After reviewing how a potential multimillion-dollar fraud scheme was halted by the vigilance of San Francisco Superintendent Arlene Ackerman, Rep. Joe Barton, R-Texas, called for federal officials to beef up their review of eRate applications.

“Thank God for groups like San Francisco that are self-enforcing, but I don’t see any real effort at the federal level to apportion the amount that goes out each year,” Barton said during the second Congressional hearing on eRate waste, fraud, and abuse, held by the House Oversight and Investigations Subcommittee July 22 on Capitol Hill.

“I think everyone needs to get on this fast and enact some very stringent rules,” said Rep. Diana DeGette, D-Colo.

The Federal Communications Commission (FCC) is expected to adopt new rules in August that will address some of the problems revealed in the day-long hearing, testified William F. Maher Jr., chief of the FCC’s Wireline Competition Bureau.

House Oversight and Investigations Subcommittee Vice Chairman Greg Walden, R-Ore., ran the day-long session of the July 22 hearing on the eRate. At right is Rep. Diana DeGette, D-Colo., who called for “very stringent rules.” (eSchool News photo by Cara Branigan)

This latest hearing had a decidedly more civil and less contentious tone than one held in June. Vice Chairman Greg Walden, R-Ore., who presided over the second hearing, is expected to chair many of the subcommittee’s upcoming hearings as Rep. James Greenwood, R-Pa., has stepped down in preparation for retirement.

Barton took over as acting chairman of the subcommittee July 23.

Members of Congress who participated in the hearing commended San Francisco Superintendent Ackerman for blowing the whistle on a scheme that would have stolen nearly $50 million from the eRate program.

Ackerman said she first learned of the conspiracy, involving NEC Business Network Solutions (BNS), a subsidiary of NEC Corp., when she was asked to sign off on the district’s eRate application. In reviewing the application, she noticed many inaccuracies, including the assertion that the district had set aside $8 million in matching funds.

“I knew that was not the case,” Ackerman said. Plus, the application did not reflect the district’s technology plans, and it described the district as being 400 square miles large, when in fact the district covers only 49 square miles.

The district immediately launched an investigation that was spearheaded by George M. Cothran, an investigator for San Francisco’s city attorney’s office.

According to Cothran, it was “a traveling road show” that was at the heart of the scheme.

Judy Green and George Marchellos, employees of Video Network Communications Inc. (VNCI), acting as eRate experts, partnered with BNS and others in exchange for a “marketing fee.” Then, they allegedly infiltrated the competitive-bidding process in San Francisco and as many as 10 other school districts to beef up the applications and make sure BNS would win the bid.

To funnel even more money to BNS, the pair allegedly submitted a second, falsified eRate application on behalf of the San Francisco district–complete with forged signatures and phony price sheets–that inflated the districts’ request to nearly $113 million. In addition, Green and Marchellos allegedly falsified and forged signatures on other documents requested by the Universal Service Administrative Co. (USAC) during the review period.

The evidence “indicates to me, in a very clear way, that Judy Green was behind the fraud,” Cothran said.

Desmond McQuoid, a former school district employee in charge of San Francisco’s eRate application, is currently serving a 21-month prison sentence.

“It is our belief that Mr. McQuoid was not aware of the inflated bid,” Cothran said. When he later found out, “McQuoid may have pitched a fit, but we also know he didn’t blow the whistle.”

The applications filed with Green’s help, Cothran said, requested ineligible videoconferencing equipment and “gold-plated” items such as a server and 30 network drops for every room in each school, essentially creating a local-area network in every classroom. “It would serve no other function than to drive up the cost,” Cothran said.

USAC rejected San Francisco’s ineligible equipment requests but still committed nearly $50 million to the district, which Ackerman later refused. Interestingly, a USAC reviewer noticed a discrepancy between the budget submitted with the application and the budget posted on the district’s web site, but nothing ever happened as a result of that.

George McDonald, vice president of the Schools and Libraries Division (SLD) for USAC, called this occurrence a “human error” and blamed it on a miscommunication between the reviewer and reviewer’s supervisor.

When questioning Cothran, Walden said, “I think the question to ask is, are there any back-door channels between USAC and the co-conspirators?”

“I think that’s a legitimate question, sir,” Cothran said. He later added, “I had one contact who said there was someone, one contact, inside USAC that helped her out.”

Parties accused of wrongdoing who were called to testify at the hearing pleaded the Fifth Amendment, including Thomas J. Burger, president and chief executive of NEC Unified Solutions Inc.; William Holman, former vice president of sales for NEC BNS; and George Marchellos, former eRate consultant and salesperson for VNCI.

Judy Green failed to show, despite daily attempts to locate her by U.S. marshals.

Timothy M. Donovan, former senior vice president and general counsel for NEC USA Inc., did agree to testify, saying that NEC already has admitted its guilt and would like to help answer the question: How can subcommittee members make sure this kind of fraud never happens again?

NEC recently agreed to a $20.6 million settlement with federal authorities for its role in the scandal (see “NEC pleads guilty to eRate scams“).

Donovan reiterated that BNS has taken steps internally to prevent this from happening again, including hiring a government contract compliance expert, providing ethics training to all employees, creating an anonymous hotline for employees to report wrongdoing, and scheduling regular audits for all government contracts.

Because the main people involved pleaded the Fifth, members of Congress could not get answers to all of their questions. DeGette said she thought it was critical for the subcommittee to schedule another hearing, because “Mr. Donovan doesn’t know a doggone thing.”

Rep. Barton asked why Burger, NEC’s president and CEO, took the Fifth Amendment when employees farther down in the food chain were at fault. “If you have nothing to hide, then there’s no reason to take the Fifth Amendment,” Barton said.

“Although his name was on an eMail or two, there’s no evidence or reason to believe he was involved with changing numbers,” Donovan replied.

Barton was surprised that no one from NEC BNS questioned VCNI and this new multimillion-dollar stream of revenue that it proposed. “No one from management expressed wonderment at all?” Barton said. “Until the San Francisco school district started asking questions, no one in the company bothered to find out if those checks were cashable?”

“It’s obvious we’ll need to have additional hearings so we can get someone to answer these questions,” Walden said.

Preventive measures

Ackerman, who testified at the hearing via teleconference, said district leaders need to make sure their schools’ eRate applications closely follow their technology plans.

“We now have a technology plan in place that drives our eRate [process],” she said. “That’s what we were missing before, a plan.”

DeGette proposed making a rule that would require applicants to secure a minimum number of competitive bids. Applicants with extenuating circumstances that prevent them from meeting the minimum could apply for a waiver, she said.

Maher, who recently resigned as chief of the FCC’s Wireline Bureau and will leave at the end of August, discussed several proposed rule changes that would have prevented the San Francisco scheme from happening.

Some of the recommendations include expanding the document-retention requirements for applicants to five years, improving certification procedures, and increasing USAC’s scrutiny of applications.

Maher said the FCC will adopt some of these changes as early as this August.

Links:

House Energy and Commerce Committee

Federal Communications Commission