax on their monthly phone bills for something called the Universal Service Fund has been used to line the pockets of some unscrupulous school officials and company executives.

The money was intended to fund the government's E-rate program, which was designed to help schools and libraries in poor and rural areas get affordable telecommunications and Internet services through subsidized discounts. The program, which began in 1998 as part of the 1996 Telecommunications Act, is overseen by the Federal Communications Commission and administered by the Universal Service Administrative Company, a private, nonprofit organization better known as USAC.

The program has achieved its main objective of wiring schools for access to the Internet but in the process has allowed fraud and waste to run rampant. About 40 fraud cases are being investigated by the FCC, the Department of Justice and the FBI.

"E-rate is the classic example of a program that was begun with good intentions and has found itself suffering from corruption, because there wasn't sufficient oversight," said Bob Williams, senior writer at The Center for Public Integrity, a nonprofit investigative research organization.

Charges of E-rate shortcomings are not new, but criticism arising from the fraud issue could extend beyond the program at a crucial time for other government Internet initiatives. The latest revelations coincide with multibillion-dollar proposals to extend the availability of high-speed Internet access equally throughout the country before the end of the decade--measures that face particularly tough sledding in an election year.

Moreover, any major telecommunications projects are destined to draw unusually rigorous scrutiny following the massive financial scandals of recent years involving such industry leaders as WorldCom, Nortel Networks and Enron. Those cases, which have culiminated in criminal charges against some top executives, have portrayed a culture of corruption in the telecommunications business unrivaled in any other sector of the technology industry.

As a result, the future of the 8-year-old E-rate program could be in jeopardy . Some members of Congress are already talking about revising the Telecom Act, and the House Committee on Energy and Commerce has scheduled a Thursday hearing to consider reforms in the program.

"The number of cases involving outright fraud have been few," said Sara Fitzgerald, vice president at consultancy Funds For Learning, who participated in a task force last summer that investigated fraud and waste in the E-rate program. "Most of the abuse happened in 1999 and 2000. Program administrators have gained more experience. Improvements still need to be made, but for the most part, participants want to follow the rules."

Still, those cases of abuse that have been uncovered are difficult to ignore. The largest scandal involving E-rate erupted in 2000, after officials discovered that Victor Fajardo-Velez, the former secretary of education for Puerto Rico, had mismanaged nearly $100 million in E-rate subsidies.

Funding fraud:
Fajardo-Velez was eventually sentenced to three years in prison and fined $4 million for irregularities associated with the use of U.S. Education Department funds. The E-rate discounts allocated between 1998 and 2000 were supposed to be used to wire 1,500 of Puerto Rico's schools for the Internet. In 2001, only nine schools had been wired.

Auditors also found nearly $23 million in equipment that had never been installed in the schools, along with $3 million per month spent on high-speed Internet connections in schools that didn't even have PCs. Since 2001, Puerto Rico hasn't received any E-rate funding.

Puerto Rican officials have worked hard to rectify the situation. Cesar Rey-Hernandez, the new secretary of education, said Puerto Rico has been installing gear previously purchased with E-rate subsidies. By the end of August, he expects 1,000 schools to be connected to the Internet through satellite technology. The FCC seems confident about Puerto Rico's reforms and is allowing it to compete for E-rate funds in 2004.

"We are trying to go back to square one to build credibility and trust," Rey-Hernandez said. "I hope we get the support we need. You can't have real education without these technologies."

But Puerto Rico is only one jurisdiction that has been investigated for fraud. In May, a subsidiary of computer maker NEC pleaded guilty to wire fraud and antitrust violation involving its participation in the E-rate program. NEC Business Network Solutions, renamed NEC Unified Solutions, was accused of rigging bids and bribing officials in the San Francisco Unified School District and several other school districts around the country.

The company was also supposedly involved in a scheme to get school districts to purchase more equipment than they needed. It agreed to pay $20.6 million to settle the criminal charges and $15 million in fines and restitution.

In Chicago, about $8 million worth of equipment provided by telecommunications carrier SBC Communications was never deployed in the city's public schools. One E-rate funding requirement is that equipment be purchased, delivered and installed in the same year that it is funded by the program.

Some cases stem from what investigators believe is the aggressive marketing of unnecessary equipment. In Atlanta, for example, officials say Cisco Systems and other companies led that city's public school system to purchase expensive equipment that it did not need.

Cisco denies any wrongdoing. "For the Atlanta Public School System, all Cisco networking equipment was sold to the integrators in accordance with their particular reseller agreement with Cisco. In all cases, the price of the equipment sold to the integrators was below the state's standard purchasing contract price," the company said in a statement.

