NEC Business Network Solutions Inc. (BNS)–part of Japanese electronics giant NEC Corp.–has agreed to pay $20.6 million after pleading guilty to defrauding the eRate program, which helps schools and libraries connect to the internet. More than $3 million of that amount will go to San Francisco schools as a result of Superintendent Arlene Ackerman’s diligence in reporting the scam, federal officials said.

The settlement isn’t the first decision reached against a company for trying to defraud the eRate, but it’s by far the largest in terms of a dollar amount–and U.S. Justice Department officials hinted there could be more to come.


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BNS was charged in U.S. District Court with allocating contracts and rigging bids for the eRate, which is financed by the contributions of telecommunications carriers to the federal Universal Service Fund.

Prosecutors said the Irving, Texas-based company inflated bids and submitted false and fraudulent documents for reimbursement to the federal government for school projects in California, Michigan, Wisconsin, Arkansas, and South Carolina.

“This conduct deprived the eRate 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 U.S. Department of Justice’s antitrust division.

Besides a $4.7 million fine, the company will provide $15.9 million in cash and goods as part of the agreement.

The San Francisco Unified School District will get $3.3 million of the fine as the whistleblower in the case.

“We made mistakes with eRate,” said Gerald P. Kenney, general counsel of NEC America, the unit’s parent company in Dallas. “We’ve acknowledged and accepted responsibility for those mistakes … and taken action to ensure that these problems can’t happen again.” (See the company’s reform pledges immediately after this story.)

Desmond McQuoid, former custodial supervisor for the San Francisco school district, had applied to the eRate in January 2000 and reportedly was approved for more than $49 million in funding to build a computer network with video conferencing capabilities.

But Ackerman refused to accept the money because of questions about the bidding process. She reported her suspicions to the FBI and to the city attorney’s office, according to the San Francisco Chronicle.

City investigator George Cothran sifted through thousands of documents and uncovered evidence to suggest that BNS–and at least one other company involved in the district’s wiring project–charged more money than was actually needed and provided kickbacks to McQuoid for choosing them, the Chronicle reported. Cothran reportedly found similar corruption on the part of BNS near Detroit, Chicago, and Milwaukee, as well as in Arkansas, Mississippi, and South Carolina. Specific school districts were not immediately identified in those cases, however.

In May 2002, City Attorney Dennis Herrera filed a false-claims suit on behalf of the San Francisco school district and the state of California. He also turned the office’s findings over to the U.S. Justice Department, which started a nationwide investigation, the Chronicle reported.

In addition to the BNS plea on May 27, the investigation has resulted in guilty pleas by McQuoid, who was sentenced to 21 months in prison, and U.S. Machinery, a California company doing business as USM Distributors, which was ordered to pay $200,000 to the San Francisco school district, the newspaper said.

“This is a big deal–a nationwide scam that had been running three years by the time we caught up with it,” Cothran told the Chronicle. “It looks like we’re going to put an end to this.”

BNS’s plea came just four days after an Atlanta Journal-Constitution report charged Atlanta city school officials with widespread waste and mismanagement of eRate funds.

NEC vows stricter
eRate compliance

As part of its settlement agreements with the U.S. Department of Justice, NEC Business Network Solutions (BNS) of Irvine, Texas, said it is putting in place a new, strengthened eRate compliance program.

Gerald P. Kenney, general counsel of NEC America, the unit’s parent company in Dallas, said the alleged instances of fraud were primarily related to a small eRate sales team within a workforce of more than 1,000 BNS employees. He added that the sales team subsequently was dissolved.

“We’re moving our business forward with a full commitment to the highest standards of legal and ethical compliance on every level,” he said.

Elements of the strengthened compliance program, some of which already have been implemented, include:

  • Appointing an Ethics Officer;
  • Appointing a Compliance Officer;
  • Retraining all staff in ethics and compliance policies and procedures;
  • Training or retraining key staff in government procurement requirements;
  • Requiring all relevant staff to read and sign an eRate Code of Conduct;
  • Establishing high-level internal management oversight of all government business;
  • Conducting regular audits of all government contracts;
  • Implementing an anonymous hot-line for employees to report ethical concerns; and
  • Providing regular progress reports to the company’s board and to the federal government.

In addition, the company is creating a new team of highly experienced federal contracting professionals who will handle all government contracts, Kenney said.

Following the newspaper’s report, Rep. James Greenwood, R-Pa., chairman of a House subcommittee investigating eRate fraud, said he would add Atlanta to the committee’s ongoing probe. (See “Congress to probe Atlanta schools’ network costs,”

Greenwood launched his inquiry last year after a September 2002 report from the Federal Communications Commission’s Office of the Inspector General cited nearly 30 federal and state investigations involving the questionable use of some $200 million in eRate funds. Because of a lack of funding to watch over the program, the FCC’s inspector general was unable to give “any level of assurance that the program is protected from fraud, waste, and abuse.”

In January 2003, these suspected abuses received further attention when the Center for Public Integrity (CPI) released a report based on the FCC’s investigations. The CPI report called the eRate “honeycombed with fraud and financial shenanigans.”

In the wake of these reports, the Schools and Libraries Division (SLD) of the Universal Service Administrative Co., the agency that administers the eRate, has stepped up its scrutiny of eRate applications. Last year, the SLD denied more than $1 billion in funding requests from suspicious applications.

The agency also formed a task force with the goal of reducing waste, fraud, and abuse. The FCC is considering the recommendations of that group and other eRate stakeholders.


NEC Business Network Solutions Inc.

U.S. Justice Department

San Francisco Unified School District

Federal Communications Commission

Schools and Libraries Division