Experts say the E-rate program in general was ripe for abuse from the beginning. In the early days, USAC had only one auditor to deal with roughly 35,000 applicants per year.

"At the early stages, we didn't have all the pieces in place to do robust audits," said Mel Blackwell, vice president of external communications at the administrating organization.

Universally better?
Blackwell and others insist that the situation has changed dramatically in recent years. USAC has hired more full-time auditors, investigators and lawyers, in addition to starting a whistle-blower hotline and planning to increase the number of site visits. The FCC's Office of the Inspector General has created an assistant general position and also hired more auditors to monitor the program.

The Universal Service Program's rapid growth alone appears to justify the expanded oversight. Since 1998, nearly $13 billion in E-rate discounts have been granted to schools and libraries across the country. As of 2001, 87 percent of all classrooms in public schools have Internet access, including 81 percent of all classrooms in schools with minority enrollment of 50 percent or more. And as of 2002, about 95 percent of all public libraries provide Internet access.

It is difficult to estimate the average individual contribution toward the Universal Service Fund, because it is based on long-distance and wireless cell phone usage. But the median is probably about $1.04 per month, according to the Telecommunications Research & Action Center, a consumer advocacy group in Washington, D.C. Given that 90 percent of Americans have stationary or portable phones, the fund translates to about $2.5 billion every year.

"Ten years ago, most classrooms didn't even have phone lines, much less Internet connectivity," said Sam Simon, chairman of TRAC. "That's changed, and I don't think the country would have gotten there without E-rate."

E-rate administrators say they have always tried to keep operational costs low. Only about 1 percent of the money collected through the fund is used for administration, Blackwell said.

But others say the effort to save costs may have unintentionally compromised oversight. Even though it would take away from money that could directly help schools and libraries, Tom Bennett, assistant inspector general for the Universal Services Fund, said more money needs to be spent on supervision.

"We still don't feel like we know what the level of fraud, waste and abuse is," he said.

Despite all the problems facing E-rate, however, supporters claim that its successes far outweigh its failures.

Without E-rate funding, they say, many schools and libraries would not have basic Internet service and other more advanced technologies in place. On average, the federal government only provides about 7 percent of overall funding for elementary and secondary schools. Poorer areas may receive more funding through block grants and federal programs such as Title I, but the bulk of funding comes from local and state governments.

Under the program, telecommunications companies or contractors provide equipment and services to schools and libraries at a discount. The difference comes from the E-rate fund. More than 30,000 schools and libraries apply for discounts every year. And about 90 percent receive some funding, according to program administrators.

A study published by the E-rate advocacy group Education and Library Networks Coalition last summer showed that many local governments have cut funding for technology to schools and libraries because of the poor economy. These municipalities are relying more on E-rate discounts to provide the basics.

Technology made possible through E-rate discounts has been instrumental in poor urban and rural areas, where unemployed people use the Internet in libraries to search for jobs or learn new skills, proponents argue. Schools in rural areas are using the program to provide distance learning for students and teachers.

In Arizona and New Mexico, E-rate discounts were used to buy equipment and services to provide advanced placement courses to students in areas with teacher shortages. In Maryland's Anne Arundel County Public Schools, many certification classes for teachers that were given at night are now being offered online.

Program supporters also note that E-rate funding has helped students and teachers at the Rochester School for the Deaf in New York use e-mail to communicate with each other and the hearing world. E-mail services have enabled parents of these children, who are often also deaf, to communicate with teachers and administrators.

Such projects encompass why E-rate proponents are so passionate in their defense of the program. Supporters are particularly worried that their concerns will fall victim to cost-cutting politics in this election year.

But at least one congressional staff member said it is too early to write off E-rate for good.

"There has been substantial discussion about dealing with macro telecommunication issues next year," said Larry Neal, spokesman for the House Committee on Energy and Commerce. "While E-rate could come up, changes to the program are not necessarily a logical consequence of these discussions."

School Internet Program Lacks Oversight, Investigator Says
By SAM DILLON, June 18, 2004

WASHINGTON, June 17 - Representative Joe L. Barton listened to an hour or so of Congressional testimony on Thursday about waste and fraud in the federal program that helps poor schools connect to the Internet before questioning an official who has been investigating it.

"Is it your view that these applicants view this program as a big candy jar, free money?" Mr. Barton, Republican of Texas and chairman of the House Energy and Commerce Committee, asked H. Walker Feaster III, inspector general for the Federal Communications Commission, the agency that oversees the program.

"I'd agree with that," Mr. Feaster replied.

The E-rate program, administered by a little-known corporation, the Universal Service Administrative Company, is financed by a fee collected from all telephone users. It has disbursed $8.1 billion since it began wiring schools in 1998. Most of the 30,000 or more districts and libraries that receive financing each year pay only about 10 cents on the dollar for equipment and Internet services. This arrangement has led contractors to prey on the program and school officials to be less careful in acquisitions than they might be in spending district money, several witnesses testified Thursday.

Representative James C. Greenwood, Republican of Pennsylvania and chairman of the Subcommittee on Oversight and Investigations, opened the hearings by listing the dismal findings of a string of recent investigations. In Puerto Rico, Mr. Greenwood said, investigators found $23 million worth of telecommunications equipment sitting shrink-wrapped on pallets in a government warehouse years after it had been bought with program money. In Milwaukee and New York, there have been indictments in the defrauding of schools, he said. In Chicago, SBC, one of the largest telephone companies in the United States, returned $8.8 million in federal money after vast quantities of Internet routing equipment bought for use in schools were found stockpiled improperly in a warehouse, Mr. Greenwood said. In San Francisco, NEC pleaded guilty to felonies for preying on schools there and in Michigan, Oklahoma, Arkansas and South Carolina.

"And I fear that we may be only seeing the tip of the iceberg,'' Mr. Greenwood said.

Much testimony focused on oversight for the program.

Carol Mattey, a deputy bureau chief in the Federal Communications Commission, said that audits conducted to date suggested that rule breakers were few. Ms. Mattey cited an error rate of less than 1.2 percent in the audits conducted last year but said her agency would be "expanding the scope of our auditing work in the coming year substantially."

But Mr. Feaster said there were not enough full-time auditors devoted to the program. Together, the Universal Service Company and the F.C.C. have about 15 auditors who review E-rate programs, and private auditing companies are contracted to do additional work, Mr. Feaster said. But all of the auditors combined scrutinize only a tiny percentage of the vast number of projects the program approves each year, he said.

Under questioning from Representative Greg Walden, Republican of Oregon, Mr. Feaster estimated that since the program began disbursing in 1998 it had given upward of 200,000 grants. Yet F.C.C. and Universal Service Company auditors have carried out or overseen fewer than 200 audits, Mr. Feaster said.

Several lawmakers were at pains to praise the goals of the program.

"We should not let a few bad apples spoil the bushel," said Representative Bobby L. Rush, Democrat of Illinois, noting that the program had helped schools in his Chicago district obtain Internet access. "It's clear that this is a program that is helping to bridge the gap between the haves and the have-nots."

JUSTICE DEPARTMENT CHARGES NEC IN PROBE INTO FEDERAL E-RATE PROGRAM

Regulatory Intelligence Data; 5/27/2004; INDUSTRY GROUP 92

Regulatory Intelligence Data
05-27-2004

Nec-Business Network Solutions Inc. Agrees To Plead Guilty To Bid
Rigging And Wire Fraud And Agrees To Pay $20.6 Million Fine And Restitution

WASHINGTON, D.C. - NEC-Business Network Solutions Inc., a subsidiary of NEC America Inc., has agreed to plead guilty and to pay a total $20.6 million criminal fine, civil settlement and restitution today relating
to charges of collusion and wire fraud in the Federal Communication Commission's E-Rate program, the United States Attorney's Office for the Northern District of California and the Department of Justice's Antitrust and Civil Divisions announced.

The E-Rate program, created by Congress in the Telecommunications Act of 1996, provides funding for needy schools and libraries to connect to and utilize the Internet. Under the E-Rate program, which is funded by monies collected from telephone users, schools apply for monies for cabling,

Internet backbone equipment (i.e. servers, PBX, and switches), and monthly connectivity service fees.
In court papers filed under seal on May 24, 2003, and unsealed today in U.S. District Court in San Francisco, NEC-Business Network Solutions Inc. (NEC/BNS), based in Irving, Texas, was charged with allocating contracts and rigging bids for E-Rate projects at five different school districts
in Michigan, Wisconsin, Arkansas, and South Carolina, in violation of the Sherman Antitrust Act. NEC/BNS is also charged with wire fraud by entering into a scheme to defraud the E-Rate program and the San Francisco Unified School District by inflating bids, agreeing to submit false and fraudulent
documents to hide the fact that it planned on installing ineligible items, agreeing to donate "free" items that it planned to bill E-Rate for, and submitting false and fraudulent documents to defeat inquiry into the legitimacy of the funding request. The plea agreement calls for a $4.7 million criminal fine for the bid rigging and wire fraud.

"This conduct deprived the E-Rate program of fair and competitive prices, caused the program to pay for unnecessary and ineligible items, and as a result, prevented the funding of projects at other needy schools," said R. Hewitt Pate, Assistant Attorney General in charge of the Department's Antitrust Division. "The Division will continue to prosecute vigorously those who defraud the E-Rate program."

NEC/BNS also entered a civil settlement today to provide restitution for the harm caused by the criminal conduct. The United States Attorney's Office for the Northern District of California, together with the Department's Civil Division, will intervene in a civil action brought by the San Francisco Unified School District (SFUSD) alleging that various companies, including NEC/BNS, submitted false claims in the E-Rate program. The SFUSD filed the civil action as a relator under the qui tam provisions of the False Claims Act. The United States intervened against NEC/BNS, Inter-Tel Technologies Inc., a subsidiary of Inter-Tel Inc.; TPC Liquidation Inc (formerly known as Video Network Communications Inc. or VNCI); and former VNCI employees Judy Green and George Marchelos. United States signaled its intention to proceed with the case as the plaintiff. The relator may be entitled to share in a portion of any money the government recovers in the lawsuit.

In addition to pleading guilty to the pending felonies, NEC/BNS agreed to resolve pending civil claims as part of a nationwide global resolution. That civil settlement requires NEC/BNS to pay $10.3 million in cash and provide $5.6 million in goods and services to designated school districts as a condition of a three year probation. Under the terms of the plea agreement, the company has and will continue to cooperate in the government's ongoing investigation, and will enter into a comprehensive Corporate Compliance
Program as a special condition of its probation.

U.S. Attorney Kevin Ryan in San Francisco said, "Congress established the E-Rate program to help educate the underprivileged. This criminal attempt to steal funds from the program comes at the expense of children across the country, and is totally unacceptable." The U.S. Attorney also praised the City and County of San Francisco, the Department's Antitrust and Civil Divisions, and the FBI, for devoting the necessary resources needed to ferret out this fraud. Sentencing for NEC/BNS is scheduled before Judge Charles R. Breyer in San Francisco federal court today at 3:30 p.m. (PT).

"This case represents an overlap between two of the FBI's highest criminal investigative priorities, corporate fraud and public corruption. It underscores the severe damage which can be done by corrupt public officials and companies, and the importance of the FBI's aggressive pursuit of such cases," said Mark Mershon, FBI SAC in San Francisco. San Francisco City Attorney Dennis Herrera said, "Today's settlement represents an excellent outcome for San Francisco public schools and a remarkable achievement for a whistleblower action that proved decisive in uncovering and stopping a nationwide scheme to defraud underfunded school districts. It vindicates Superintendent Ackerman's decision to refuse suspect funding from the E-Rate program, and it is powerful testimony to the outstanding
efforts of U.S. Attorney Kevin Ryan and investigators and attorneys of my office's Public Integrity Team."
"This is a victory for the children and I am pleased that justice was served," said San Francisco Unified School District Superintendent Arlene Ackerman. "To expose these widespread illegal business practices was the right thing to do because our students were being robbed of the much needed funds they deserve. I would like to express my gratitude to U.S. Attorney Kevin Ryan, City Attorney Dennis Herrera and all the agencies involved for their diligence and hard work during this long investigation."

The Sherman Act charge, a violation of 15 U.S.C. 1, carries a maximum penalty of a $10 million dollar fine and a $400 special assessment. The wire fraud charge, a violation of 18 U.S.C. 1343, carries a maximum penalty of a $500,000 fine and restitution to the victims of the crime and a $400 special assessment. The maximum fines may be increased to twice the gain derived from the crime or twice the loss suffered by the victims of the crime, if either of those amounts is greater than the statutory
maximum fine. The plea announced today resulted from an ongoing federal investigation of fraud and anti-competitive conduct in the E-Rate program.

Federal Bureau of Investigation agents from San Francisco, Los Angeles, Fresno, and Detroit conducted the two-year investigation. The investigation is being conducted jointly by the United States Attorney Office for the Northern District of California (Assistant U.S. Attorneys Jeffrey L. Bornstein
and Sara Winslow) along with the Department's Antitrust Division (trial attorneys Mike Wood from the Cleveland Office and Richard Cohen and Matthew Segal from the San Francisco Office). The Department's Civil Division attorney Alicia Bentley is handling the civil action jointly with the U.S. Attorney's office. The FCC's Office of Inspector General also assisted in the investigation. Anyone with information concerning fraud or anticompetitive conduct in the E-Rate program should contact the Cleveland Field Office of the Antitrust Division at (216) 522-4070 or the San Francisco office of the FBI at (415)553-7642.

Related court documents and information:
US District Court, Northern California

All press inquiries to the U.S. Attorney's Office should be directed
to Assistant U.S. Attorney Matthew J. Jacobs at (415) 436-7181. Press inquiries
regarding the Department's Antitrust Division should be directed to Gina
Talamona, Deputy Director, Office of Public Affairs, (202) 514- 2007.

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